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Get Cash Flowing Again
By: Mark E. Battersby
Issue: 2009aug
A new option for small-business borrowing.
The White House recently announced a $15 billion, multi-pronged plan to help ease the credit crunch affecting businesses. One program earmarks extra funding for loans and technical assistance by the U.S. Small Business Administration’s (SBA) microloan lenders.
In addition to extra funding for microloans, new ARC (America’s Recovery Capital) Stabilization Loans offer 100 percent guaranteed deferred payment of loans up to $35,000 to help viable small businesses facing immediate economic hardship make payments on existing loans.
The recently announced plan will also reduce small-business lending fees and increase the amount the SBA will guarantee on some small-business loans.
Considering how tough it is for businesses to find affordable financing, it’s understandable for those who oversee government-subsidized funding to be overwhelmed. Surprisingly, while many promotional products dealers, suppliers and distributors find themselves caught in the middle of the credit crunch and economic downturn, few have turned to the SBA, the country’s so-called “lender of last resort.”
The Recovery Program
The U.S. Treasury Department will boost bank liquidity by purchasing small-business loans in the secondary markets. The $15 billion from the U.S. Treasury is primarily to buy loans and free up lending by community banks, credit unions and other small-business lenders. With these financial institutions accounting for 40 percent of all SBA-backed lending, the SBA’s announcement provides assurances to secondary markets that the government stands ready to purchase 7(a) and 504 first-lien securities.
Since banks depend on secondary markets for liquidity, local community banks may be more willing to lend to promotional products businesses because they’re confident that the U.S. Treasury will be a ready buyer of the loan in secondary markets.
The SBA is immediately raising guarantee levels on some of its loans and temporarily eliminating certain loan fees. Microloan intermediaries are already providing loans of up to $35,000 to start-up, newly established and growing small businesses.
Expansion of the SBA’s Surety Bond Program will allow more small promotional products suppliers to compete for large contracts by raising the maximum amount for contracts that qualify for SBA surety bonds to $5 million and up to $10 million, in some cases.
Come And Get It
The SBA doesn’t actually make loans to promotional products businesses; it is primarily a guarantor of loans made by private banks and other institutions. SBA-backed loans do, however, carry lower interest rates and lower fees than their commercial counterparts, making them more affordable for entrepreneurs and small-business owners.
An SBA guarantee gives promotional products suppliers and distributors access to the same kinds of reasonably priced, long-term financing available to large businesses by virtue of their size and economic clout. Borrowers apply for loans directly with lending institutions such as banks, credit unions or small-business lending companies.
Remember that only lenders approved to participate in SBA lending programs can help with SBA-guaranteed loans. Private lenders determine whether a borrower’s application is acceptable. If it is, the lender forwards the application and a credit analysis to the SBA.
The SBA estimates roughly 90 percent of businesses, or more than 25 million, qualify as “small” under its guidelines, which exclude gambling-related businesses, nonprofits, businesses that restrict patronage and some franchises on the SBA’s watch list.
Who uses SBA loan guarantees? In 2008, of the $18 billion in SBA-backed loans, 35 percent went to start-up businesses, nearly 32 percent went to minority-owned businesses and nearly 23 percent went to women-owned businesses. The most frequently financed industries in 2008 were services, retail trade, accommodation/food service, construction firms and manufacturing.
The Basic 7(a) Loan Guaranty Program
The SBA’s 7(a) Program is the agency’s primary business loan program. Designed to help small businesses obtain financing when they might not otherwise be eligible through normal lending channels, the 7(a) Program is the most flexible.
Financing under this program can be guaranteed for a variety of general business purposes, such as working capital, machinery and equipment, furniture and fixtures, land and buildings (including purchase, renovation as well as new construction), leasehold improvements and even debt refinancing. In commercial lending institutions, loans are up to 10 years for working capital and up to as many as 25 years for fixed asset funding.
The temporary elimination of fees for 7(a) loans can mean substantial savings. Typically, these fees range from two percent to 3.75 percent. On a $300,000 loan with a 75-percent guarantee, for example, the guarantee would normally be three percent. With the temporary elimination of fees, the promotional products business borrower would save $6,750 ($300,000 x 75 percent x three percent). With the new 90-percent guaranty, savings would be $8,100 ($300,000 x 90 percent x three percent).
Certified Development Company (CDC) “504” Loans
Designed as a long-term financing tool for economic development within a community, the SBA’s 504 program helps promotional products suppliers and distributors requiring “brick and mortar” financing. The 504 program provides long-term, fixed-rate financing for small businesses to acquire real estate, machinery and equipment for expansion or modernization. The 504 program cannot, however, be used for working capital or inventory, consolidating or repaying debt or refinancing, nor can a business engaged in speculation or investments in rental real estate qualify for 504 lending.
