Aiding acquisitions

If you are expanding your company, looking to acquire another business or planning to purchase equipment to manufacture a new product, you may consider the
lending options available through the Small
Business Administration (SBA). Many mid-sized corporations benefit from SBA lending
vehicles, which are generally structured with
lower down payment requirements, competitive rates and longer terms.

“If a $10 million company with 100 employees wants to acquire a smaller company, the
SBA is a lending venue for those types of
transactions,” says Robert H. Bruno, vice
president and senior SBA lending specialist
for Huntington Bank in Cleveland and Akron.

“Many times, business owners think SBA
loans are only for those who want to start up
a business or buy real estate,” Bruno adds.

This is true, he says, but business acquisition, equipment financing and obtaining lines
of credit to fuel growth are also reasons why
various companies turn to the SBA for loans.

Smart Business spoke with Bruno about
ways middle-market companies can utilize
SBA-backed loans.

Who can qualify for an SBA loan?

The general rule with SBA lending is, if
there is no conventional credit available elsewhere, then SBA is a legitimate vehicle for
gaining capital to fund certain expenses.
What does ‘available credit’ mean? In a
bank’s eyes, certain industries are considered
higher risks because of a historically high
default rate in that industry or because the
real estate they acquire for their operation —
say a hotel or restaurant — is considered
‘special use.’ To banks, special use translates
to escalated risk; and banks don’t like risk.
Therefore, credit is not made available to
those perceived high-risk candidates.
Instead, to obtain a loan, those business owners would need a guarantor as a sort of ‘insurance’ for the bank. This is where SBA programs, such as 7(a) and 504, enter the picture. Banks recognize that SBA loans are
secured investments in the secondary market with a guarantee from the government.
SBA loans allow business owners to acquire
property, capital and even other businesses.
These lending vehicles aren’t just for startups or small companies. In fact, many mid-sized corporations can attribute their growth
to the capital they obtained through SBA-backed loans. Medical practices, professional firms and manufacturing operations are
candidates. Eligibility limits vary and depend
on a company’s revenue and industry.

What are advantages to SBA loans versus
conventional loans?

First, SBA loans allow people who originally thought they could only lease equipment to consider purchasing instead. The
SBA can usually provide longer terms for
loans on capital equipment. On some capital equipment, an SBA loan will go up to 15
years for amortization and term. Also, the
SBA generally offers more favorable rates
than conventional loans and requires a
lower down payment.

For example, if you were to purchase
general purpose real estate, a bank would
most likely demand 20 percent down. For
an SBA loan, you can put down 10 percent.
This is a clear opportunity for business
owners who do not want to tie up cash
flow in a down payment, yet want to invest
in property, equipment or other capital to
grow their businesses.

What are the key differences between an SBA
7(a) and 504 loan?

Essentially, 7(a) loans are used for acquisitions, working capital and real estate. An
offshoot of the 7(a) is the SBA Express, for
lines of credit and smaller loans under
$350,000. 504 loans help finance fixed
assets, and 7(a) provides loans up to $2 million. SBA loans are always personally guaranteed by the principals of the business, and
the 7(a) loan is guaranteed up to 75 percent
to the lender by the SBA, with the exception
of the Express program. The 504 program
requires approval from a lender and a certified development corporation, which expedites the loan application to the SBA. You
can access more capital with the 504 program, but it is a two-part loan that involves
a first mortgage, or loan, from a lender and
a debenture to back the rest of the loan. All
programs are ideal for business owners who
lack sufficient collateral to meet conventional lending guidelines. Also, there are no
balloon payments on SBA-backed loans.

What about the time for approval?

Time and paperwork are two misnomers
associated with SBA loans. Acquiring an SBA
loan should not be a long, drawn-out process,
especially if you deal with a preferred lender.
With a preferred lender’s jurisdiction to
approve and underwrite 7(a) loans for up to
$2 million and Express lines of credit for up
to $350,000, the process for an SBA should
take no longer than a conventional loan. A
preferred lender generally can close an SBA
7(a) loan in as quickly as 30 to 45 days. Sure,
the paperwork is slightly different, but the
steps a banker guides you through as he or
she reviews your business plan and matches
you with an appropriate lending vehicle are
the same. You can contact the SBA District
Office in Cleveland to learn names of bank
personnel who specialize in SBA lending. An
SBA specialist will help you decide what SBA
program is most appropriate for your needs
and help you prepare necessary documents
so you can ‘pass go’ and gain capital without
running into obstacles.

ROBERT H. BRUNO is vice president and senior Small Business Administration (SBA) lending specialist for Huntington Bank in
Cleveland and Akron. Reach him at (216) 901-4729 or [email protected].