The White House recently announced a $15-billion, multi-pronged plan to help ease the credit crunch affecting so many businesses — a plan that could potentially help many struggling electrical contractors. Surprisingly, while many electrical contracting businesses find themselves caught in the middle of the credit crunch and economic downturn, few have turned to the country's so-called “lender of last resort” — the U.S. Small Business Administration (SBA), based in Washington, D.C. Considering how tough it is for contractors to find affordable financing these days, that may be changing. The organization's recently expanded programs open up new options for small business borrowing.
One program earmarks extra funding for loans and technical assistance by the SBA “microloan” lenders. The new plan will also reduce small-business lending fees and increase the amount the SBA will guarantee on some small business loans. However, the program doesn't stop there. Let's take a look at some of the specifics of this plan to see how recent policy changes might benefit you and your business.
The recovery program
The U.S. Treasury Department will boost bank liquidity by purchasing small business loans in the secondary markets. The $15 billion from the U.S. Treasury will be used primarily to buy loans, thereby freeing up lending by community banks, credit unions, and other small business lenders. With these financial institutions accounting for 40% of all SBA-backed lending, the SBA's announcement provides assurances to secondary markets that the government stands ready to purchase 7(a) and 504 first-lien securities.
Because banks depend on the secondary markets for liquidity, a local community bank may now be more willing to lend to an electrical contracting business, for example, because it will have the confidence that the U.S. Treasury will be a ready buyer of the loan in the secondary markets.
The SBA is immediately raising guarantee levels on some of its loans and temporarily eliminating certain loan fees. Microloan intermediaries are already providing loans of up to $35,000 to start-up, newly established, and growing small businesses. In addition to extra funding for microloans, new ARC Stabilization Loans offer 100% guaranteed deferred payment of loans up to $35,000 to help viable small businesses facing immediate economic hardship make payments on existing qualifying loans.
Expansion of the SBA's Surety Bond Program will allow more electrical contractors and other small businesses to compete for contracts by raising the maximum amount for contracts that qualify for SBA surety bonds to $5 million, with bonds of up to $10 million, for certain contracts.
Come and get it
The SBA does not actually make loans to electrical contractors; it is primarily a guarantor of loans made by private banks and other institutions. SBA-backed loans do, however, carry lower interest rates and lower fees then their commercial counterparts, making them more affordable for entrepreneurs and small business owners.
An SBA guarantee gives electrical contractors and other business owners access to the same kinds of reasonably priced, long-term financing available to large businesses by virtue of their size and economic clout. Borrowers apply for loans directly with a lending institution, such as banks, credit unions, or small business lending companies.
It's important to remember, however, only lenders approved to participate in SBA lending programs can help with SBA-guaranteed loans. The private lender determines whether or not a borrower's application is acceptable. If it is, the lender forwards the application and its credit analysis to the SBA.
The SBA estimates that more than 25 million businesses nationally qualify as “small” under its guidelines — which accounts for about 90% of all businesses. That encompasses everything except gambling-related businesses, nonprofits, businesses that restrict patronage, and some franchises that are on the SBA's “watch list.”
Who uses SBA loan guarantees? In 2008, of the $18 billion in SBA-backed loans, 35% went to startup businesses, nearly 32% went to minority-owned businesses, and nearly 23% went to women-owned businesses. The most frequently financed industries in 2008 were services, retail trade, accommodation/food service, construction firms, and manufacturing.
The Basic 7(a) Loan Program
SBA 7(a) is the agency's primary business loan program. Designed to help small businesses obtain financing when they might not otherwise be eligible through normal lending channels, the 7(a) program is the most flexible.
Financing under this program can be guaranteed for a variety of general business purposes, such as working capital, machinery and equipment, furniture and fixtures, land and buildings (including purchase, renovation, and new construction), leasehold improvements, and even debt refinancing. Working through commercial lending institutions, loans are up to 10 years for working capital, and up to as much as 25 years for fixed asset funding is available.
