A New Quick Fix for Small Business Borrowing in 2009
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A New Quick Fix for Small Business Borrowing in 2009

One program earmarks extra funding for loans and technical assistance by the U.S. Small Business Administration’s (SBA) 'microloan' lenders.

By Mark E Battersby

The White House recently announced a $15 billion, multi-pronged plan to help ease the credit crunch affecting so many sign businesses. One program earmarks extra funding for loans and technical assistance by the U.S. Small Business Administration’s (SBA) 'microloan' lenders.

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  • In addition to extra funding for microloans, new ARC Stabilization Loans offer 100% 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 increases the amount the SBA will guarantee on some small business loans. However, the new program does not stop there.

    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 will primarily, be used to buy loans, and free up lending by community banks, credit unions and other small business lenders. With these financial institutions accounting for 40% 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 the secondary markets for liquidity, a local community bank may now be more willing to lend to a sign business because it will have the confidence that the U.S. Treasury will be a ready buyer of the loan in the secondary markets. However, the new program does not stop there.

    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.

    In addition to extra funding for microloans, new ARC Stabilization Loans offer 100% guaranteed deferred payment of loans up to $35,000 to help viable small businesses facing immediate economic hardship make payments on existing qualifying loans.

    Expansion of the SBA’s Surety Bond Program will allow more small businesses to compete for contracts by raising the maximum amount for contracts that qualify for SBA surety bonds to $5 million and up to $10 million, for certain contracts.

    Come and get it
    The SBA does not actually make loans to sign 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 then their commercial counterparts, making them more affordable for entrepreneurs and small business owners.

    An SBA guarantee gives sign business owners 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 a lending institution, such as banks, credit unions or Small Business Lending Companies.

    Remember, however, only lenders approved to participate in SBA lending programs can help with SBA-guaranteed loans. It is the private lender, who determines whether a borrower’s application is acceptable. If it is, the lender forwards the application and its credit analysis to the SBA.

    The SBA estimates that over 25 million businesses nationally qualify as “small” under their guidelines -– that is about 90% of all businesses. That encompasses everything except gambling-related businesses, non-profits, businesses that restrict patronage and some franchises that are on the SBA’s “watch list.”

    Who actually benefits from SBA loan guarantees? In 2008, of the $18 billion in SBA backed loans, 35% went to start-up businesses, nearly 32% went to minority owned businesses and nearly 23% 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. Working through commercial lending institutions, loan periods are for up to 10 years for working capital, and as long as 25 years for funding fixed assets.

    The temporary elimination of fees for 7(a) loans can mean substantial savings. Typically, those fees have ranged from 2% to 3.75%. On a $300,000 loan with a 75% guarantee, for example, the guarantee would normally be 3%. With the temporary elimination of fees, the sign business borrower would save $6,750 ($300,000 x 75% x 3%). With the new 90% guaranty, savings would be $8,100 ($300,000 x 90% x 3%).

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    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 sign businesses requiring “brick and mortar” financing. The 504 Program provides long-term, fixed-rate financing to 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 sign operation does not have a tangible net worth in excess of $7.5 million and does not have an average net income in excess of $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 that has been set up to contribute to the economic development of its community. The 270 CDCs nationwide, work with the SBA and private-sector lenders to provide financing to small businesses.

    For a Section 504 loan, the 1.5% application fee frequently charged to a sign business applying to the Certified Development Company for a loan has been eliminated. For a typical $600,000, Section 504 loan, fees saved would equal almost $9,000. What’s more, the SBA will temporarily eliminate the fee it charges the first mortgage lender, a fee equal to 1/2% 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/ 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 purpose of the loan. For most purposes, the SBA’s maximum guarantee for any borrower remains at $1,500,000, or 75 percent of a $2 million loan.

    A sign maker or 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, they typically respond -– to the lender -– within a few business days.

    It should also be noted that the U.S. Small Business Administration is, itself an excellent resource (www.sba.gov) for small businesses. It also has a host of resource partners (www.sba.gov/localresources/index.html), including many participating lenders all too willing to assist a sign maker and his or her sign business reap the rewards of the both this newly-expanded SBA programs and its other programs.

    Considering how tough it is for many sign businesses to find affordable financing, you would think those who oversee government-subsidized funding would be overwhelmed. Surprisingly, while many sign businesses find themselves caught in the middle of the credit crunch and economic downturn, few have been turning to the country’s so-called “lender of last resort,” the U.S. Small Business Administration.

    Today, thanks to the newly-announced program, a sign business owner will immediately benefit from a 90% loan guarantee, see reduced fees for 7(a) loans and notice that fees have been eliminated for many SBA guaranteed loans. Microloan intermediaries around the country are already providing loans of up to $35,000 to start-up, newly established and growing businesses.

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