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SBA Lending at a Glance – A Win-Win Solution

SBA Lending at a Glance – A Win-Win Solution

SBA Lending at a Glance – A Win-Win Solution

The U.S. Small Business Administration (SBA) was officially established in 1953, and over the past six-plus decades has provided millions of loans and other forms of financing to small businesses across the U.S., Puerto Rico, the U. S. Virgin Islands and Guam.

The SBA works with lenders to provide loans to small businesses and is responsible for establishing guidelines for loans extended by lenders, community development organizations and other lending institutions; and it guarantees these loans will be repaid – mitigating much of the risk associated with lending to smaller and “riskier” businesses.

Over the years, many community banks have avoided offering government loan programs for various reasons – the most common being the lack of a clear understanding of these programs. But the simple fact is, providing a full slate of lending solutions to small businesses is important, and gaining an understanding of these loan programs is not as complex as it may appear.

The following is an easy-to-follow overview of the three most widely utilized loan programs offered by the SBA and the U.S. Department of Agriculture (USDA):

SBA 7(a) Loan Guaranty Program
 

Use of Loan Proceeds

  • Real estate construction, purchase, expansion & refinance (minimum 51% owner-occupied)
  • Working capital
  • Purchase of furniture, fixtures, machinery & equipment
  • Business start-up or acquisition

Qualifiers/Details

  • Businesses must be For Profit
  • Tangible Net Worth < $15,000,000 and Net Income After Tax < $5,000,000 (2-Year Average)
  • Maximum loan amount of $5,000,000
  • Loan guaranty up to 90% of the loan amount with a maximum guaranty of $3,750,000
  • Maximum variable interest rate = Wall Street Journal Prime Rate + 2.75% or LIBOR alternative
  • Loan guaranty fee ranges from 2% to 3.75%
  • Loan terms vary depending on use of loan proceeds

Benefits to Participating Banks

  • U.S. Government Guaranty of up to 90% of the loan amount under the SBA 7(a) Loan Program.
  • Expand market share by utilizing government loan programs to meet the credit needs of business owners that do not qualify Under conventional lending standards and guidelines while reducing loan portfolio risk and increasing profitability.
  • Reduced reliance on bank participations. Government-guaranteed loans are not subject to the bank’s legal lending limit.
  • Capital ratios can be improved – the guaranteed portion of the loan is not included in the calculation for risk-based assets or subject to reserve requirements.
  • Reduce loan portfolio credit risk through the guaranty and the concentration of risk through secondary market sales.
  • Increased liquidity and earnings through secondary market sales.
  • Significant yields can be achieved on invested funds due to substantial non-interest premium income on secondary market sales and through ongoing annual servicing income.

SBA 504 Loan Program
Use of Loan Proceeds

  •  Real estate construction, purchase, expansion, & refinance (minimum 51% owner-occupied)
  • Purchase of furniture, fixtures, machinery & equipment

Qualifiers/Details

  • Business must be For Profit
  •  Tangible Net Worth < $15,000,000 and Net Income After Tax < $5,000,000 (2-Year Average)
  • Maximum loan amount of up to $5,500,000
  • Lender finances up to 50% of project costs through a conventional 1st mortgage loan
  • Local Certified Development Company (CDC) finances up to 40% of eligible project costs though a 2nd mortgage loan
  • Maximum interest rates:
    • First mortgage lender provides variable or fixed conventional rates
    • CDC provides below market fixed rate financing
    • SBA fees are approximately 3% of the loan amount
    • Borrower must meet job retention or creation requirements

Benefits to Participating Banks
 
• Competitive advantage gained by offering the borrower a blended fixed interest rate
• Lender finances only 50% of project costs
• No Agency documentation or reporting requirements
• Lender can take advantage of CRA credits

USDA Business and Industry Program
 

Use of Loan Proceeds

• Real estate construction, purchase, expansion & refinance
• Working capital
• Purchase of furniture, fixtures, machinery & equipment
• Business start-up or acquisition

Qualifiers/Details

  • Businesses can be For Profit or Non-Profit
  • Business must be located in a qualifying rural area with a population center of 50,000 or less Maximum loan amount up to $25,000,000
  • Loan Guarantees vary as follows:
    •  Up to 80% for loans of up to $5,000,000
    •  Up to 70% for loans in excess of $5,000,000 up to $10,000,000
    • Up to 60% for loan in excess of $10,000,000 up to $25,000,000
  •  Interest rates are negotiable with the lender
  • Minimum Tangible Net Equity Requirement of 10% for existing businesses and 20% for start-ups
  • Loan Guaranty Fee of 3% and Annual Renewal Fee (currently .50%). Both fees are calculated as a percentage of the guaranteed principal loan amount
  • Loan terms vary depending on use of loan proceeds

Benefits to Participating Banks

  • Same as those listed under SBA 7(a) Loan Guaranty Program

Since the end of the Great Recession, more and more community banks are offering SBA and USDA loan programs to their customers and prospects – allowing these banks to extend credit to businesses that cannot typically qualify for conventional bank financing, while addressing the need to mitigate lending risk. The utilization of SBA and USDA Loan Programs is a positive step toward achieving this goal.

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