SCORE Minnesota

SBA Extends Recovery Lending Through April 30

March 30, 2010

The President signed legislation to extend the U.S. Small Business Administration’s ability to provide enhancements in its two largest small business loan programs by $40 million which will support about $1.4 billion in small business lending.
The enhancements, first made available under the American Recovery and Reinvestment Act of Feb. 17, 2009 allotted $730 million to help small businesses, including $375 million to increase the SBA guarantee on 7(a) loans to 90 percent and to waive borrower fees on most 7(a) and 504 loans.  The funds for these programs were exhausted on Nov. 23, 2009, and an additional $125 million was provided in December.  Those funds were exhausted in late February, 2010.

In a presentation to SCORE, Kristin Wood, Executive Director of SPEDCO, provided the following overview of SBA’s Loan Programs. There are three main SBA loan programs – the SBA 504, the 7(a) and the Express loan programs. Two programs – the 7(a) and Express loans are bank loans that are guaranteed by the U.S. government; the 504 loan program is a combination bank loan and direct loan from the SBA.

The SBA 504 Loan Program is the government’s premier program to help businesses purchase owner-occupied commercial real estate. This program is administered by a Certified Development Company (CDC) such as SPEDCO, which is a regional economic development organization licensed by the SBA. The CDC processes, approves, closes and services the loans. Funding is arranged by the SBA issuing a bond (“debenture”). By providing long-term, below-market subordinated financing the 504 program offers small businesses the opportunity to expand their operations and hire new workers by helping to conserve cash. The following is a comparison of a conventional loan versus an SBA 504 loan:

Conventional Loan	SBA Loan
$   700,000 – Bank Mortgage	$500,000 Bank 1st Mortgage, 10 year term
Balloon in 3-5 years	$400,000 SBA 2nd Mortgage, 20 year term
$   300,000 Cash Equity	$100,000 Cash Equity
$1,000,000	$1,000,000

small business administration

Advantages of SBA 504 over Conventional Financing

Low down payment. Just 10% down in most situations allows the customer to preserve cash for working capital. Most banks have a policy that permits it to lend only 60-70% of the appraised value of the project, forcing the borrower to provide 30-40% of the purchase price plus the cost of renovations and any related soft costs. Equity of 15-20% is required for start-ups and businesses with irregular profitability, lack of historical debt service ability, a short track record or for single purpose properties.

Fixed rate on the SBA 504 portion. The customer doesn’t have to worry about the prime lending rate going up. He/she can plan because they know the amount of the SBA mortgage payments for the next 20 years.

Long term. SBA 504 loans are for 10 or 20 years. Because the SBA is in a second lien position, the bank doing the 50% first lien loan is willing to lend at a longer term, which  ensures the monthly mortgage payment is lower.

Low interest rate. Even with all the fees and closing costs included in the rate, the SBA 504 loan is still a low rate for a subordinate mortgage loan. The blended rate between the bank portion and the SBA 504 portion makes the project affordable for the borrower. As of February 1, 2010 current interest rates are at all time historic lows in the range of 5.75%.

The Bank benefits, too! For the banker wishing to participate at 50% exposure, the lender gets CRA credits, may lend at a lower loan-to-value ratio, makes a growing business customer happy, and has lower risk because the SBA 504 loan is in second position behind the bank.

504 Loan Proceeds are used to purchase Fixed Assets, including:

• Acquisition of vacant land for construction of a building
• Acquisition of land and building
• Renovation of building; addition to building
• Construction of a building
• Acquisition of heavy duty machinery & equipment (such as printing press)
• Associated soft costs: title searches & insurance; attorneys fees; appraisals; environmental reports; architects; permits; surveys; installation of machinery; points on bridge loans, small amount of furniture and fixtures, etc.
• Refinancing is permitted in certain limited circumstances

Temporarily Reduced Fees
A portion of the Stimulus Bill of 2009 temporarily reduced the fees on a 504 loan. A bank participation fee of .5% has been waived and the loan origination processing fee of 1.5% will temporarily be paid by SBA.

The SBA 7(a) Loan Program is geared towards the start-up or purchase of a business. It is used most often to finance inventory, working capital, vehicles, machinery and equipment or leasehold improvements. While a 7(a) loan may technically be used to purchase real estate, it is typically done so only when refinancing is taking place. Financing is provided by the bank and the SBA provides a guarantee to the bank based upon loan amount. As part of the Stimulus Bill, the SBA will provide a 90% guarantee for loans up to $2 million. Furthermore, at this time, the SBA has temporarily waived all guarantee fees.

7(a) Terms and Interest Rates: Unlike the 504 loan which offers only 10 or 20-year fixed interest rate terms, the 7(a) loan program is a floating rate product offering a variety of terms tailor-made to suit the project including:

• Working capital — up to 7 years
• Equipment — up to 10 years
• Real estate — up to 25 years
• Rates can be fixed or variable
• Variable rates must float with prime

Maximum Interest Rates:
Term up to 7 years — Prime + 2.25%
Term 7 years and over — Prime + 2.75%

The SBA Express Loan is similar to the 7(a) loan program in that it is a bank loan guaranteed by the SBA. Unlike a 7(a) loan which receives a guarantee of up to 90%, however, an Express loan receives only a 50% guarantee from the government. The maximum loan is $350,000. It is the only SBA loan that can be used to finance revolving loans or a Line of Credit.

The main advantage to using an Express loan is the bank uses all of its own documents including application documents and closing documents. In addition, the bank makes its own credit decision based on the bank’s own underwriting criteria.

For loans of less than $25,000, collateral is not required, but, a personal guarantee needs to be signed. For loans between $25,000 and $150,000, the bank uses its own policy to determine how much collateral is required. Loans larger than $150,000 require the bank to fully collateralize the loan and to include a lien on personal assets.

SBA Express Fees
Loans less than $150,000 require a 2% guaranty fee
For loans  greater than $150,000 the 3% guaranty fee has temporarily been waived
Maximum interest rates:  $50,000 or Less – Prime + 6.5%
$50,000 or More – Prime + 4.5%

SBA Special Purpose Loan Programs include a variety of special programs for various public causes, including pollution control, Community Adjustment and Investment Program (CAIP) for businesses explicitly affected by the NAFTA agreement, veterans, underserved rural communities, and many others.  For more information on SBA guaranteed loan programs go to the SBA website.

SBA Online Training
The SBA provides a financial primer program that covers many aspects of funding your small business.  It is a video course, with an optional PDF file script.

SCORE Training
View SCORE seminars on all aspects of small business by clicking here.

To learn more about how to fund a small business contact SCORE by clicking the link on the right to the office nearest you or click here to request free face to face counseling.

Have you ever considered volunteering for SCORE? Our members help millions of new or existing small businesses succeed each year by sharing their knowledge and experience. Click here or the link on the right to the office nearest you to learn more.

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Filed under: Capital,Entrepreneurship,Financial,SBA,SBA Loans

Tags: American Recovery and Reinvestment Act, Certified Development Company, conventional loan, Funding, regional economic development, SBA, sba 504 loan, sba 7(a) loan, SBA Express Loan, SBA guaranteed loan programs, SBA loan programs, SBA Special Purpose Loan, small business administration, small business loan programs, SPEDCO