It’s really a no-brainer. When the government approved continued funding for two key provisions in the American Reinvestment and Recovery Act (ARRA) of 2009, small business owners retained access to millions of dollars. All they need to do is ask.
The $375 million appropriated by ARRA ensures a Small Business Association (SBA) loan guarantee of up to 90 percent while reducing fees on the 7(a) and 504 loans. In this win-win situation, lending institutions can approve nearly risk-free loans for small business improvements or startups.
The loans don’t come from SBA itself but through regulated and approved SBA lenders. While many small business owners have been stonewalled when trying to obtain loans through normal channels, the SBA loan programs help owners get funding they might not otherwise be eligible for, with fewer out-of-pocket costs.
The 7(a) Loan
The 7(a) loan is really the mainstay of the SBA loan program and allows small business owners to request money for a variety of general expenses including equipment, machinery, working capital, construction, property acquisition and even some debt refinancing.
Utah’s SBA Deputy Director Steve Price doesn’t understand why more small business owners in Utah aren’t taking advantage of the loan program. “It’s really an amazing program that doesn’t cost the tax payers anything and helps support the success of small business in Utah,” Price says. “The federal government is taking the majority of the risk away from the lenders and giving owners access to capital that is so vital to the economy.”
Because the 7(a) loan comes through commercial lenders, not the government, small business owners can check with their financial institution to make sure they are eligible to approve SBA loans. If so, the owner applies directly with their lender and is obligated to repay the full amount. In some cases, the lender may still not be willing to loan money, even through the SBA loan program. Applicants must make sure they have a strong business plan, eligibility and a history of good credit.
Eligibility for a 7(a) loan is based on a number of factors, but requirements are very broad to ensure funding to as many small businesses as possible. The company must be based in the United States, meet SBA size standards for the industry, use the funds to establish a new business or assist an existing business, show a willingness to repay debts, utilize a strong business plan and have proficient management skills.
“In 2009 in Utah, there were 2,200 SBA loans totally $302 million,” Price says. “That’s $300 million out on the streets that wouldn’t have been there otherwise. We’re making loans to the riskiest businesses there are, the ones having a hard time getting access to cash.”
The 504 Loan
The 504 loan, an additional guarantee program offered by the SBA, is a long-term financing opportunity that provides fixed-rate financing in order to purchase assets for expansion or updating.
Many 504 loans involve real estate acquisition where the small business owner doesn’t have 30 to 40 percent for a down payment. With the 504 loan, the owner only needs to provide 10 percent down with a loan from a certified development company covering 40 percent and a private sector lender covering the remaining 50 percent. The SBA guarantees 40 percent of the loan.
Funds can be used for improving existing buildings, upgrading parking lots or streets, constructing new facilities and purchasing equipment. The 504 loan cannot be used for working capital or debt repayment.
For businesses meeting the job creation requirements or a community development improvement, the maximum SBA debenture is $1.5 million. A maximum SBA debenture of $2 million is allowed when meeting a public policy goal including business district revitalization, diversity program development, export expansion and the support of growth for woman-owned and operated small businesses. Legislation in the works could increase the loan limit to $5 million.
“This makes it easier for a small business owner to get more money for a bigger building,” Price says. “The federal government doesn’t allow us to go out and advertise. But we work with lenders and try to encourage them to participate as much as they can.”
In addition to the 7(a) and 504 programs, the SBA has its own microloan program using intermediary lenders to give business owners small, short-term loans. The owners apply through an intermediary, which tends to be a nonprofit, community-based organization, and the SBA makes the loan for up to $35,000.
Microloans have been used for purchasing inventory, supplies, furniture and equipment but cannot be used for real estate purchases or debt repayment
“Before microloan programs, it was difficult to get lenders to finance smaller loans,” Price says. “Lenders have to do as much paperwork for a $1,000 loan as it does for a $50,000 loan.”
An Economic Boost
According to the U.S. SBA, of the original $730 million received to support small businesses in the economic recovery, $375 million was set aside for the SBA loan guarantee programs. Between February and November 2009, the SBA supported more than $14 billion in loans across the country with an average weekly loan volume up by 75 percent. Since then, an additional $125 million was provided in December, $60 million was allocated in February and an extra $40 million was added in March.
In April, President Barack Obama authorized an additional $80 million to continue the 7(a) and 504 programs. It is estimated that the funding will support another $3 billion for small business lending under the SBA programs, and could be extended through the rest of 2010.
In normal loan situations, a high loss-rate could be expected, but Price says the SBA has experienced a loss-rate of around 2 percent with the remaining 98 percent of loans being effectively paid back.
SBA also offers training for small business owners, furthering the chance of success. Whether it’s information about creating a business plan, developing a marketing and advertising campaign, learning better business management skills, organizing finances or business basics, tools are available at www.sba.gov/training
to help build a better business.
In Utah, the SBA has been successful in getting a large number of credit unions to fund smaller loans. Price says that because credit unions are nonprofit entities, loan officers are used to making small loans compared to larger commercial banks. Loans as small as $3,500 can be approved through the 7(a) or microloan programs, giving owners more options for small business funding.
David Doria works as the Utah SBA manager for Mountain American Credit Union, the country’s leading credit union when it comes to SBA loans. “This has been a time when financial institutions are recoiling and are not lending as much in the past,” Doria says. “I think [the SBA loans have] been a great benefit. Say what you want about the Obama administration, they’ve really been friendly to the SBA program.”
This year alone, Mountain America branches in Utah have approved more than 60 SBA loans totaling almost $6 million with several more millions of dollars already approved for additional loans. Business owners are using the loans to purchase equipment, real estate and business acquisitions.
“I think it’s a fantastic partnership between the government and the private sector of lending institutions,” Doria says. “Some government programs don’t work very well, but by and large the SBA program has performed very well.
During 2009, the SBA district office in Utah was the highest producing office in the country when it comes to the SBA loan program. Price attributes this to the thriving entrepreneurial spirit flourishing in the state. And although Utah is an enterprising state, it is also very conservative when it comes to business expenditures. With the number of new small businesses increasing and current small businesses expanding, it is believed the economy will start stabilizing, and will eventually turn around.
“Historically, the majority of new jobs come from small business, probably because most of the innovation comes from small business owners,” Price says. “Nearly 98 percent of business qualifies as a small business.”
With small business owners in the United States creating the majority of jobs and products, it is no wonder the SBA is doing all it can to promote the well-being and livelihood of small businesses. Keeping these companies strong could be the road back to economic recovery for the country. That’s why such emphasis, and money, is being placed in the loan programs.
“We also know that small businesses could greatly benefit from the additional tools the president has proposed, including higher SBA loan limits and refinancing for commercial property mortgages, which could help thousands of small businesses avoid potential foreclosure,” says SBA Administrator Karen Mills in a statement released in April. “Small businesses need these improvements to ensure their access to the capital they need to drive economic growth and create jobs in communities all across the country.”