SBA lending: What’s new for 2005?

Recently, the Small Business Administration (SBA) extended its deadline until April 3, 2005, for advance comments from the general public on key issues relating to its small business standard size, the rules used by the SBA and other federal agencies to determine whether a business is considered small.

This is just one of a number of rules that could potentially change later this year in regards to SBA funding. And although the SBA has received its full funding request for the new federal fiscal year, it appears the first applicants will have the best chance of getting funding before the rules potentially change again.

While the program is fully funded, SBA loan fees are back up to pre-9/11 levels and larger loans are harder to obtain. The best advice from bankers: let us help you evaluate the pros and cons of the loans available.

What’s new for 2005

Because of the expiration of post-9/11 growth incentives on Oct. 1, 2004, fees for SBA loans, which are calculated on the guaranteed portion of the loan, rose from one percent to two percent for loans under $150,000 and from 2.5 percent to three percent for loans from $150,000-$700,000. Loans over $700,000 require a 3.5 percent guaranty.

In addition, combining SBA financing with traditional bank-backed financing is no longer an option under the program’s revised guidelines.

Before reaching for plastic to cover a major expenditure, businesses should still consider the remaining positives of SBA funding.

For smaller loans that fit most small business needs, a substantial fee may be a deal-breaker, however borrowers may be able to get their fees financed by the lender. For businesses in need of financing an amount greater than an SBA loan can provide, borrowers should consider breaking down borrowing needs to get higher-risk activities funded by a 7(a) loan, and obtain traditional bank financing for separate, lower-risk projects.

Still a safety net

Of course, many start-ups and early-stage businesses can only obtain affordable financing through the SBA 7(a) program, which offers long terms and low monthly payments with government backing, helping to finance businesses without a long track record.

While fee schedules are up and creative financing options are down, the application process for a 7(a) loan remains essentially the same. The SBA had announced plans to modify the definition of small businesses based on number of employees instead of revenue, but that proposal has been shelved for now.

Being prepared

Although 7(a) funding is available for businesses without substantial corporate histories, potential borrowers will need a thorough business plan that carefully details the acquisition process and terms; biographical, credit and financial histories for the people supporting the company; and projected or historical business financial statements.

Lenders will still be looking for as much detail as possible from would-be borrowers. Because of the lack of business collateral, the personal net worth and quality credit histories of the business owners are key. Your lender should be able to assist you in presenting the best possible case for financing.

Time is of the essence

Loans of $100,000 take about five to seven days to receive credit approval from an SBA Preferred Lender and two to three weeks to move through the closing process when a well-thought-out proposal is presented. Larger loans can take 10 to 15 days to receive credit approval and 30 to 60 days to move through the closing process.

Business owners considering this type of loan should talk with their banker as soon as possible so they don’t miss out on the fixed amount of funding set aside by the federal government to guarantee SBA loans.

Dale Tumey, Vice President, Business Banker Senior at Huntington Bank, can be reached at (231) 922-5619 or email him at dale.tumey@huntington.com.

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