BECAUSE banks often shy away from high-risk loans to small businesses, the Small Business Administration stepped in to fill the gap. The SBA has a number of tools to help your company obtain a loan. The federal agency even has one that is available specifically to support an international trade contract.
Years ago, the SBA made direct loans to small businesses, but this became a heavy budgetary burden. Except for one small program, the direct SBA loan activity was discontinued and the SBA expanded its loan guarantee efforts.
How it works: Suppose you started a retail clothing store three years ago with a partner. You recently submitted a business plan to your favorite bank (up until now) and the bank rejected your FTC loan request. The banker said that although you have been profitable, the business is still a little too weak for a $100,000 loan to physically expand the store and buy more inventory.
The next step is to ask the commercial bank to consider the loan with an SBA guarantee. A lender generally feels more comfortable when a government agency is willing to repay the loan to the bank when the borrower can not.
If the bank's branch does not have the required SBA forms, the main office should have them. Or you can contact the local SBA office to have the papers mailed directly to you. Complete the forms and submit them to the bank.
The First National Bank of Maryland, Maryland National Bank and Signet Bank have been designated as preferred lenders. This means the entire operation is in the hands of the bank. It can review your loan application and, if it qualifies under the SBA procedures and its own credit standards, the bank can simply make the loan. Other banks must forward the loan application documents to the SBA for approval prior to making the loan. This could prolong the process by an additional week.
Types of loans: The SBA 504 Program is for the purchase of fixed assets such as land, buildings and equipment. However it can also be applied toward leasehold improvements. To start with, you have to come up with 10 percent of the cost of the project. The lender supplies 50 percent of the funds without any guarantee from the SBA. The bank provides the remaining 40 percent, which is secured by SBA bonds. The interest rate will be a blended rate derived from is a combination of the commercial lending rate for the bank's portion and the SBA bond rate for the SBA guaranteed portion. The bond rate is usually below commercial lending rates. The bond portion is capped at $750,000. To be eligible, the borrower must have less than $2 million in net profits and a net worth under $6 million. For most businesses, these restrictions are no problem. The term of the loan is from 10 to 20 years.
The SBA 7(a) program guarantees 90 percent of the loan balance up to $155,000 and 85 percent for greater amounts. A loan can range from $5,000 to $1 million and may be used for working capital or for the purchase of equipment, land and/or buildings. The maximum lending rate is 2.75 percent over the prime rate for loans that extend for more than seven years and 2.25 percent over prime for a maturity under seven years.
The SBA 7(a) and the SBA 504 programs permit the bank to accept collateral under a second mortgage for real estate or equipment purchases.
The International Trade Loan Program is not as well known as the first two and is actually part of the 7(a) program, according to Vincent Hanrahan, SBA business development specialist. Call him at (301) 962-2235. It is a loan guarantee that targets creation or expansion of export activity or assistance for domestic firms that have been hurt by foreign imports into the United States.
The SBA can guarantee up to $1 million for the purchase of land and/or buildings and equipment. Alternatively, the funds may be used to recondition equipment or make other physical improvements to assets that will remain in the United States to produce goods or services. An additional $250,000 loan can be extended for working capital. Any existing SBA loan that you may have is included in the calculation of these loan maximums. The maturity for the loan is 25 years.
Note that the trade loan requires that all liens be placed as first mortgages against any fixed assets bought with the money.
The SBA also has the Export Revolving Line of Credit. It can be used for working capital or to purchase fixed assets and/or labor that supports the manufacture or sale of products to be exported. It guarantees 90 percent of a bank loan up to $500,000. The SBA has made arrangements with the Export-Import Bank of the United States to extend an additional $500,000 guarantee that effectively brings the maximum to $1 million. The maximum term of this loan is 18 months. You must have been in business for at least one year, but this requirement can be waived by the SBA if you have extensive international trade experience.
Direct loans are made to companies that can not obtain an SBA-guaranteed loan. To be eligible, the applicant must be rejected by at least two lenders. The amount is limited to $150,000. The loans are difficult to obtain since they focus on businesses located in areas of high unemployment or companies whose owners are handicapped, Vietnam-era veterans, disabled vets or people who earn a low income.
The bottom line: While banks tend to slow their lending activity in times of economic uncertainty, the SBA can help you get that needed loan.
Patrick Rossello, president of The Business Consulting Group, is D a member of a number of local advisory boards including The
College of Notre Dame. Send questions or suggested topics to = him c/o MONEY AT WORK, The Evening Sun, 501 N. Calvert St. ; Baltimore, Md. 21278.