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Legislation enacted last December raised the maximum loan amount and total project size in the SBA's 504 and 7(a) programs. The new rules also made permanent a 7(a)-affiliated program called SBAExpress and increased its maximum loan amount to $350,000.
In addition, the legislation increased national funding levels for the 504 program 21 percent, to $5 billion, and the 7(a) program 28 percent, to $16 billion. SBA programs are increasingly self-supporting owing to improved loan performance and higher borrower fees.
SBA's 504 loan program provides businesses with long-term, fixed-rate financing for major fixed assets, such as land and buildings. SBA's maximum share of a qualifying project is now $1.5 million for nonmanufacturing firms, $2 million for nonmanufacturers that meet public policy goals, and $4 million for manufacturers. Public policy goals1 include business district revitalization, export expansion, and rural development and businesses owned by women, veterans, and minorities.2
Typically, a 504 project includes a loan secured with a senior lien from a private-sector lender for up to 50 percent of the project cost, a loan secured with a junior lien from a certified development company (CDC) for up to 40 percent of the cost, and a contribution of 10 percent equity from the small-business owner. SBA requires all 504 borrowers to create or retain one job within two years of the project's funding for every $50,000 (up to $100,000 in some cases) of CDC financing.
Why should a business consider a 504 loan? Growing businesses are often unable to qualify for traditional financing because of typical requirements of down payments of 30 percent or more. SBA's 504 program gives small-business owners access to the kind of long-term, below-market, fixed-rate financing that large corporations obtain through the bond markets. Advantages for borrowers include a lower down payment, fixed-rate financing that avoids the uncertainties of future market fluctuations, and a longer repayment term that brings debt service in line with the cash flow generated by the asset.
There are several advantages for the commercial lender as well. Lenders can reduce risk by financing a smaller portion of the project while maintaining a first-lien position on 100 percent of the assets being financed; retain commercial-account relationships while participating in long-term financing; participate in projects that exceed legal or administrative lending limits; sell their first-mortgage portion on the secondary market; broaden the community's tax base; and stimulate the local economy through job creation and retention.
Custom Processing Service Inc. (CPS) — Gregg Shemanski and Jeffrey Klinger established an Exeter Township, Pennsylvania, micronizing firm with three employees in 2000. (Micronizing is the process of pulverizing materials so they can be used in products such as paint, ink, and plastics.) In 2003, CPS installed new equipment and now operates what is believed to be the world's largest “air mill” in the micronizing field. To finance the new equipment and purchase a building, Shemanski and Klinger obtained an SBA 504 loan through the South Eastern Economic Development Company of Pennsylvania and Leesport Bank.
Miller Supply-Ace Hardware — Dale Miller of Miller Supply-Ace Hardware in Northampton, Pennsylvania, competes with large home-supply retailers by providing hands-on customer service. He expanded his business in 1999 by building a new, larger store. The expansion was financed through a $250,000 7(a) loan from National Penn Bank and a $460,000 SBA 504 loan from Allentown Economic Development Corporation.
Funding for SBA's flagship 7(a) loan guarantee program has been increased to $16 billion, or $3.5 billion above the program allocation in the last fiscal year. The maximum government guarantee to an individual business owner has been increased from $1 million to $1.5 million on loans with a maximum gross loan amount of $2 million.
In the 7(a) program, lenders provide loans that are, in turn, guaranteed by SBA to small businesses unable to secure financing through normal lending channels. Lenders primarily use the 7(a) program for loan applicants who want to start a new business, lack adequate collateral, or need a longer time to repay.
SBA requires personal guarantees from the principal business owners and may require liens on owners' personal assets. SBA also requires some collateral but typically does not turn down a loan when insufficient collateral is the only unfavorable factor.
The loan term depends on the use of the proceeds and the business' repayment ability: usually five to 10 years for working capital, up to 15 years for equipment, and up to 25 years for fixed assets, such as the purchase or major renovation of real estate.
Both fixed and variable rates are available in the 7(a) program. Rates are pegged at no more than 2.25 percent over the prime rate for loans with maturities of less than seven years and up to 2.75 percent over the prime rate for seven years and longer. For loans under $50,000, rates may be slightly higher.
SBA charges a guarantee fee, which the lender can pass on to the borrower. The fee is usually based on the dollar amount and, sometimes, on the maturity of the loan. The fee is 0.25 percent of the guaranteed portion of any loan with a maturity of one year or less.
On loans with maturities of more than one year, the guarantee fee is 2 percent of the guaranteed portion on loans of $150,000 or less, 3 percent on loans of $150,000 to $700,000, and 3.5 percent on loans of over $700,000.
The 7(a) program has broad eligibility requirements to accommodate a wide variety of small-business financing needs. Businesses must be for-profit and fall within the size standards set by the SBA. SBA determines if a business qualifies as small based on the average number of employees during the preceding 12 months or on sales averaged over the previous three years.3 Loans cannot be made to businesses engaged in speculation, gambling, or real estate investments.
SBAExpress authorizes lenders to use their own underwriting standards, procedures, and documentation and still receive a 50 percent SBA guarantee. Lenders typically use SBAExpress for loan amounts of less than $50,000 and lines of credit.
Kane Is Able Inc . — This firm began as a small trucking operation in Scranton, Pennsylvania, during the height of the Great Depression. Eugene J. Kane took over the family business in 1955 and expanded into warehousing with the help of an SBA direct loan. He later received three SBA 7(a) loans. Today, this warehousing, trucking, and packaging firm serves the northeastern U.S. and has over 600 employees and $70 million in annual sales.
Tolas Health Care Packaging — Carl Marotta, the owner of this Feasterville, Pennsylvania, company, started to develop packaging and adhesive materials for health-care and other high-tech industrial markets. He received an SBA 7(a) loan through Union National Bank and Trust Company to purchase a building. His sales continue to increase and his company has grown from 30 employees in 1991 to its current level of 132.
Dynamic Student Services — Daniel Lieberman started his textbook business out of his West Chester University dorm room. He soon formed a partnership with his parents, Michael and Miriam Lieberman, and opened his first retail location. Dynamic Student Services received an SBA loan in 1997 and has expanded to three locations. Annual sales were in excess of $6 million in 2003.
Sneaker Villa — Chris Lutz founded this Reading, Pennsylvania, company in 1989 with a $30,000 home-equity loan. In 1992, he received a $200,000 7(a) loan from Leesport Bank. The business has grown from one store with five employees to 14 retail locations with 200 employees. Sales in 2004 topped $30 million.
For information in Pennsylvania, contact John Fleming, Public Information Officer, SBA Philadelphia District Office, 900 Market Street, 5th Floor, Philadelphia, PA 19107 ; (215) 580-2718; email@example.com. In New Jersey, contact Harry Menta, Public Affairs Specialist, SBA New Jersey District Office, Two Gateway Center, 15th Floor, Newark, NJ 07102 ; (973) 645-2434; firstname.lastname@example.org. In Delaware, contact Jayne Armstrong, District Director, SBA Delaware District Office, 824 N. Market Street, Suite 610, Wilmington, DE 19801 ; (302) 573-6382; email@example.com. For information on SBA programs and services, go to www.sba.gov.