The temporary elimination of fees for 7(a) loans can mean substantial savings. Typically, those fees have ranged from 2% to 3.75%. On a $300,000 loan with a 75% guarantee, for example, the guarantee would normally be 3%. With the temporary elimination of fees, the electrical contracting business borrower would save $6,750 ($300,000 × 75% × 3%). With the new 90% guarantee, savings would be $8,100 ($300,000 × 90% × 3%).
Certified Development Company (CDC) “504” loans
Designed as a long-term financing tool for economic development within a community, the SBA's 504 program helps businesses requiring “brick-and-mortar” financing, providing long-term, fixed-rate financing to small businesses to acquire real estate, machinery, and equipment for expansion or modernization. The 504 cannot, however, be used for working capital or inventory, consolidating or repaying debt, or refinancing. Nor can a business engaged in speculation — or investments in rental real estate — qualify for 504 lending.
Under the 504 loan program, “small” means the operation does not have a tangible net worth in excess of $7.5 million and does not have an average net income in excess of $2.5 million after taxes for the preceding two years.
Central to the 504 loan program is an entity known as a Certified Development Company (CDC). This entity is essentially a nonprofit corporation that has been set up to contribute to the economic development of its community. The 270 CDCs nationwide work with the SBA and private-sector lenders to provide financing to small businesses.
For a Section 504 loan, the 1.5% application fee frequently charged to an electrical contracting business applying to the Certified Development Company for a loan has been eliminated. That means for a typical $600,000 Section 504 loan, for example, fees saved would equal almost $9,000. What's more, the SBA will temporarily eliminate the fee it charges the first mortgage lender, a fee equal to ½% of the first mortgage in a Section 504 loan transaction.
The 7(m) Program
The SBA's microloan program provides short-term loans of up to $35,000 to be used by small businesses for working capital or purchases of inventory, supplies, furniture, fixtures, machinery, and/or equipment. The SBA makes funds available to nonprofit community-based lenders (intermediaries) which, in turn, make loans to eligible borrowers in amounts up to a maximum of $35,000. The average loan amount is in the neighborhood of $13,000. Unfortunately, the proceeds from microloans cannot be used to pay existing debts or to purchase real estate.
The SBA makes or guarantees a loan to an intermediary who, in turn, makes the microloan to the applicant. Each intermediary lender has its own lending and credit requirements, of course, and will generally ask for the personal guarantee of the business owner as well as require some type of collateral. Each intermediary is also required to provide business-based training and technical assistance to micro-borrowers.
How much, how fast?
The maximum loan amount for a 7(a) loan is $2 million. For 504 loans, the loan structures and amounts vary, because lenders and borrowers each determine how much equity they are putting into the loan. However, for the SBA portion of the loan, the maximum amount is either $2 million or $4 million, depending on the purpose of the loan. Typically, the SBA's maximum guarantee for any borrower remains at $1.5 million or 75% of a $2 million loan.
An electrical contractor that needs working capital, to make payroll or to buy inventory can immediately apply to a local SBA participating lender. Once the SBA receives a complete application package from the lender, it typically responds within a few business days.
The U.S. Small Business Administration (www.sba.gov) is an excellent resource for small businesses. It also has a host of resource partners (www.sba.gov/localresources/index.html), including many participating lenders that are more than willing to help an electrical contractor reap the rewards of these newly expanded SBA programs.
Thanks to these programs, an electrical contracting business owner will immediately benefit from a 90% loan guarantee, see reduced fees for 7(a) loans, and notice that fees have been eliminated for many SBA guaranteed loans. Microloan intermediaries around the country are already providing loans of up to $35,000 to start-up, newly established, and growing businesses. So don't delay. Check out these new rules today. They just might be the answer you've been looking for.
Battersby is a freelance writer in the suburban Philadelphia community of Ardmore, Pa. He can be reached at [email protected].