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Small Business Financing is Still Available Through the US Small Business Administration (SBA) and Banks

By Patrick Mucci, Vice President and SBA Specialist, KeyBank

Despite the challenging economic climate, small businesses can still obtain credit through banks that partner with the U.S. Small Business Administration (SBA), which guarantees business loans.

Recognizing that small businesses remain the most fertile source of both business growth and employment, the recently signed American Recovery and Reinvestment Act actually increases the availability of SBA financing. This represents one of the first and most directly beneficial effects of the Act, and a bright ray of hope in an otherwise often gloomy business finance landscape.

To understand the significance of the SBA financing aspects of the Act, it’s important to recognize a key negative factor that has contributed to the overall credit squeeze: the collapse of the secondary market for asset-backed securities, prompted by the decrease in the value of securities based on sub-prime mortgages. The secondary market had previously allowed banks to sell their SBA loans to investors, raising funds for those banks to make future loans to businesses and consumers. The overall tightening of credit markets has temporarily threatened the availability of SBA financing as the secondary market for securitized SBA loans has slowed considerably. (It has rebounded recently, but the speed and extent of its recovery remains unclear.) When banks are unable to sell their loans on the secondary market, they have to hold them on their books. As a result, some banks have become unable to make SBA loans. In fact, some banks are no longer taking new applications for SBA loans at all. Naturally, this has diminished access to SBA loans, one of the most desirable, dependable and affordable forms of financing for small businesses.

Fortunately, the new American Recovery and Reinvestment Act brings good news for small business financing through SBA programs.

The act provides $730 million to the SBA and changes its lending and investment programs, all initiatives that will help unfreeze credit for small businesses. The SBA is working on fully developing the various pieces of the legislation, and, as they do, financial institutions will implement them and businesses will benefit.

The funding includes:

• $375 million in the temporary elimination of some loan fees, making loans more affordable

• $255 million for a new loan program to help small businesses meet existing debt payments, providing liquidity to borrowers, known as “America’s Recovery Capital Stabilization Loans” or “ARC.”

• $30 million to expand the SBA’s Microloan program, which will help finance up to $50 million in new lending and $24 million in technical grants assistance to microlenders

• $70 million for improvements to SBA operations, including technology systems for more efficient lending and oversight processes, expanding the SBA’s Surety Bond Guarantee program (from $2 million to $5 million and in limited circumstances to $10 million) and increasing staff to handle new programs

In addition, the act also:

• Allows the SBA to increase its loan guarantees to 90 percent on some loans from current levels (75 percent on loans greater than $150,000 and 85 percent on loans less than $150,000)

• Allows the SBA to use its 504 Certified Development Program to refinance existing loans for fixed assets.

• Establishes secondary market liquidity for Section 7(a) loans, SBA’s largest guarantee program, as well as a secondary market for “first lien” 504 loans, which support small business capital-asset and real-property investments.

The government's heavy focus of the secondary markets is intended to stimulate further activity in secondary markets.

These changes in SBA lending through the American Recovery and Reinvestment Act are certainly welcome and timely. But it’s also important to recognize that many banks were making SBA loans even before these improvements were made.

Banks that are staffed by business-lending professionals who understand SBA lending, know their customers and recognize opportunities to deliver the benefits of SBA lending to customers are ideally positioned to lend through SBA programs even under present, distressed economic conditions.

These are banks in local markets making local lending decisions based on local knowledge. They are relationship based, so they understand their customers’ businesses in the context of local, as well as global, conditions. Therefore, they can realistically assess the risk in making a loan.

One very significant positive lesson in this recession is that the healthiest banks are well capitalized, with sensible credit standards, solid underwriting and detailed knowledge of the markets they serve. For example, KeyBank, as a whole, which has no exposure to subprime mortgage loans and which has continued to make sound credit decisions, actually increased its loans to businesses in January 2009 over the previous January.

Even during the well-publicized credit tightening that justifiably worries so many business people, KeyBank actually increased its SBA Express lending (a part of the SBA 7A program — see sidebar below) by 11 percent from January 2008 to January 2009.

Clearly, financing remains available for businesses that can demonstrate the ability to support themselves during currently challenging economic conditions. Just as clearly, banks cannot be faulted for reluctance to lend to failing companies. Most banks understandably prefer to lend to full-relationship clients these days, working with businesses whose operations they know thoroughly.

The advantages of SBA lending, a good idea in any business climate, have only intensified during this recession, with SBA-savvy banks ideally positioned to deliver.

About the author: Patrick Mucci is a vice president with KeyBank. He has more than 33 years’ experience in financial services and now specializes in government-guaranteed lending. His office is at 66 S. Pearl Street in Albany, and he may be reached at 257-9405 or by e-mail at Patrick_Mucci@keybank.com.

GETTING STARTED WITH SBA LOANS: THE BASICS

The U.S. Small Business Administration provides in-depth expertise to small businesses on structures, operations, management and financing. The SBA guarantees business loans, in partnership with banks, through two different small business lending programs.

The SBA 7A program provides the most commonly used type of SBA loan. A bank partners with the SBA, the bank processes the loan application under SBA processes, and the SBA provides a guaranty, protecting the bank should the business owner default on the loan. The bank essentially makes and administers the loan and the SBA backs it. SBA Express loans are part of the SBA 7A program, providing the fastest turn-around on loan applications.

The SBA 504 Program provides loans to businesses specifically for major fixed assets: to purchase land, buildings, and some types of equipment and machinery. A bank lends 50 percent of the total project cost, while a certified development corporation (CDC) lends 40 percent, using the 504 program, and the borrower contributes equity of 10 percent. The program reduces the risk to the bank in such a partnership and allows the borrower to expand the business while retaining operating capital. Interest rates and terms are more generous than conventional financing, although job creation requirements and other eligibility guidelines apply.

Visit the U.S. Small Business Administration web site at www.sba.gov for more information.

GETTING AN SBA LOAN

As with any business loan application process, obtaining an SBA loan requires the borrower to demonstrate the ability to pay back the loan through the cash flow of the business. Lenders seek proof of this ability by assessing the business’s management capability, collateral and owner’s equity contribution, among other factors.

They usually require a business plan, which the business owner often develops with professionals including an attorney, accountant and banker.

Most SBA loans require a personal guarantee by any owner with a 20 percent position in the business. And the credit scores of all owners comprise an important component in proving the ability to repay the loan.

Well-run businesses that demonstrate the ability to repay loans will find that banks will just about fight over them.