Easy money Featured

9:57am EDT July 22, 2002

Tim LaSpina needed a loan, and he had just enough experience to know he wasn’t going to get it by walking into a bank. His company, LaSpina Tool and Die in Hudson, was too small (LaSpina and one employee), too young (18 months in business), and it didn’t need very much money — at least by a banker’s standards.

But LaSpina isn’t shy. He asked for $100,000 to buy his second computer-controlled machine tool (plus some extra working capital), and got approval within 24 hours. The interest rate is competitive and repayment terms are more favorable than if he’d sought traditional funding.

LaSpina’s secret source of capital? A loan guaranty from the U.S. Small Business Administration.

“I didn’t even try the regular way,” says LaSpina. “The first machine I bought was through a leasing company. The second machine we bought through the SBA. The deal was much better — (it was) more flexible for me to do it that way. The traditional means are too rigid. We don’t have to do it that way anymore. We have choices now.”

Why use the SBA?

Over the years, business owners have come up with a number of excuses for not using the SBA.

Some don’t like the idea of handing over sensitive financial information to the federal government. Others assume it’s a vast bureaucracy of paperwork that’s more trouble than the loan guaranty ultimately is worth.

But over the last few years, the SBA has worked to clarify its mission as a financing organization and built a track record of customer-focused performance that puts many traditional lenders to shame.

Gilbert Goldberg, district director at the SBA’s Cleveland District office, emphasizes that the SBA doesn’t require any information that borrowers haven’t already supplied to the bank. People who have been through the process insist that their tax forms contain far more sensitive information than anything the SBA wants to see.

Aside from the fast response time, there are advantages to an SBA-backed loan. For owners like LaSpina, who haven’t built a track record, it’s often the only way to secure meaningful financing — which is precisely why the SBA exists.

In addition, the payback on an SBA loan is as long as 10 years — compared to terms as short as a year or two from banks.

LaSpina is paying back his loan over nine years, bringing monthly payments to less than $1,500. That’s a lot of leverage for a fledgling business.

“The great thing about the SBA,” LaSpina says, “ is it gives me that cushion. When you’re talking about $100,000 over 10 years, it gives you a little cushion rather than having a five year lease.”

How it works

The SBA doesn’t actually lend money. Instead, it backs traditional bank loans by guaranteeing them against default.

The amount of that guaranty varies depending on the program, but it can be as high as 80 percent.

If the borrower defaults, the SBA repays the guaranteed amount of unpaid principal and accrued interest. So rather than being another source of capital, the SBA more accurately serves as a lubricant to help banks write loans that would otherwise be too risky.

Each year, the SBA guarantees nearly 800 loans in Northeast Ohio, mostly through its 7(a) and 504 loan programs. In 1995, in response to complaints about loads of paperwork and slow turnaround, the administration introduced a low documentation — or “Lowdoc” — program. Revamped last year, that program now applies to loans of up to $150,000.

To use it, borrowers start with the bank’s loan application. If the banker recommends — or insists upon — the SBA guarantee, the borrower only completes an additional one-page application for the SBA. Goldberg says the answer is usually provided within 24 hours.

That’s how LaSpina got his loan. With direction from his accountant and his banker — Stephen Hendricks, vice president of Second National Bank of Warren — he started gathering the necessary financials in early January 1998. By mid-February, he and his accountant filled out the SBA application and a day later received good news from the SBA.

Then he took the paperwork back to Hendricks, who was able to approve the loan.

“Bankers like to sleep well at night,” says SBA’s Goldberg, “and the way they sleep well at night is by wearing two belts and two pairs of suspenders. They like to have two to three times the collateral value (of a loan). And a lot of times small business is short in collateral. So they substitute our guaranty for the shortfall in collateral.”

Hendricks agrees that it’s probably the only reason LaSpina was able to get financing at this point.

Why banks like it

Not long ago, you couldn’t walk into a bank and ask for a small business loan of less than $250,000. It just wasn’t profitable for the bank.

But with most business growth occurring today in the nation’s smallest business, banks are working hard to figure out how to profit on loans of as little $25,000.

The problem lies in the amount of paperwork they have to do before putting $25,000 at risk for a profit margin of just 4 or 5 percent.

Says Goldberg: “Over the past six years, the agency has tried to make it easier for small business to take advantage of our programs — easier for the banking community to use our programs since they’re the ones actually making the loans.”

While Hendricks believes the Lowdoc program has helped, the competitive landscape in banking, ironically, has cut into the SBA’s business, Goldberg notes. Banks are figuring out how to make smaller loans, so they refer fewer people to the SBA for guarantees.

How to reach: U.S. Small Business Administration: (216) 522-4180 or www.sba.gov; LaSpina Tool and Die: (330) 342-4822

SBA loan programs

The U.S. SBA offers two primary types of loans: 7(a) and 504. Several options are available within these categories depending on the size, purpose and need for the loan.

7(a) loan Guaranty

Purpose: Provides short- and long-term guaranty on loans of up to $750,000 to eligible credit-worthy businesses that cannot obtain financing on reasonable terms through normal lending channels.

Terms: Interest rate not to exceed 2.75 percent over prime (higher for loans under $50,000). Maturity up to 10 years for working capital and up to 25 years for fixed assets.

Guaranty of:

  • 80 percent for loans of $100,000 or less;

  • 75 percent for loans greater than $100,000;

  • 90 percent for loans made under the Export Working Capital Program.

Target customer: Start-up and existing small businesses.

Delivered through: Commercial lending institutions.

504 loan program

Purpose: Provides long-term, fixed-rate financing to small businesses to acquire real estate, machinery or equipment to expand or modernize.

Terms: Maximum guaranty of $1 million at 40 percent from the SBA. In addition, 10 percent of loan proceeds are provided by the borrower and 50 percent through an nonguaranteed bank loan.

Target customer: Small businesses requiring “brick and mortar” financing.

Delivered through: Certified development companies — private, nonprofits set up to contribute to the economic development of their communities or regions.