Understanding SBA financing

Published on Tuesday, January 26, 2010

By Allyson Brainson and Len Morrissey, Eastern Bank

The U.S. Small Business Administration (SBA) was created in 1953 as an independent agency of the federal government. Their mission is to aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation.

With the exception of Disaster Relief Loans, the SBA does not make loans directly to businesses. They act as a guarantor on bank loans and work with local CDC’s (Certified Development Corporations) to secure financing for owner-occupied commercial real estate and equipment. By partnering with the SBA, banks are able to offer financing to small businesses that they might otherwise be unable to provide. Guarantees of up to 90% of the loan amount help mitigate the banks’ default risk, allowing them to offer longer repayment terms and relaxed underwriting guidelines.

The SBA 7(a) serves as the SBA’s primary business loan program to help qualified small businesses obtain financing when they might not be eligible for business loans through normal lending channels. It is also the SBA’s most flexible business loan program, since financing under this program can be guaranteed for a variety of general business purposes. Loan proceeds can be used for most sound business purposes including working capital, machinery and equipment, furniture and fixtures, leasehold improvements, and debt refinancing. Loan maturity is up to 10 years for working capital and equipment financing. This program is available for most established for-profit businesses, however each business must pass SBA eligibility tests. These tests are designed to exclude businesses owned by individuals with high levels of personal liquid assets. Loan amounts under this program can be up to $2 million with guarantees up to 90%. The SBA fee for this guarantee varies between 2% and 3.75% of the guarantee amount. However, under the recent Economic Stimulus Plan/ Recovery Act of 2009 these fees are being waived through 2/28/2010.

The SBA Express program is a sub-set of the regular 7(a) program and is the most flexible SBA program available. Loan amounts are limited to $350,000 with a maximum guarantee of 50%. Unlike the regular 7(a) program, the SBA Express program can be used for lines of credit rather than just term loans. There are also fewer restrictions and more flexibility for the lender to use its own policies and lending guidelines. There is minimal up front paperwork and a streamlined application process.

The SBA 504 Loan Program, with the assistance of CDC’s (Certified Development Corporation), provides up to 90% long-term, fixed-rate financing for small to medium sized businesses that provide employment opportunities to individuals. This program offers below market, fixed rates to businesses for the purchase or construction of an owner-occupied building. It may also be used for the modernization, renovation, and restoration of a building including leasehold improvements or the purchase of equipment with economic useful life of 10 years or more. Whereas conventional bank financing for equipment or commercial real estate typically requires a down payment of 30%, the SBA 504 program offers 90% financing. The bank provides one loan for 50% of project costs at their standard rates and amortization, usually a 5 year term with a 20 year amortization for real estate. The CDC provides the second loan for 40% at a below market fixed rate. The borrower provides the remaining 10% of project costs. For equipment financing amortization may be up to 10 years versus the 5 to 7 year amortization typically offered in conventional financing. The longer amortization and lower rates reduce payments and improve the cash flow for the borrower while the lower down payment requirements allow the borrower to retain more of their money to use for their business. The fee for the SBA second loan is approximately 2.5% of the loan amount, however these fees have temporarily been drastically reduced to less than 1% under the Economic Stimulus Plan/ Recovery Act of 2009. As with the 7 (a) program this fee reduction is set to expire at the end of February 2010.

On October 7th, 2009 the SBA announced that Eastern Bank had outpaced its larger competitors to rank as the #1 SBA lender for the fiscal year ending 9/30/2009. The rankings are issued annually in October, based on the number of loans originated by each bank in the SBA fiscal year, which runs from October 1st to September 30th. Although Eastern Bank is only the 5th largest bank in the state by deposits, the bank’s desire and commitment to serve small businesses led it to the top spot in this year’s rankings.

Allyson Brainson is a Vice President and Business Banking Officer serving the Cape market. Please contact Allyson at (508) 923-2221 or a.brainson@easternbank.com for more information on SBA loans or any small business products and services. Len Morrissey is a Vice President and SBA Specialist serving all of Massachusetts and supporting our Business Bankers and Commercial Lenders in all matters relating to SBA financing. Len can be reached at (781) 598-7378 or l.morrissey@easternbank.com.