SBA Alternative Financing

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West Hartford, CT

phone: 860.232.9858
fax: 860.232.9438

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General Business
by Jack Veale

Is your business in a cash crunch? Have you been looking to borrow money for expansion, but been turned down by a bank because your credit history is nonexistent or less than exemplary? Many family businesses may need additional financing but have had prob-lems using conventional lenders, such as banks, because they donít meet the banks’ stringent financial standards or are undercapi-talized. If these problems sound familiar, consider one of the many programs offered by the Small Business Administration (SBA) as an alternative financing source.

What Is the SBA?
The SBA was established in 1953 to ìaid, counsel and protect the interests of the Nationís small business community.î To accomplish this, the SBA works with finan-cial intermediaries, banks and other lending institutions to provide loans and venture capital financing to small businesses unable to secure financing through normal lending chan-nels. While the SBA does not loan money directly to businesses, it does facilitate the process by guarantying loans made by con-ventional lenders. What the SBA looks for in return is above all the ability to repay the debt, management capability and adequate collateral. It also requires all owners who own at least 20% of the company to personally guaranty the debt.

Eligibility for SBA Loans
Most types of businesses are eligible for SBA loan programs. Interested businesses must be for-profit enterprises, do business within the United States and have reasonable owner equity to invest.
Small Business Size Standards
One of the most important concerns in quali-fying for a SBA loan program is falling within the SBA’s small business size standards. Here are general guidelines grouped by indus-try. In some cases, the government further refines the size standards by specific SIC code.

  • Industry Small business size stan-dards
  • Retail/Service $3.5 to $13.5 million in gross receipts
  • Construction $7.0 to $17.0 million in gross receipts
  • Agriculture $0.5 to $3.5 million in gross receipts
  • Wholesale No more than 100 employees
  • Manufacturing 500 to 1,500 employees

Gross receipts are measured using an average of the preceding three years, and employee levels are measured over the preceding 12 months.
You can use the proceeds of an SBA loan for most general business purposes, including to purchase real estate to house business opera-tions, to acquire furniture, fixtures and equipment, to purchase inventory, and to use as working capital.

Specific SBA Loan Programs

The SBA has a variety of loan programs to fit the needs of most borrowers. A few of the more popular programs are:

7(A) Loan Guaranty Program. The 7(A) Loan Guaranty Program is one of the SBAís primary lending programs. The total amount of the loan you request from the lender has no legislated limit, but the maximum amount the SBA can guaranty is generally $750,000. Thus, with a lender requesting the maximum SBA guaranty of 75%, the total loan amount available under this program typically is lim-ited to $1 million. You can use the proceeds for any of the business purposes mentioned here. This particular program requires a sub-stantial amount of documenta-tion and asso-ciated fees to process loans.

The LowDoc Loan Program. This program significantly reduces the documentation and fees associated with the 7(A) program: The borrower and lender need only to complete a one-page application. The SBA must approve or deny the application within 36 hours after it is submitted. The maximum amount available under this program is $150,000, with the SBA guarantying 80% of amounts for loans up to $100,000 and 75% of the amounts between $100,000 and $150,000. Effective in 1998, the prospective lender can  electronically submit applications for LowDoc Loans.

CAPLines Loan Program. CAPLines is the umbrella program under which the SBA helps small businesses meet their short-term and cyclical working capital needs. A CAPLines loan can be for any dollar amount up to the maximum SBA guaranty amount of $750,000 (except for the small asset-based line described below). Five types of loan pro-grams falling under the CAPLines umbrella are:

  1. Seasonal Line. This advances against anticipated inventory and accounts receivable when businesses experience seasonal sales fluctuations and can be revolving or nonrevolving.
  2. Contract Line. This finances direct labor and material costs associated with performing assignable contracts and can be revolving or nonrevolving.
  3. Builders Line. This is similar to the contract line, except that the project under construction serves as the collateral.
  4.  Standard Asset-Based Line. This asset-based revolving line of credit is for businesses unable to meet credit stan-dards associated with long-term credit. Businesses draw from this line of credit based on existing assets and repay as their cash cycles dictate. Because these loans require continual servicing and monitoring of collateral, the lender may impose additional fees.
  5. Small Asset-Based Line. This is simi-lar to the standard asset-based line, except that the maximum amount avail-able is $200,000, and stricter servicing requirements exist.

Interest Rates, Fees and Terms of Repayment

The borrower and lender negotiate interest rates, but rates are subject to SBA ceilings, which are pegged to the prime rate. Interest rates may be fixed or variable. Fixed rate loans must not exceed the prime rate plus 2.25% if the maturity is less than seven years. If the maturity is seven years or more, the maximum rate is prime plus 2.75%. When a business borrows $50,000 or less, the ceil-ing ranges between prime plus 3.25% and prime plus 4.75%. Variable rate loans may be pegged to either the lowest Prime rate or the SBA optional rate peg, which is a weighted average of rates the federal government pays for loans with maturities similar to the aver-age SBA loan.

To offset the costs of the SBAís loan pro-grams to the taxpayer, the SBA charges lenders a guaranty and servicing fee for each loan approved. Lenders typically pass these fees on to the borrower once they pay them. The fees are based on the amount guarantied, as the chart illustrates:

Amount Guarantied Guaranty Fee
Less than or equal to $80,000 2%
$80,001 — $250,000 3%
$250,000 — $500,000 3.5%
Greater than $500,000 3.875%

In addition, all loans are subject to a 0.5% annualized servicing fee, which is applied to the outstanding balance of the SBAís guaran-tied portion of the loan. Maturities for SBA loans vary, as the SBA tries to match the maturity to the borrowerís ability to repay the loan without causing undue financial hardship. Useful guidelines to keep in mind are maximums of seven years for working capital loans and 25 years for real estate and equipment loans.

A Viable Alternative
As you can see, the SBA represents a viable alternative to conventional financing. Due to the above market interest rates, fees and col-lateral required, businesses shouldn’t con-sider SBA loan programs a permanent solu-tion to securing the financing necessary to sustain their long-term growth. But these programs can help businesses cope while building the credibility and credit wor-thiness that conventional lenders require.

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