Government-backed loans can often provide attractive borrowing benefits
"Your loan has been approved but it is contingent upon obtaining an SBA guarantee." As a small business owner, that response from your banker might send shivers up your spine. Your first thought might be, "Why? Aren’t we good enough anymore?"
Truth be told, many times a bank wants to utilize some sort of government program because it may provide additional security to the bank but, oftentimes, because of the benefits afforded the small business as well.
The Small Business Administration should no longer be considered the "lender of last resort." In fact, some businesses actually seek an SBA-guaranteed loan just because they understand the advantages of the guarantee.
SBA loan programs
7(a) loan program
The flagship loan program is referred to as the 7(a) loan. It is not a loan from the SBA but, rather, a guaranty from the SBA to the bank. The program allows for longer repayment terms than conventional banks. Depending on the use of proceeds, terms are generally from five years for working capital requests to 25 years for real estate loans.
With a conventional loan, lenders may offer a three-year note on a real estate loan that amortizes over 20 years, but every three years you have to re-negotiate the terms. There is no guarantee that the lender will in fact refinance when the balloon comes due.
With an SBA loan, the note term and amortization match. That’s the major benefit of using the SBA. The guarantee provides comfort that the lender is extending a long-term commitment. 7(a) can be used for working capital, equipment or real estate purchases, start-ups, acquisition of an existing business and refinance of existing debt.
The SBA also offers several other loan programs under the umbrella of 7(a). Using almost the same rules and policies of the 7(a) program, those programs are more efficient to process and designed for small loan requests.
Low Doc loans – under $150,000
Low Doc loans are available to existing businesses or prospective businesses with excellent credit history. Applicants supply their bankers with the standard information, including three years of financial statements and interim statements (or a business plan if it is a new business), personal financial statements, A/R and A/P aging reports, a schedule of existing debts, and projections. The banker faxes a two-page application to the SBA and within 48 hours a decision is usually made.
Pre-loan program – under $250,000
The pre-loan program is designed for women, minorities, veterans, exporters and rural businesses seeking loans before they have a lender. Using an SBA-designated intermediary to assist with the application, the request is sent to the local SBA office for approval. With the pre-approval by the SBA, it is often easier to find a bank to make the loan. Processing is generally less expensive under this program, too.
Express loans – under $150,000
This option makes it easier and faster for banks to provide small business loans. Banks are allowed to use their own documentation and procedures to approve and service loans in exchange for a reduced guarantee of 50% versus a 75-85% guarantee under the other loan programs.
504 loans
Another "flagship" SBA program, 504 provides fixed-rate financing on fixed assets for up to 20 years. 504 is a second-mortgage loan that requires a low down payment. Banks partner with SBA-designated "Certified Development Companies" (CDC) which lend money that is 100% guaranteed by the SBA. The bank finances a portion of the loan on its terms and receive a first-lien position on the assets purchased while the CDC finances a (usually) smaller portion, and takes a second lien on the assets purchased.
Other loan programs
Wisconsin Housing and Economic Development Authority (WHEDA) also offers a small business guarantee program for Wisconsin companies. The WHEDA maximum guaranty is $200,000 while the SBA maximum guaranty is $1 million, but WHEDA can be more flexible than SBA is certain situations. For example, if purchasing an existing building, the SBA requires the business to occupy, at minimum, 51% of the property. WHEDA is willing to consider situations that may not meet that minimum, plus it may be less expensive than some of the SBA programs.
Investigating options
When a banker suggests a guaranteed loan program, it may not mean the borrower is a greater credit risk. The banker is likely investigating all options to find the most favorable terms for the borrower.
For more information about government loan programs, visit www.sba.gov/financing or ask your business banker.
Jesse Hagen is with WBD Finance Corp., the statewide CDC for SBA 504 loan packaging. The organization provides other packaging and planning assistance for other government-guaranteed loan programs. Additional information can be obtained at www.wbd.org. The Waukesha office can be reached at 262-970-8533 or 800-536-6799.
