Fifth Third Bank uses effective lending strategies Featured

7:00pm EDT January 26, 2009

Since 1953, the Small Business Administration has delivered about 20 million

loans, loan guarantees and other forms

of assistance to small businesses across the

country. The government-sponsored program not only helps small businesses when

they are starting out but also helps more

mature companies find funding to continue

to grow.

“The biggest benefits are lower down payments and a longer payment stream,” says

John Guy, senior vice president for small

business administration and alternative

lending at Fifth Third Bank. “The program

does allow banks to lend to companies that

they may not on traditional guidelines.”

Smart Business spoke with Guy about the

SBA’s different programs, how to take

advantage of those and how the tough economy has affected the SBA program.

How are SBA loans different?

The SBA program was created to help

companies who may not qualify for conventional financing. It covers a broader range of

stages in a company’s life, from start-up to

mature companies. The government created

this program to encourage lenders to loan

money to these companies, and the inducement is to provide a guarantee for, depending on which program it is, a portion of those

loans to mitigate a loss to the bank.

What kinds of programs are available?

The major program is the 7A. Under the 7A

we’re able to lend up to $2 million, the government guarantees about 75 percent of that

loan, and it enables people to use the funds

for the widest range of opportunities — purchasing real estate, working capital, equipment financing, etc. Borrowers are able to

put less down than they would on a conventional basis. By comparison, for most commercial loans, banks want you to put about

20 percent down. For an SBA loan it’s 10 percent. Depending on the asset you’re going to

finance, you’ll get longer terms for an SBA

loan. For real estate transactions, conventional terms are likely to be 10, maybe 15

years; with an SBA loan, a 25-year term is

pretty standard.

The SBA also has an Express program,which is for secured and unsecured transactions under $350,000. This program is geared

to enable banks to meet the needs of smaller companies. The SBA Express program

has a guarantee of 50 percent.

The final program is the 504 program. It is a

long-term financing tool for economic development within a community. To qualify for a

504 loan, a business must demonstrate that it

is creating or retaining a job or jobs based

upon the size of the company. Generally, the

test is one job for every $50,000 provided by

the SBA. For ‘small manufacturers’ the criteria may be one job created or retained for

every $100,000. The funds provided for a 504

must be used for fixed asset projects such as

purchasing land and improvements, including existing buildings, construction of new

facilities or long-term machinery or equipment. This program however is more restrictive than the 7(a) program because proceeds

can not be used for working capital, inventory, consolidating or refinancing debt. The 504

program is different in its structure as well.

Typically, financing has a bank involved,

which provides up to 50 percent of the

financing. It has a nonprofit Certified

Development Company (CDC), which uses government guaranteed debentures to fund

40 percent of the transaction, and then the

borrower will put in about 10 percent.

What is involved in the application process?

It is a more paper intensive transaction. A

good lender with a motivated borrower can

close an SBA loan within the same time

frame as it could do a conventional loan. In

many instances, it depends on how motivated the borrower is in terms of providing

information. There is more information, and

a lot of that extra paperwork is on the

lender’s part. The most important things that

borrowers need to be able to do is show how

they plan to use the money and their ability

to repay it. They must also provide a business plan, tax returns, a bio of the principals

involved, a description of the business and

the legal documents that substantiate that

they are a business.

What types of problems might you face when

applying for an SBA loan in this economy?

Normally, when economic times are

tighter, more people use the SBA program,

even those who can qualify for conventional

lending, because the terms are usually a little

more flexible. It enables, in most instances,

borrowers to put less money down, which

means they have more capital available to

invest in their business.

Due to the current economic environment,

banks have tightened their credit requirements; they’re asking for larger down payments, stronger cash flow coverage, better

business plans and more experience in the

relevant business or industry. There are also

fewer SBA lenders today, especially non-bank lenders.

Borrowers need to explore several options to find that particular institution for

the kind of business that they have. We suggest people start with the bank that they’re

used to operating with. That bank has the

advantage of knowing something about the

customer, maybe the history of the business

if it already exists, so that will give you a

leg up.

JOHN GUY is a senior vice president for small business administration and alternative lending for Fifth Third Bank. Reach him at

(513) 534-7108 or john.guy@53.com.