U.S. Small Business Administration (SBA) financing has been around for a long time, but these loans are available to more business owners than ever due to recent program enhancements.
Your banker should be able to take you through the programs and eligibility requirements to see if an SBA loan fits your needs, says Tim Dixon, SBA program manager and senior vice president at FirstMerit Bank. And if you work with a preferred lender who has the authority to make decisions on behalf of the SBA, the SBA lending process can be straightforward.
“We do the heavy lifting and try to make the SBA loan process look very much like any conventional business loan,” Dixon says.
Smart Business spoke with Dixon about expanded and enhanced SBA lending.
What has a SBA loan traditionally covered?
The core SBA 7(a) lending programs can help when your company:
- Has been in business for a short time.
- Is tight on collateral or is leveraged.
- Has some particular industry risk.
- Cannot meet standard down payments.
- Needs extended amortization to better fit with cash flow.
The two main SBA loan programs are 7(a) and 504, which is done with an area Certified Development Company. The 7(a) loans have a broad range of eligible uses and can serve a variety of purposes — real estate, equipment, working capital, refinancing debt, financing a change in ownership, etc.
The 504 program, which typically has slightly larger loan amounts, focuses on economic development and expansion, and the job retention and creation that come along with it. There are just a handful of eligible purposes, such as real estate purchase and expansion, or purchasing heavy equipment that has a useful life of at least 10 years. And certain types of projects may be eligible for special consideration, including energy efficient projects or projects located in targeted economic development areas.
What SBA program changes are enabling more companies to receive larger loans?
Several years ago, the SBA expanded its role by increasing the size of loans that can be extended. The maximum aggregate exposure of SBA-guaranteed loans for standard SBA programs is $5 million. Under the 504 program, however, you can go even higher in terms of total project amount. If you’re buying real estate or doing a significant expansion, your total project could be as high as $12 million when you leverage all dollars together. The bank could do a first mortgage loan, and the SBA does a second mortgage financing up to $5.5 million with a long-term fixed rate, while the borrower puts some equity in.
At the same time, the SBA increased the size that can qualify for lending. What might have been considered a midsize company now qualifies for these ‘small business’ loans.
A couple of exciting changes also became effective Oct. 1. The SBA continued the waiver of the SBA guarantee fee on 7(a) loans of $150,000 or less. The waiver is very broad, just based on the loan’s dollar size. It can be used for any number of purposes, such as working capital, equipment, refinancing, etc. It’s targeted at benefitting traditional small business owners at those loan amounts — helping grow Main Street.
Secondly, the SBA expanded fee reductions for veteran-owned businesses, which vary depending on the loan amount and can offer significant savings. This program underscores its commitment to helping veterans, who are often small business owners. These programs run through this fiscal year, or until Sept. 30, 2015.
What has been the impact of these enhancements on lending?
Some of the changes have really had an impact on increasing the number of loans.
The SBA’s new administrator also has been working on additional enhancements to the programs. The SBA is always looking at the underlying eligibility requirements to try to provide simplicity for banks and businesses.
Have any SBA loan programs been reduced?
Yes. There was a temporary program that expired Sept. 30, 2012. It allowed banks expanded capability to use the 504 program to refinance eligible projects and debt. It locked in a good portion of the deal at low 10- or 20-year fixed-rate financing. The banking industry has been lobbying to have that program resurrected. The program might return later this year or in 2015.
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