When the Bank Says No

Following is a “good news” quote from Bloomberg BusinessWeek Small Business Financing entitled, “An Uptick in Small Business Loans from Big Banks,” posted by Patrick Clark on March 12, 2013:

Biz2Credit, which Bloomberg BusinessWeek profiled in October, calculates its monthly Small Business Lending Index.  The findings: Big banks approved 15.9 percent of the small business loan applications in the index, up from 15.3 percent in January 2013 and 11.7 percent in February 2012. February’s big bank approval rates were the highest since Biz2Credit began compiling the index in January 2011. Small bank approval rates have also ticked up, to 50.3 percent of loans in February, up from 49.9 percent in the previous month and from 47.6 percent in February 2012.

Biz2Credit Chief Executive Officer Rohit Arora pointed to a handful of reasons for higher approval rates: A stable economy over the past 18 months has given banks an historical basis for making loans, and attractive premiums on securities backed by Small Business Administration-guaranteed loans are giving banks greater incentive to work with small businesses.

In 2009, I have worked as the Business Lending Manager for Members Choice Credit Union (Members Choice) in Houston, TX. During a time when small business lending virtually came to a halt in the United States, Members Choice hired me to start up a small business lending department specializing in the U.S. government sponsored SBA loan program. From the vantage point of a small business lender who was still accommodating small business loan requests the last four years, I witnessed time and again small businesses who found they no longer had a source of credit at the bank where they kept their company funds. The combination of an economic recession, with a trend toward larger financial institutions, led many small business owners to seek financing from unconventional means such as credit unions and banks offering the SBA government sponsored loan programs. Having painted such a bleak background for small business financing trends the last few years, the above quoted information is indeed good news for small business owners.

Seeing banks become more accommodating to small business loan requests, and seeing the economy recover, why would a small business owner still be attracted to an SBA government sponsored loan program? I usually sum up that answer in one phrase saying, “lower down payments, longer repayment terms, and easier qualifying criteria than conventional bank loans.” Cash is a precious commodity to a growing small business.  As the business grows, its needs for capital to support that growth can be funded from within the business itself, if the business has an accommodating credit partner to fund new facilities needed for that growth. The SBA loan program offers a long term loan product which provides permanent working capital injections and financing for long term capital assets such as equipment and real estate. By funding these long term needs with long term debt, the small business owner is assured their financing is in place for 25 years on real estate and for 10 years on non-real estate transactions. Combine that with the lower equity requirement demanded by an SBA lender versus a conventional lender, and the points add up in favor of the small business.

Speaking of points, the SBA loan does not come for free. The U.S. Small Business Administration is a federal agency that does a better job of paying its own way than any other federal agency. The typical SBA borrower will pay an SBA guaranty fee for his loan equal to approximately 2.5% of the loan amount. These fees fund operations of the U.S. Small Business Administration, and they are a long term cost amortized over the life of the 10 or 25 year loan. For many small business owners, this fee is a bargain for long term financing that assures and sustains the success of their business.

I find that a majority of my small business loans have funded either small business real estate or the purchase of a business. SBA real estate loans fund purchases of new facilities for the business, remodeling and expansion of existing facilities, as well as new construction of new buildings for the business.  SBA lenders are especially proficient at providing interim construction financing as part of the same loan as the 25 year permanent financing.  Our construction-to-perm loans involve only one loan closing with only one set of loan closing costs. We use a professional construction management company to qualify the contractor, and to monitor the job and control the disbursements to the contractor.  This valuable service can eliminate the need for a contractor’s “payment and performance” bond to save money for the small business owner on the construction project cost.

In addition to small business real estate and small business acquisition financing, I also use the SBA loan program to finance partner buyouts, new business equipment, permanent working capital injections, and restructuring of short term or expensive debt into more favorable repayment terms. It is a privilege to be a leader in the SBA lending community in Houston.  I am the 2013 president of the Houston Association of Government Guaranteed Lenders, and our trade association represents over 300 SBA lenders in the 32 counties including and surrounding Harris County. A listing of these lender members can be found at www.haggl.com.