Borrowing through the SBA Featured

8:00pm EDT March 26, 2007

Asoft economy is a breeding ground for start-ups, a product of experienced executives squeezed out of jobs. Then there are baby boomers, who are breaking into new businesses rather than planning retirement. Add to that a young work force that will set the bar as the most entrepreneurial generation ever, according to an Intuit Future of Small Business Report released earlier this year.

“Jobs are being squeezed, and that inspires people to start their own businesses,” says Craig Johnson, president and CEO, Franklin Bank in Southfield.

Small Business Administration (SBA) loans present valuable borrowing opportunities for start-ups and growing businesses. Over the years, the SBA has streamlined the process for obtaining loans, and banks are better equipped with in-house professionals who can answer questions, prepare and process SBA loan applications.

“SBA loan products have evolved,” Johnson says, noting that companies who assume they do not qualify for loans because of sales volume should look carefully at program parameters. “Depending on the business type and industry, they may very well qualify.”

Smart Business asked Johnson to offer a roundup of SBA loan programs and outline the benefits of this government-backed financing.

What type of business can really benefit from the flexibility and structure of SBA loans?

Typically, start-ups are ideal candidates for SBA loans, as are existing businesses that need longer-term loans to purchase a piece of equipment or real estate. The longer you amortize the mortgage, the lower your payments. With SBA loans’ longer amortization periods, business owners won’t sacrifice cash flow as they acquire capital to grow. There are specific parameters that dictate what type of businesses qualify for SBA loans.

The Small Business Act states what constitutes a small business, and the definition varies depending on the industry. The SBA outlines size standards online at www.sba.gov. A bank will also help a business determine eligibility for SBA loans.

What types of SBA loans are available?

There are three main programs: the 7(a) program with a maximum loan of $2 million; the SBA Express program, an off-shoot of the 7(a) for lines of credit and smaller loans less than $350,000; and the 504 program, which is geared toward businesses that want to expand through capital improvements.

Besides longer term limits, all of these loans are designed with lower-percentage down payments. The programs are ideal for business owners who lack sufficient collateral to meet conventional lending guidelines. There are no balloon payments on these loans.

When is an SBA Express loan or 504 program appropriate?

The Express program can be used for working capital lines of credit. If the borrower has a collateral shortfall that the bank may not be comfortable with, the SBA Express program provides banks with a 50 percent guarantee. This allows banks to bundle this program with existing lines of credit so they can offer a flexible product to small business owners. Banks can approve SBA Express loans without obtaining a credit decision from the SBA, so the processing turnaround is usually within 36 hours.

The 504 Program is structured somewhat differently from the 7(a). It is designated for capital improvements, such as purchasing real estate or equipment. The benefit to this program is long-term, fixed-rate financing. A borrower generally puts down 10 percent of the project amount, the SBA covers 40 percent of the loan, and the bank lends 50 percent. This provides interest rate protection on 40 percent of the transaction, which is tremendous peace of mind for small businesses.

How does the SBA loan approval process work?

Depending on the loan that a borrower applies for and the bank’s SBA lending designation, decisions are made either at the bank or governmental level. Approval through a Preferred Lending Program (PLP) means the bank has delegated authority to make initial eligibility and credit determinations. For borrowers, this translates to faster approval because applications are evaluated in-house.

Approval through an SBA General Program (GP) requires the bank to gather credit and eligibility information and expedite paperwork to the SBA. The SBA reviews this information along with the loan structure. What’s important for borrowers to know is that regardless of whether approval is processed through a GP or PLP, the result is the same. The difference is in how fast loans are approved and whether decisions are made locally.

More new and growing businesses are taking advantage of the SBA’s long-term, fixed-rate financing today, and banks are well equipped to answer questions and process applications.

CRAIG JOHNSON is president and CEO of Franklin Bank in Southfield. Reach him at clj@franklinbank.com or (248) 386-9860.