posted 09/13/10 | Banking
By: Linda Hanson, President – Kansas City Region
Small to mid-size businesses are the primary job growth engine in the U.S. economy. And they’ve been Enterprise’s growth engine as well because of our focus on working with private businesses.
This recession has been especially difficult for many small businesses and it’s important for their owners to know about the resources available to them. Of course, Enterprise has substantial resources – from our experienced bankers to Enterprise University classes to our financial advisory services - but the SBA can also be a useful resource in certain situations. We thought this might be a good time to re-acquaint you with the SBA and some recent changes in SBA programs.
The SBA provides a number of financial assistance programs for small businesses designed to meet key financing needs, including debt financing, surety bonds and equity financing. However, the SBA is best-known for its guaranteed loan programs for small businesses.
The 7(a) loan program is SBA’s primary and most flexible loan program, with financing guaranteed for a variety of general business purposes. It’s designed for start-up and existing small businesses and is delivered through commercial banks.
The SBA’s 504 loan program provides long-term, fixed rate financing to acquire fixed assets such as real estate or equipment for modernization or expansion. It’s delivered by Certified Development Companies – private, non-profit corporations set up to promote community economic development.
The SBA also offers a microloan program (up to $35,000) and a disaster assistance loan program to repair or replace property, inventory and equipment that have been damaged or destroyed in a declared disaster.
The 7(a) loan program is the most widely used because it allows borrowers with positive cash flow and few assets to obtain a loan. The SBA does require a lien on assets – except for receivable and inventory – owners also must make a personal guarantee. These loans have fixed or floating rates. Currently the maximum floating interest rate is 2.75 percent over prime, which can be lower than traditional lending. 7(a) loans are broad in nature and can be used to finance working capital, machinery and equipment, furniture and fixtures, land and buildings or management buyouts.
Two important advantages of the 7(a) and 504 loans are their repayment options. For conventional equipment loans, the borrower has three to five years to repay the loan. With SBA loans, the business owner has up to 10 years. For commercial real estate loans, repayment terms traditionally are 15 to 20 years. With an SBA guarantee, the amortization period may be extended up to 25 years. Also, for 7(a) loans there are no penalties for loans repaying early with an amortization less than 15 years.
The American Recovery and Reinvestment Act of 2009 (ARRA) allocated $730 million to the SBA to help small businesses and later added another $305 million. This funding allowed the SBA to make several temporary changes in its programs, including:
• Elimination and reduction of fees for borrowers on 7(a) loans and 504 loans.
• Raising the guarantee on 7(a) loans to 90%.
• Doubling the surety bond guarantee to $5 million to help small businesses compete for federal construction and service contracts.
Other changes involve refinancing opportunities and access to investment capital for small businesses.
SBA programs aren’t a fit for all small businesses, but they can be valuable tools in the hands of a creative and experienced banker as part of an overall business financing strategy. For more information contact your Enterprise relationship manager or visit www.sba.gov.
Linda Hanson is the President of the Kansas City region of Enterprise Bank & Trust. lhanson@enterprisebank.com (913) 663-5525