SBA Loans
There can be situations when you may consider a loan through the Small Business Administration (SBA) for your company’s financing needs. I highly recommend you visit the Small Business Administration’s website, sba.gov. There you will find useful information to help you make an informed decision for your small business loan. This article is not intended to repeat all the information on SBA’s website but rather share some of the insights I learned by securing SBA loans for clients in the early ‘90’s.
If you have read my blog or the article on “Credit Crisis” from my website, you will understand why small businesses needed help in the ‘90’s. Had it not been for the SBA, most small companies would not have made it through those tough times. Establishing the SBA is one of the few good things Washington has done for small business.
What makes the SBA work for small business is its guarantee to the lender. The SBA guarantees 85% of loans up to $150K and 75% up to the maximum of $2 million. In my day, the maximum guarantee was $750K. Can you see the beauty to the lender yet? The upside to the lender is a lien on all collateral and a guarantee backed by the full faith and credit of the United States of America. So this is why, in tough times, banks and other lenders will push SBA loans to greatly reduce their risk of any loss.
Generally, the SBA does not make direct loans so you must start with a lender that does handle this type of service. The two most common SBA lenders are banks and privately held finance companies that only make SBA loans. Both groups must adhere to SBA guidelines so you might want to shop around if you need the SBA guarantee to secure your loan.
Speaking of guidelines, the SBA sets the maximums for such things as interest rate, term of the loan, the SBA fee and the guarantee amount. Interest rates are pegged to the Wall Street Journal Prime Rate (WSJ). These maximums are:
Interest Rate: loans up to 7 years, WSJ Prime plus 2.25%, over 7 years, WSJ Prime plus 2.75%. The rate can be fixed or variable.
Term of Loan: working capital is 7 years; all other loans will be based on the estimated useful life of the asset. Real estate can be up to 25 years.
SBA Fee: ranges from 2% to 3.75%, depending on the loan amount and term. This is usually paid by the lender but will be deducted from your loan amount.
Guarantee Amount: 85% of loans up to $150K and 75% of loans greater than $150K, up to the maximum of $2 Million. Small loans of $50K or less are guaranteed at 50%.
An Export Working Capital loan is guaranteed at 90%, up to a maximum of $1 million.
Recently I have heard that SBA has eliminated their fee so you need to check with someone who is current on all the changes. Your local bank may know.
All SBA loans do provide for a prepayment penalty. During the first 3 years, the penalty starts at 3% of the outstanding balance. After 3 years, the penalty is .5% of the outstanding balance.
Any lender can submit a loan package to the SBA for approval and guarantee. However, if the lender is not an established SBA lender the time for the SBA to review and approve the loan will be longer. The SBA categorizes lenders by their experience processing loans. The first category is Certified Lender Program (CLP). A CLP lender will have enough experience processing SBA loans to know if your loan will be approved by the SBA. This lender will receive a faster turn-around by the SBA than one not certified. The other category is Preferred Lender Program (PLP). A PLP lender can approve loans on behalf of the SBA and need only document the loan properly. The SBA approval time is eliminated.
Your first step should be to obtain a loan score from Business Loan Scores© to determine if you need the SBA guarantee or not. If you do, the next step is to select a bank or other lender and go through their approval process. Only lenders can submit loan requests to the SBA. So, if you use a CLP or lender not experienced with SBA loans, you will first have to pass their approval process and then that of the SBA. If you use a PLP lender, you will only be required to pass the approval process of that PLP lender.
Having said that, don’t exclude the CLP lenders because they are striving to become a PLP lender and may be more flexible. Therefore, I suggest you solicit three SBA lenders.
No matter what type of lender you end up with, you will need the services of a SBA Packager. They will charge a fee, probably around $1,000. This packager will be needed after your lender has approved your loan and not before. So don’t rush out and hire a packager. Certainly the small loans, $50K and less, do not require a full SBA package. In fact, on the SBA’s website, they state that they will accept the lender’s internal documents.
Most SBA loans will not have any great advantages versus a conventional loan except the loan to purchase real estate. You would have to search far and wide to find any lender of any type that would grant you a 25-year term loan for any purpose. Usually you will end up with a 5-10 year “balloon” note with monthly payments based on 15-20 years amortization. What is a balloon note? In simple terms, it’s a short term note with long term amortization. At the 5 or 10 year balloon point in time, the note matures and becomes fully payable.
Banks like balloon notes to finance real estate on a conventional basis. Don’t panic if you have one. Generally the bank will renew the note for another 5 years and continue the long term amortization. But here is the kicker: the option to renew or not is entirely at the discretion of the lender. You, the borrower, have no say or recourse other than to find another lender. This could become a problem if your balloon comes due in a year when you report a net loss. This would be the absolute worst time for you to find another lender.
Not so with the SBA 25-year loan. The term is locked in; no balloon and no one can change any part of the note. If you have or contemplate requesting a real estate loan, I highly recommend you consider a SBA loan. The SBA guarantee fee may be a good investment since you or I don’t have a crystal ball to predict the future. They may even waive the fee.
I earlier suggested that you purchase your loan score from Business Loan Scores© to determine if you would need the SBA guarantee or not. In addition, the loan score report will tell you if you have negotiating leverage with the lender. Remember, the SBA sets the maximum interest rates. The actual rate will be between you and your lender whether it be a SBA or conventional loan.
It’s been my experience that business owners are so happy to get the loan approved they never question or ask for a lower rate. This was the case in the early ‘90’s and will likely be the norm in the current credit crisis. While this article is not intended to be a direct sales pitch, I would like to point out the possible benefits of Business Loan Scores©.
Let’s say you are approved for a $200K loan with a rate of 7%. That’s roughly $12,000 in interest the first year. If you knew you had negotiating leverage, you could ask for and receive a 1% reduction, which would be a $2,000 savings in the first year. If it were a 5-year term note, then you would have earned a fantastic return on the cost of the loan score. I think you have the point.
At the writing of this article, I read a column in the local newspaper specifically regarding SBA guidelines. There are three important points that may be of interest to all business owners.
1. The guarantee portion of 7(a) loans is raised to 90%. Nice deal for lenders.
2. The guarantee fee for 7(a) loans is waived. Good deal for business owners.
3. The Surety Bond limit is raised to $5 million and in some cases $10 million. Also a good deal for business owners. The previous limit was $1 million.
These changes are for the rest of 2009 or until the SBA’s budget is exhausted. You may want to make a decision soon because the government’s budget year ends 9/30/XX. I have seen years when the SBA was out of budget before year end. The column did not comment on what might be available for 2010 and beyond.
The three temporary changes above do not appear on the SBA’s website so I suggest you contact the SBA or your bank to confirm these statements. In view of these temporary changes, a SBA loan is no more expensive than a conventional loan. Better Hurry.
Businessloanscores.com
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