Obtaining Loans Through the SBA

March 1, 2010
Despite the tight credit market, there is one funding source that’s available, even if your credit isn’t fabulous: the Small Business Administration.

The past several months have been a nightmare for Ron Butler. After a construction project went awry in the middle of the crumbling real estate market, the owner of Butler C&D Body Shop in Merriam, Kan.—which has 10 employees and earns $2 million in annual revenue—was in trouble. Due to myriad run-over costs, Butler had drained his financial resources to finish the shop’s new building and was upside down on the loan he’d taken out through his local bank. Taking drastic measures to finish the project, he cashed out retirement funds and life insurance, took out a second mortgage on his home, maxed out credit cards and borrowed $325,000 from a friend. “I was bound and determined I was going to get it done with or without the bank,” he says. “I basically came up with another $900,000.”

The good news is that the new building is finished. The bad news is that Butler is now paying exorbitant interest rates on the debt he owes. He’s hoping to find relief, however, in a funding source that’s available: the Small Business Administration (SBA), which typically guarantees loans for businesses with less than 500 employees. “I’m going to try to refinance everything in an SBA loan,” he says. He plans to refinance the initial loan he has through his bank, as well as pay off his other debts, starting over again with a 25-year amortization loan backed by the SBA. If Butler is approved, it will lower his monthly payments by as much as $6,000.

A Boost for Business

The SBA has gotten a couple shots in the arm during the economic downturn, thanks to the stimulus package last year, and an update this fall. For repairers whose banks are leery of giving them traditional loans during such a tight credit market, the SBA may be a viable option. They’ve relaxed the terms of most loans to make them more attractive to banks and small business owners. Right now, the SBA is backing up to 90 percent of the loans—up from 75 to 80 percent before the stimulus package—and has waived the application fee it normally charges.

“Without any kind of capital injection, most small businesses could very easily fold within 60 days if there are no revenues.”
     —Wilfredo Gonzales, district manager, North Florida SBA

David Hall, spokesman for the SBA in Washington, D.C., says the biggest development recently was the implementation of the Recovery Act in February 2009. Hall says SBA lending increased by 80 percent on a weekly basis following the Recovery Act. Better still, the SBA received more funds last December. “We were given an additional $125 million for Recovery Act Loans, keeping the highest guarantee, and reducing or eliminating fees, and should support $4.5 billion [more] in lending,” he says.

Wilfredo Gonzales, district director of the North Florida SBA, says these loans provide recession relief to businesses that may struggle to find it elsewhere. “Many businesses really live hand to mouth. Without any kind of capital injection, most small businesses could very easily fold within 60 days if there are no revenues,” he says. “In anticipation of that, they want to gear up their financial resources and attempt to get loans to provide them with inventory.”

The nice thing about SBA-backed loans is that you don’t have to have great credit to apply. “The SBA guarantee is designed to help businesses that would not have credit elsewhere,” Hall says.

However, not all lenders participate in the SBA loan program, although Hall says more than 12,000 financial institutions do. To find out which lenders in your area participate, check sba.gov.

Emergency Loans

One loan option available to small business owners is the American Recovery Capital (ARC) loan, which was implemented on June 15 as a response to the pressures the economic recession has been putting on small businesses. ARC loans are emergency loans of up to $35,000 that are intended for viable businesses that are struggling to survive because of the economic downturn. The loan can be used to pay off a business’s current debt, to free up money for operating costs such as payroll. Companies can choose whether they want the loan all at once, or dispersed over six months. Repayment can be deferred for one year. Businesses have five years to pay off the loans, which are interest-free. The SBA has backed approximately 5,450 of these loans from June 15 to Jan. 15, Hall says, adding that he expects the money allocated for these loans to last until August or September at the rate it’s being dispersed right now. Each small business is limited to only one ARC loan.

7(a) and 504 Loans

The most common SBA loan is known as the SBA 7(a) loan. It can be used for all legitimate businesses purposes—from working capital to acquiring equipment to payroll. The lender makes the entire amount of the loan available to the borrower. Whatever amount the bank lends, the SBA will guarantee up to 90 percent, not to exceed $1.5 million, Hall explains.
Yet another loan option is the SBA 504 loan. Hall says the 504 loan is designed to help businesses acquire fixed assets like real estate or big equipment. For the 504, the business itself has to have at least 10 percent equity in whatever the amount of the loan is. Hall uses the example of a business that needs $100,000. The business has to provide 10 percent, or $10,000, so the loan itself is only $90,000.
The SBA will back up to $1.5 million for the 504 loan, and one of the limiting requirements for businesses is that they must have tangible net worth of $7.5 million or less and net income of $2.5 million or less for the past two years, Hall says.

A Hopeful Future

Butler, who is in the process of applying for an SBA 7(a) loan, hopes to hear back from his bank soon. The current interest rate on his original bank loan is 8.9 percent, and his creditors are hitting him hard with an annual percentage rate of 12 or 13 percent. “If I could have done this a couple of years ago before the economy crashed, I would have already been refinanced,” he says.

Hall says the main factor in successfully securing an SBA-backed loan is having a solid business plan that shows you know how operate a viable company.

For those that do, Hall is confident the SBA loan program is providing a great way for business owners to remain successful amidst the recession. “[These loans are] helping businesses not only stay afloat but also expand,” he says. “It’s often the best-kept secret in the business community.”

SBA Loans
At a Glance
ARC 7(a) 504
Who qualifies?
Businesses with fewer than 500 employees Businesses with fewer than 500 employees Businesses with fewer than 500 employees;
net worth
can’t exceed
$7.5 million
What’s it
used for?
Emergency $$
to pay off
current debt
To pay for legit business expenses (working capital, payroll) To acquire fixed assets (real estate, big equipment)
$35,000 $1.5 million $1.5 million

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