SBA gives women a foot in the door; a prequalification program helps those who might have been turned down for bank loans get the expansion money they need

Nation's Business, Dec, 1997 by J. Tol Broome

A prequalification program helps those who might have been turned down for bank loans get the expansion money they need.

Rhonda Cline launched her manufacturing business--whirlpool baths and spas--on a shoestring three years ago. Demand for her products grew quickly; revenues for aqua Life Industries in Helena, Mont. went from $52,000 in 1994 to $400,000 last year. But Cline's lack of expansion capital began to pose a serious threat to the company. Some customers, frustrated by delays, canceled their orders.

As a fledgling entrepreneur and single mother of two, Cline figured that her chances of securing a bank loan were slim. Then she read in the local newspaper about a pilot U.S. Small Business Administration loan program for women-owned businesses.

Cline followed up and this past February obtained an SBA-guaranteed bank loan through the Women's Prequalified Loan Program she had read about. The loan financed relocation to a larger facility, additional equipment, and supplies. And there was enough left over for working capital. Cline expects 1997 revenues for the firm--which has four full-time and two part-time employees--to be $500,000.

The Women's Prequalified Loan Program began in 1994 in 16 SBA offices around the country. It went nationwide in October 1996 and is now offered by 55 of the SBAs 68 district offices.

From the program's inception through this past June, the SBA issued 871 prequalification letters, and 674 loans totaling $71.6 million were closed.

Through the program, women business owners can receive SBA prequalification for a bank loan guaranteed by the agency. The guarantee means that in the event of a default, the SBA will cover most of the unpaid loan balance.

Unlike other SBA programs that guarantee bank loans, the women's program enables the borrower to get the guarantee before approaching a bank. The bank becomes involved only after the SBA has signed off. This is a big advantage for young firms because banks are more likely to approve a loan that has been prequalified by the SBA.

"I had been turned down several times by banks due to a lack of collateral, even though my business was profitable," says Cline. "The Women's Prequalified Loan Program places less emphasis on collateral. It has been vitally important to my business that I was able to obtain one of these loans. It has helped me expand my business to a whole new level."

Sherrye Henry, assistant administrator for the SBA's Office of Women's Business Ownership in Washington, D.C., says: "This program has been received enormously well. The SBA and Congress together devised this program for women. It has worked particularly well for women with service businesses who do not have widgets to offer as collateral."

Before the program began, Henry says, a woman seeking financing was likely to be stiff-armed at the bank as soon as she walked in the door. "Most women never even got to the part about the ongoing positive history and good track record of their company," she says. While prequalification "does not ensure that the bank will make the loan," Henry adds, "it does enable most owners to get a good look at the loan request from the lender."

How The Program Works

The program focuses primarily on the credit history, character, and experience of the borrower. Consequently, there are no stated equity or collateral requirements.

The maximum loan amount is $250,000. The SBA provides banks with guarantees of up to 80 percent on loans up to $100,000 and up to 75 percent on loans of more than $100,000

To be eligible, a small business must be at least 51 percent owned, operated, and managed by women, its annual sales cannot exceed $5 million; and it must employ no more than 100 workers.

For loans under $100,000, the SBA requires only a one-page application from the borrower. For loans over $100,000, the borrower must submit an expanded application, a business plan with projections, resumes on the principals, a copy of the most recent year-end business financial statement or tax return, and a personal financial statement.

Loan maturities are based on the ability of the business to repay, on the purpose of the loan proceeds, and--for loans for fixed assets--on the "useful life" of the assets, or how long they can be expected to last.

For real estate, the term can go to 25 years. Maturities of loans for other fixed assets, such as equipment and machinery, usually are limited to seven to 15 years.

For most working-capital loans, the borrower can take up to seven years to repay--although in some instances the repayment period can be as long as 10 years.

These terms compare favorably with the typical maximum terms for conventional business loans: 15 years for real estate, seven years for other fixed assets, and four years for working capital.

Interest rates may be fixed or variable and are negotiated between the borrower and the lender. The rates are subject to SBA maximums. The maximum rate for loans of $50,000 or more is prime (based on the prime rate published in The Wall Street Journal, which recently has been 8.5 percent) plus 2.25 percent for loans of less than seven years, and prime plus 2.75 percent for loans of seven years or more.