How the SBA and other government guaranteed loans can help your business

Government-guaranteed financing offers businesses important advantages over traditional financing. The U.S. Small Business Administration (SBA) offers government-guaranteed loans, working with banks and a community development company (CDC), such as the statewide New York Business Development Corp. The SBA provides financing, particularly through "preferred lender" banks, to businesses that otherwise could not access funds to grow and prosper. A preferred lender is one the SBA selects, for its business lending expertise, to use SBA criteria and procedures to grant SBA-guaranteed loans. Preferred lenders approve SBA loans, reducing processing time and the risk to the banks. This encourages banks to finance growing and difficult to finance businesses such as hotels, restaurants and start-ups. The SBA essentially acts as an insurance company covering the loan. Through its 7(a) Loan Guaranty Program, its primary loan guarantee program, the SBA guarantees as much as 85% on loans up to $150,000 and 75% for loans up to $2 million. If a loan with a $100,000 balance and an 85% SBA guarantee goes into default, the government will pay the bank $85,000 of the $100,000 balance. The SBA Express program provides loans up to $250,000. In an efficient approval process, preferred lenders use their own documents to process, service and liquidate loans if borrowers go into default. SBA Express guarantees up to 50% of a loan, permits revolving lines of credit and may not require collateral on loans of less than $25,000. SBA Export Express also works through preferred lenders to help qualified small companies develop and expand foreign markets. The SBA Express Line of Credit program provides for a working capital line of up to $350,000 and with a term of up to seven years. Conventional lines of credit are typical for one year and must be paid off at the end of the term. This line does not require an annual out of debt period. SBA 7(a) loan programs offer longer terms than conventional loans: up to 25 years for real estate, seven years for working capital and 10 years for equipment. If a borrower finances real estate, equipment and working capital, the payback period for the entire loan will be pro-rated according to the percentage used for each purpose. Down payments vary based on time in business and use of loan proceeds. Interest rates for 7(a) loans are limited to 2.75% over the Wall Street Journal prime rate of interest. SBA loan repayment terms include monthly installments of principal and interest, without "balloon payments." The costs for SBA loans are minimal, with loan-packaging fees from $250 to $1,500, and an SBA Guaranty fee, like an insurance premium, of 2 to 3.5% of the guaranteed portion of the loan. This fee is financed in the loan. The maximum SBA 7a loan is $2 million. To qualify for an SBA loan, a company must be independently owned and operated, not be dominant in its field and must meet SBA employment or sales standards for different business types. Qualified businesses can use SBA-guaranteed loans for such purposes as: *Constructing new commercial buildings if they are owner occupied; * Purchasing land and existing buildings, which also must be owner occupied; * Expanding or modernizing facilities; * Purchasing machinery, equipment, fixtures, or inventory; * Augmenting receivables and working capital. Banks work with the SBA and the CDC through the 504 loan program that allows expanding businesses to finance 90% of real estate acquisitions or improvements or the purchase of equipment at a fixed rate over 20 years. Banks finance 50% with interest rates adjusted every five years, the CDC finances 40% with rates fixed for up to 20 years. By requiring businesses to provide only 10% of the equity for projects (banks typically require 25%), this program allows businesses to preserve capital for other purposes. Stable interest rates also make the 504 program attractive to businesses. SBA 504 loans typically go up to $5 million and in some cases can be as much as $10 million. Businesses considering this type of financing should check with lenders or the CDC concerning 504 program requirements such as job creation and owner occupancy. Lenders can also explain how to combine 7(a) and 504 financing and additional benefits under these programs. When a company in our market needed more space and a more centralized location than its rented facility provided, it used the 504 program to buy its own building located near where its employees live. Its loan payment is only 25% of its former rent and workers' commute is shorter. Another area company had leased equipment for five years and needed additional working capital and a line of credit. Through an SBA Express loan, KeyBank provided a $200,000 line of credit and a 7(a) loan for $400,000. This refinanced the leased equipment over eight years, reduced its monthly payment and provided long-term working capital to reduce its accounts payable, all through one loan. Working with banks, the SBA and the CDC, businesses can grow through resourceful, affordable, convenient government-guaranteed financing programs. Visit www.sba.gov (the SBA site) and www.key.com/sba to find the financing your company needs. The KeyBank site contains information on how to write a business plan and an application form with application checklist. Patrick Mucci is vice president with KeyBank, Albany, N.Y.