By George M. Dawson
Q. I hear a lot about SBA loans. How do they work?
A. Quite well indeed. The SBA makes credit available to small businesses that don't qualify for conventional financing--for example, those companies that are newer, are short on loan collateral or need long-term loans. The SBA works through banks and licensed nonbank lenders [the 7(a) program], Certified Development Companies (CDCs, also known as the 504 program) and nonprofit microlenders.
The SBA is an insurance agent, not a lender. It insures lenders against loan losses, guarantees bonds to finance CDC loans and finances microlending agencies that, in turn, lend to small businesses. (For more on microloans, see "BizScene" on page 10.) Its programs are complex--combining government and lender bureaucracies--but functional.
Some of the rules: Everyone who owns 20 percent or more of the business must personally guarantee the loan. There's also a reverse-means test--in other words, you can be too rich to borrow. Proceeds of the loan should not pay off owners of the business. Financed real estate must be owner-occupied. Loans can't replace excessive cash withdrawals from the business by owners. Only limited amounts of existing debt can be refinanced. SBA loans can't be used to pay delinquent withholding taxes, nor can they be used to fund charitable, religious or nonprofit organizations.
Loan guarantee fees are passed on to the borrower and range from 2 to 3.8 percent of the amount borrowed, plus a servicing fee. Interest rates range from 2.3 to 4.8 percent above prime. You can roll fees into the loan and deduct interest expenses.
The SBA offers a thicket of specialized subprograms designed to help small-business owners with everything from international trade to accessing lines of credit. You can find lots of information at the SBA Web site (http://www.sba.gov).
The lesson is, don't try this alone. Your local SBA office has the names of contact people at local lenders designated as Preferred or Certified lenders. These folks know how to work the system; their loan applications get priority processing from the SBA.
Where else can an established business get 25-year financing to buy its own building with only a 10 percent down payment? Or a new business borrow $5,000 for inventory? Or get a response to loan requests for no more than $150,000 in less than 36 hours? What a deal!
Attard Communications Inc., (516) 467-6826
Cyber Dialog Inc.,http://www.cyberdialog.com
Mellon Private Asset Management, 4695 MacArthur Ct., 2nd Fl., Newport Beach, CA 92660
Wood Young and Co. Inc., (800) 966-8620, email@example.com
Paul DeCeglie (MrWritePDC@aol.com) is a former staff reporter for Journal of Commerce and American Banker.
George M. Dawson (firstname.lastname@example.org) is a small-business consultant and author of Borrowing to Build Your Business: Getting Your Banker to Say "Yes" (Upstart Publishing, $16.95, 800-235-8866). E-mail him your financing questions at email@example.com