April 1, 2011

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On the Money

Small Business Lending Myths Debunked

Richard Gray

April 1, 2011

Contrary to what you’ve probably heard in media reports, banks are lending and are looking for qualified borrowers, particularly small businesses. In fact, banks work with the government-backed Small Business Association (SBA) to offer loans specially geared toward small businesses looking to grow. Despite banks’ efforts to get the word out about SBA lending, there are many misperceptions about what an SBA loan is and how it works. Let me dispel some of the myths. Myth: There is substantially more paperwork for an SBA loan than for a conventional commercial loan. Truth: SBA loans require just two additional pages of paperwork from the applicant than conventional commercial loans do: (1) an IRS request for tax transcripts to verify tax information furnished with the loan application, and (2) a personal history form to verify legal residence and check for criminal background. These simple forms do not pose substantial additional burden over a conventional commercial loan application, which includes sections for the company’s present and historical financial info, details on the business model and background on principals. Myth: My company is too big to qualify for an SBA loan. Truth: Until just a few months ago, the SBA used size and revenue guidelines based only on industry type, as determined by North American Industry Classification System (NAICS) codes. For example, a company in the general building/construction industry with annual revenues up to $33.5 million would be considered a “small business” by SBA standards. Retail and service industries are typically limited to annual revenues of $7 million, while manufacturing and wholesaling industries are typically limited to 500 or fewer employees to qualify for an SBA loan. However, in late 2010, an alternative size standard was implemented that allows businesses with a net worth less than $15 million or a three-year average net income of $5 million or less to qualify for an SBA loan. These new guidelines serve as a qualifier if a business fails to meet the first definition of small business based on NAICS codes. Myth: It takes longer to obtain an SBA loan than a conventional commercial loan. Truth: Conventional and SBA loans can take a month or more from application to closing, depending on the complexity and collateral being offered. Approval of the loans is where the timing varies. SBA’s “preferred lenders” (an official designation by the SBA) can keep the time it takes to obtain approval on an SBA loan to that of a conventional loan. An SBA preferred lender acts as the SBA’s agent and obtains SBA approval within 36 hours of the bank’s in-house approval. SBA does not do any underwriting and instead accepts the preferred lender’s underwriting. When not working with a preferred SBA lender, though, the myth can hold true, as the SBA has to underwrite and approve the loan in addition to the bank’s underwriting and approval process. This could take a few weeks longer than a conventional commercial loan or an SBA loan with a preferred lender. Myth: My company’s conventional loan cannot be refinanced into an SBA loan. Truth: Under the regular SBA Guaranteed Loan Program, a lender can consider a refinance or consolidation of existing conventional debt if three requirements are met: (1) The existing lender will not experience a loss. (2) The debt being refinanced is and has been current for the past 12 months (i.e., no late payments). (3) The new loan reduces the payment debt service by a minimum of 20 percent. Under SBA’s 504 Loan Program, which is used to finance fixed-asset acquisition or expansion, businesses have not historically been able to do any refinancing. However, due to the passage of the Small Business Jobs Act in late 2010, the SBA can now refinance certain conventional loans under the 504 Program for a limited time. If your conventional loan was made with the purpose of purchasing, remodeling or expanding a facility, or purchasing large equipment with a useful life of 10 or more years, you may be able to refinance into an SBA 504 loan. The benefits of doing this include locking in a fixed rate for the full 10- to 20-year term of the SBA portion of the loan (typically up to 40 percent of the total loan amount) instead of the typical 3–5 year fixed-rate guarantee on a conventional loan. The conventional, or bank, portion of the loan would be at market rates. The ability to refinance under these conditions will yield a better overall interest rate and should be taken advantage of before the incentive expires on or about September 2012. Richard Gray is senior vice president of commercial lending and SBA lending at Bank of American Fork, Utah’s largest community bank with 12 branches across Salt Lake and Utah counties and a loan office in Layton. Located out of the bank’s Murray office, Gray has assisted local small businesses obtain SBA funding for 35 years.
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