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 cannot 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 nonbank 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 email@example.com.