Not Just Another Bureaucracy: The Small Business Administration's loan guarantee program is a lot more proactive than you might think

New Mexico Business Journal, Dec, 2001 by Susan Craig

NEW MEXICO IS A STATE OF SMALL business, and small business is always looking for the money needed to start up, to grow, to diversify. The U.S. Small Business Administration, or SBA, helps. Its assistance is not minimal. During the last fiscal year (October 1, 2000 through September 30, 2001), the SBA's two major lending programs provided $57.7 million to the state's small businesses. That money paid for equipment and machinery, inventory, working capital, debt financing or purchase of an existing business. It went to manufacturers, wholesalers, restaurants, real estate developers, hair salons, bagel purveyors, hotels, franchise operations, 'mom-and-pop' grocery stores.

The two major SBA lending programs are the 7(a) program, guaranteeing up to 80 percent of loans up to $100,000 and up to 75 percent on loans over $100,000, with a maximum guaranty of $750,000; and the 504 program, providing long-term, fixed-rate subordinate mortgage financing for acquisition and/or renovation of capital assets.

If your business needs a shot in the arm, however, you can't just run down to the SBA office and ask them for a loan. The SBA does not loan money directly, but rather it guarantees a certain percentage of loan monies provided by your bank. Here's what you should know.

Perks on Offer

An SBA lending package consists of a three-way partnership between your money, the bank's money and the SBA's guarantee to the bank. This spreads the risk, and makes loans more possible.

Another perk of SBA lending is that the terms of the loans may be longer: for example, Wells Fargo Bank offers terms of 25 years for real estate loans, 10 years (or the useful life of) equipment and seven years for a loan for working capital. If you were applying for an SBA 504 loan, according to Wells Fargo vice president Sondra Tye, that could make a difference of five years in loan repayment time and lower payments over a conventional loan.

Fees may be lower as well, and it's often possible to structure a loan with no future albatrosses such as balloon payments or variable interest rates. Ed Cadena, deputy district director and chief of finance for SBA District 682, offers a comparison, saying that "the biggest killer of small business is lack of cash flow; if we can give longer terms, the business can reinvest back into itself." An example:

* Conventional non-assumable loan for $750,000: 20-year amortization (term), 11 percent interest, fee of $7,500 = payments of $7,742 a month with a balloon payment of $681,105 after five years.

* SBA assumable loan for $750,000: 25-year amortization, negotiable interest at 10.5 percent for purposes of this example, guarantee fee of $18,671 = payments of $7,488 a month with no balloon payment. 'Guarantee fee' means the fee assessed on that portion of the loan guaranteed by the SBA.

Help Is at Hand

When you shop for a loan, you have many options. But you don't have to figure this all out yourself. There is help everywhere. Prior to a loan application, help is available for constructing a business plan that will include all the relevant information required by the bank. If you do not know how much money you will need (and lenders consistently report that most business people underrate how much they will need), the bank will not be able to determine the best loan package for you.

New Mexico is fortunate to have a strong network of 19 Small Business Development Centers (SBDCs), and most preferred and certified SBA lender banks will request loan applicants to use this resource. "I'm glad that the SBDC's free assistance is available to our customers," says Marjo Pace, vice president, Western Commerce Bank in Carlsbad. "I send almost all my customers there. The SBDC is always working to make their programs more accessible to the customer."

SBA lenders in New Mexico compliment the SBDCs for their assistance. "Financial institutions should be proud to have them," says Fred Brenson, president of Sunrise Bank. Michael Athens, government lending products specialist at Bank of American, concurs. "The customer often won't know what he needs, hasn't quite thought through the process," he says. "We suggest that customers go to the SBDC for assistance. The centers in New Mexico are excellent."

Another valuable source of assistance is the Service Corps of Retired Executives (SCORE), an SBA-sponsored organization that matches volunteer business management experts with clients in need of advice. Other organizations that receive SBA funding to provide technical assistance to small businesses as they prepare for microloan application (up to $35,000) are ACCION New Mexico, the Women's Economic Self-Sufficiency Team (WESST Corp) and the New Mexico Community Development Loan Fund.

Debunking the Myths

SBA lending has long been rife with myths. "It loans only really large amounts so if I don't need half a million dollars then I can't apply" "It's a federal program and therefore far too cumbersome and lengthy a process to undergo." "I can't get a loan for my startup business."