Loan Help From The SBA

September 24, 2008
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A lot of banks in Michigan and all over the country have cut back on Small Business Administration lending due to the credit crunch. But for a small business owner, an SBA loan remains well worth pursuing.

Richard Temkin, Michigan district director of the U.S. Small Business Administration, said SBA's most basic and most used type of loan — the 7(a) loans — are down 37 percent year to date. On the other hand, 504 loans are up 9 percent. The 504 loan program provides growing businesses with long-term, fixed-rate financing for major fixed assets such as land, equipment and buildings.

The SBA does not offer loans itself but rather guarantees 50 percent to 85 percent of a loan made by private banks or other financial institutions. The percentage of the loan guaranteed by the SBA varies depending on the loan program.

"Certainly we think that the guarantee would be attractive to a bank and help it make loans to small businesses in the current environment that it otherwise might not make," Temkin said.

"What we're finding is that many banks are raising their credit bar so much — to the point that they're not making loans with or without the SBA guarantee to the extent that they were before."

Tom Zernick, head of SBA lending for Citizens Bank, acknowledged that financial institutions have softened in SBA lending through the course of this year. Zernick's team originates and processes SBA credits for Citizen's entire footprint, which includes Michigan, Ohio, Wisconsin and Iowa. What he and his team have found is that the SBA loan is often a great fix for certain clients looking to preserve cash with smaller down payments and longer amortizations.

"We've used SBA loans aggressively to be able to provide those benefits to clients that don't want to put 20 or 25 percent down to buy a building or purchase equipment. They may only want to put 10 percent down, and we've allowed them to come to the closings with a lot less cash into the deal so they can preserve it for their working capital," Zernick explained.

He said Citizens Bank and others continue to look at conventional commercial loan applications on an ongoing basis, but they're using the SBA guarantee to shore up credits they might not otherwise offer conventionally. Because they get that 75 percent or 85 percent SBA guarantee, Zernick said, banks tend to be more comfortable with the collateral mix, or the down payment amount, or the length of time the business has existed.

"We are actually using SBA loans to help repair balance sheets, as well, because we do debt refinancing," Zernick added. "If a client is at another bank and needs help paying down payables or needs some permanent working capital, we entertain those applications through our SBA group."

For a small business, one of the biggest benefits of an SBA loan is the lower down payment requirement. If a business owner buys a $1 million building, for instance, a conventional loan would likely require a 20 to 25 percent down payment but as little as 10 percent down on an SBA-guaranteed loan.

"It's a sizable cash savings for a small business, and cash is king," Zernick said.

Another advantage is that an SBA loan provides longer amortization or repayment terms. On a conventional real estate loan, for example, a bank might do an amortization of 15 years, but with an SBA loan, there's the ability to go up to 25 years, so the borrower can substantially reduce his monthly principal and interest payment.

Lastly, there are no balloons on an SBA loan.

"Most conventional loans balloon, or mature, in three to five years, and the balance is due at that time," Zernick explained. "The bank can choose to renew the note or not. Because the SBA loan has no balloon, it gives the business owner access to permanent long-term capital. He gets sleep-at-night financing."

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