Under the 504 loan program, small means small if the promotional products operation has a tangible net worth less than $7.5 million and an average net income less than $2.5 million after taxes for the preceding two years.
Central to the 504 loan program is an entity known as a Certified Development Company (CDC). This entity is essentially a nonprofit corporation set up to contribute to the community’s economic development. The 270 CDCs nationwide work with the SBA and private-sector lenders to provide financing to small businesses.
A Section 504 loan eliminates the 1.5-percent application fee frequently charged to businesses applying to the CDC for loans. For a typical $600,000, Section 504 loan, fees saved equal almost $9,000. Plus, the SBA will temporarily eliminate the fee it charges the first mortgage lender, a fee equal to one-half percent of the first mortgage in a Section 504 loan transaction.
Microloans, The 7(m) Program
The SBA’s microloan program provides short-term loans of up to $35,000 to be used by small businesses for working capital or purchases of inventory, supplies, furniture, fixtures, machinery and/or equipment. The SBA makes funds available to nonprofit community-based lenders (intermediaries) which, in turn, make loans to eligible borrowers in amounts up to a maximum of $35,000. The average loan amount is in the neighborhood of $13,000. Unfortunately, the proceeds from microloans cannot be used to pay existing debts or to purchase real estate.
The SBA makes or guarantees a loan to an intermediary, who in turn makes the microloan to the applicant. Each intermediary lender has its own lending and credit requirements, of course, and will generally ask for the personal guarantee of the business owner as well as require some type of collateral. Each intermediary is also required to provide business-based training and technical assistance to micro-borrowers.
How Much And How Fast?
The maximum loan amount for a 7(a) loan is $2 million. For 504 loans, the loan structures and amounts vary since lenders and borrowers each determine how much equity they are putting into the loan. However, for the SBA portion of the loan, the maximum amount is either $2 million or $4 million depending on the loan’s purpose. For most purposes, the SBA’s maximum guarantee remains at $1,500,000, or 75 percent of a $2 million loan.
A promotional products business in need of working capital to make payroll or to buy inventory can immediately apply to a local SBA participating lender. Once the SBA receives a complete application package from the lender, it typically responds—to the lender—within a few business days.
It should also be noted that the U.S. Small Business Administration (www.sba.gov) is an excellent resource for small businesses. It also has a host of resource partners (www.sba.gov/localresources/index.html) including many participating lenders willing to assist business owners reap the rewards of these newly expanded SBA programs and others.
Mark E. Battersby is an Ardmore, Pennsylvania-based freelance journalist.
610-789-2480
mebatt12@earthlink.net
Hands-On
How a supplier used an SBA loan to get the cash he needed to buy the space he wanted.
Caro Krissman sought SBA loan assistance when he wanted to purchase a 6,000-square-foot commercial building in downtown Los Angeles. He needed the facility for office, warehouse, distribution and fulfillment space at his fast-growing supplier company, Source Abroad Inc. (UPIC: sourcea). “We’re lean, lack inventory and generate $6 million a year in sales, but we need more space for distribution,” he says.
Instead of ponying up a 30- or 40-percent down payment typical of commercial property loans, the terms of Krissman’s 504 SBA loan only required a minimum of 10 percent down. Sixty-percent backed by private lenders, the remaining 40 percent is covered by the government at only 5.2-percent fixed interest. “To get that fixed rate for commercial property is virtually impossible outside of the SBA structure,” says Krissman, “so this is a great deal for us.”
Krissman borrowed the money through a bank that handles SBA loans and recommends others seek out banks with experience setting up government loans. However SBA loans can also be obtained from a nonprofit Certified Development Company.
When applying, Krissman also says to be prepared for a thorough autopsy of past financial statements, including P&L statements and past years’ tax returns, year-end financials and W-2s for the principal. The company’s owner also must guarantee the loan.
Also know that the SBA will inquire about the purpose and goal of the loan. Krissman says the SBA just wants to know that the building will help the company to grow and to facilitate future employment.
SBA 504 loans mature at a maximum of 20 years. This was a drawback for Krissman, who prefers 30-year loans, but he says the low rates and owning his building outright more quickly make up for it. “Of course there’s always risk in purchasing vs. leasing a building,” he says. “If you feel that you are in a position to be in a certain location for a long period of time and there’s a good market opportunity in your area, [owning your own building] is a good stabilizing force in your company.”
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