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 for the client and try to make the SBA loan process look very much like any conventional business loan,” Dixon says.
Smart Business spoke with Dixon about SBA lending changes.
What traditionally has been covered by SBA lending?
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. However, under the 504 loan program, you can go even higher in terms of total project amount. Say you’re buying real estate or doing a significant expansion, your total project could be as high as $12 million when you leverage all your dollars together. The bank could do a first mortgage loan, and the SBA would do a second mortgage financing with a long-term fixed rate, while the borrower puts some equity into the project.
At the same time, the SBA increased the size of businesses that can qualify for lending. What might have been considered a midsize company now qualifies for these ‘small business’ loans.
Another change became effective Oct. 1. The SBA authorized a 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 really targeted at benefitting traditional small business owners at those loan amounts — helping grow Main Street. It runs through this fiscal year, or until Sept. 30, 2014.
What has been the impact of these enhancements on lending?
Some of the changes have been in place for a few years, and have really had an impact on increasing the number of loans.
In addition, the SBA has been busy since some of its major program changes, providing continued enhancements. 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 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 again. The program might return later this year or in 2014. ●
All opinions expressed herein are those of the authors/sources and do not necessarily reflect the views of FirstMerit Corporation.
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