Fifth Third Bank on small business lending Featured

8:00pm EDT September 25, 2009

The Small Business Administration is offering new initiatives, making this a great time to evaluate whether you qualify for funding under the programs.

The initiatives, created as part of the American Recovery and Reinvestment Act, are providing additional capital to small businesses and have led to a greater interest in the SBA program, says John Guy, senior vice president for SBA and alternative lending at Fifth Third Bank. Lending has increased about 50 percent since December, and about 850 lenders have re-entered the program, many after not making loans for more than a year.

“It’s one of the most exciting times for the SBA,” Guy says. “The changes are expected to enable about 70,000 more businesses to qualify for SBA financing.”

Smart Business spoke with Guy about how business owners can take advantage of the new initiatives.

How will the SBA’s new initiatives impact small businesses?

The SBA is trying a number of different things to improve the ability of banks to lend and borrowers to qualify for new funding or additional amounts not offered through conventional loans.

The first change impacts both the borrower and bank. The SBA waived the borrower’s guaranty fee, which ranged from 2 percent to 3.75 percent and was tied to the guaranteed amount. Paying the fee was a major objection for a lot of borrowers when determining whether to do an SBA or conventional loan.

On the bank’s side, the guaranty for the 7(a) program, one of the main SBA programs, increased from 75 percent up to 90 percent. This improved the bank’s willingness to do a loan.

An alternative size standard was also created for the 7(a) program. The standard had historically been solely based on company size or number of employees, which was different for each industry. Now the program has an alternative standard, which is based on net worth and average income.

This is similar to the one for the 504, the other major SBA program. Now for both programs, borrowers can have net worth of at least $8.5 million and average income of $3 million over the last two years.

By expanding the 7(a) standard, a greater number of larger companies will qualify for the program.

The 504 program is primarily used for the financing of larger, longer-term fixed assets such as real estate, which is offered in partnership with a community development corporation and could not be used to refinance existing debt. However, this was expanded to allow for refinancing.

Also reintroduced was The America’s Recovery Capital Loan Program (ARC). This new program provides loans to companies experiencing challenges as a result of the downturn. Qualified borrowers are able to get up to $35,000 to cover principal and interest payments on their existing debt; the government offers a 100 percent guaranty to the lender.

How can a business take advantage of these new programs?

Talk to your local bank, as most are affiliated with the SBA program. You can also talk to your SBA district office or find information at There are also small business development corporations that are interested in helping businesses meet their financial needs, or you can partner with other financial institutions for help.

Most of the requirements for these initiatives are pretty standard compared with the regular SBA program; for example, nonprofit companies and businesses involved in the gambling industry are not eligible. Companies are limited by either their sales size or the new alternative standard.

How has an improving secondary market helped businesses seeking SBA loans?

One of the advantages of the 7(a) loan is that the guaranty portion of the loan is very liquid. This gives the banks the ability to sell the guaranty in the secondary market. The fee received from the sale provides additional capital for the bank that can be used to help them make more loans.

But a number of lenders were not able to do loans once the recession hit and the secondary market started declining. Without that source of capital many of these lenders greatly reduced or stop doing SBA loans. The government and Treasury Department have done several things to shore up this market. As the economy has improved, so has the confidence in the secondary market, and many investors have come back.

Premiums in the secondary market have gone from 1 percent at the end of last year to an average range between 5 and 7 percent.

How will businesses benefit from these initiatives?

It gives them a greater opportunity to access the capital they need. It also potentially makes banks a little more willing to finance borrowers during these troubled times. Trends have been declining as a result of the economy, so with the additional protection through guaranties, banks are more willing to accept these customers and recognize their temporary weaknesses.

Borrowers are also more encouraged because the cost of borrowing through the SBA is lower. And banks also have a higher guaranty, so borrowers have a better chance of getting financing than they would have before these changes.

john Guy is the senior vice president of Small Business Administration and alternative lending with Fifth Third Bank. Reach him at (513) 534-7108 or