By Sharon WhitakerSpring is here. As competition and lending picks up, we want more opportunity and less risk. It seems like a good time to remind everyone about the guaranty programs out there and how partnering with them can offer your customers more opportunities to access capital.
Earlier this month, I had the opportunity to attend an event on “restoring small lending” hosted by the U.S. Chamber of Commerce. One of the speakers was Small Business Administration Administrator Linda McMahon, whose advocacy on behalf of 30 million small businesses in America was so captivating that it inspired this month’s CRE Newsbytes to review the SBA programs available for banks and bank customers.
The SBA works with lenders to provide loans to small businesses. The agency does not lend money directly to small business owners; instead, it sets guidelines for loans made by its partnering lenders, community development organizations and micro-lending institutions. The SBA reduces risk for lenders and makes it easier for borrowers to access capital. Loans guaranteed by the SBA range from $500 to $5.5 million and can be used for most business purposes, including long-term fixed assets and operating capital.
So why would you use the SBA? Loan guarantees by the U.S. Small Business Administration can be used for loan requests when the term or the capital of the borrower does not meet all of the bank’s requirements. Usually the loan should still have the risk factors that meet the bank’s internal loan risk profile, but the SBA requirements are also applied, along with their required documentation requirements, to add a credit enhancement to the loan. SBA can help you book more loans that you may not have made otherwise, such as loans to startups or borrowers with limited capital.
Another option banks have is to sell the guaranteed portion at market, “which can be a 12 to 16 percent premium,” according to an ABA member. Some even sell the non-guaranteed portion. The model works well during economic expansion for lending more capital into your community. And during an economic downturn, if you have held the SBA guaranteed loans in your portfolio, if these assets are impaired and need to be liquidated, you have coverage on that loss that is backed by the SBA.
Below is a general overview of a few of the most commonly used programs. Note that some loan programs set restrictions on how you can use the funds, so check the SBA website for further details. For easy reference, use the SBA Quick Reference Guide.
SBA 504 loans are provided through Certified Development Companies, which are licensed by the SBA. The program is designed to provide financing for the purchase of fixed assets, such as real estate, building and machinery, at below market rates. The 504 program works by distributing the loan among three parties. The business owner puts in a minimum of 10 percent, the bank finances up to 50 percent (at the banks own rate and term as long as the term is 10 years or longer) and the CDC finances the remaining 40 percent (usually for 20 years at a fixed rate of interest).
SBA 7(a) loans provide a guaranty for term loans from 50 percent to 85 percent, depending on the program, for the purpose of expansion, renovation, new construction, purchase of land or buildings, equipment, fixtures, lease-hold improvements, working capital, refinance of debt for compelling reasons, seasonal lines of credit, inventory or starting a business. This is the SBA’s primary program for financing assistance to small businesses.
7(a) small loans are offered for loan amounts $350,000 and under, and have the same criteria as the standard 7(a) program. Loans under this program are credit scored by the SBA. If the loan does not earn an acceptable score, it can then be submitted under the full standard 7(a) program or SBAExpress program.
SBAExpress loans provide a guaranty for revolving lines of credit for a term loan for terms up to seven years, with a guaranty at 50 percent. The process is streamlined and has a fast turnaround time.
The Export Express program provides exporter and lenders a streamlined method to obtain SBA-backed financing for loans and lines of credit up to $500,000. Lenders use their own credit decision process and loan documentation. The SBA will respond to an application within 24 hours.
Export Working Capital loans are for businesses that can generate export sales and need additional working capital to support these sales. The maximum loan amount is $5 million, with a maximum SBA guaranty of 90 percent.
SBA offers a Preferred Lender program, which gives select lenders more authority to process, close, service and liquidate SBA-guaranteed loans. An SBA field office servicing the area in which a lender’s office is located can nominate the lender, or the lender can ask a field office to consider it for preferred status. (Please note that veteran-owned business may be eligible to receive fee relief through the Veterans Advantage program.)
To summarize, if you are a currently an SBA lender or want to consider SBA lending, please explore these and other programs you may not be taking advantage of to lend more in your community.
Sharon Whitaker is VP for commercial real estate finance at ABA. This article originally appeared in ABA’s CRE Newsbytes email bulletin. ABA members can click here to subscribe.