It’s no secret that federal budget cuts have forced the Small Business Administration to reduce the amount of loans it is able to guarantee. While that may be the case, those numbers are trending upwards. For the current fiscal year ending September 30 the SBA has backed 50,639 loans totaling $14.49 billion through its 7(a) and 504 programs – an increase from the prior year.
The lenders are affiliated by the SBA in sense that the lenders – bank or otherwise – extends the capital to the business and submit it to the SBA for their approval as a guarantor. If approved, the SBA will back up to 75% of some or the entire loan. This means that if the borrower defaults on the bank or lending institution, the SBA will pay that institution 75% of the balance.
Todd Harrington is managing director and chief sales officer for CIT Group where he oversees all origination activity nationwide. CIT Group, a preferred lender for the SBA, provides business loans, financial services and financing solutions worldwide. Harrington has over 18 years of working with entrepreneurs to find solutions for acquiring capital. He recently spoke with BLACK ENTERPRISE about some of the less known facts about the SBA lending program.
Entrepreneurs can get up to 90% financing on real estate. If an entrepreneur comes in with a strong business and positive cash flow, most banks outside the SBA programs will require a larger down payment, says Harrington. “This allows an entrepreneur to grow their business and reserve capital for working capital and growth so all their assets aren’t tied up in real estate,” he says.
Loan terms can extend up to 25 years. According to Harrington, most banks that don’t have an SBA lending platform are going to look to keep that term around 15 years or so. “What many banks will do is finance the loan but instead of 10% down it’s going to be 30-35% down and then probably give you a 10-year deal that’s based on a 15-year amortization schedule.” This, in turn can lead to a balloon payment in that tenth year.
SBA-backed loans have no balloon payments. As non-SBA backed bank notes come up for renewal and one-time balloon payments are required, “it’s really putting some entrepreneurs in a tough position because their bank that did the deal 10 years ago might not be in a position to refinance that note today even though the borrower might be performing,” claims Harrington.
Renovation and construction financing is available under SBA programs. Because land is a relatively good buy depending on the market, this could be an opportunity to fund ground-up construction since it is part of the use of proceeds covered in the 7(a) program.
Under the SBA program there is a maximum interest rate a lender can charge. Most SBA lenders base the rate they charge to lend small businesses on prime – currently 3.25%. To that base, they add a spread the SBA mandates is capped at 275 basis points (a unit relating to interest rates that is equal to 0.01 of a percentage point). Based on this formula, the highest interest rate a lender can charge would be 3.25 plus 2.75, or 6%.
Still, there’s no guarantee that even an SBA preferred lender will extend a loan. An entrepreneur’s best defense is positive cash flow, sound financial health, and particularly in the case of startups, a well-written business plan and good credit score. For more information on SBA lending programs visit the agency’s guaranteed loan programs page.