The SBA's Guaranteed Loan Program
by J. Tol Broome, Jr.

Ask 10 massage therapists to tell you the most frustrating aspect of running their small business, and eight of them will probably say financing. Obtaining adequate funding to meet day-to-day working capital, equipment and facilities needs is a major challenge. You might dream of expanding your business into a massage clinic or day spa, but without money, how can you make your dreams come true?

There may be help in sight. In recent years the Small Business Administration's (SBA's) guaranteed loan program has become an attractive solution to business owners facing capital restrictions. However, many massage proprietors have little knowledge of the program's advantages, or they believe it to be too complicated.

"The SBA was formed over 40 years ago to help small businesses get started in business and to help them grow once they are in business," says Mike Stamler, a spokesman for the SBA. "I think we are accomplishing that from year to year.

"The SBA is a good potential source of financing for any business owner," he adds. "Particularly if they can't get conventional financing from a commercial lender."

"Wait just a minute," you say. "I've heard that the SBA creates a mound of paperwork and months' worth of headaches for even the smallest loan request. This SBA guy must be talking about a different program."

Nope. Up until the late 1980s the SBA's reputation as a bogged-down government bureaucracy was well-founded. It was not unusual for a loan request consisting of several inches of paperwork to take months to process. But that is no longer the case. The SBA has undergone a number of radical changes in recent years that make it one of the most user-friendly government agencies for small-business owners. Not only has the program been revamped to allow easier access, but also a number of new guaranteed loan programs have been started to meet the financing needs of more small-business owners.

The facts support Stamler's claim that the SBA has become a proactive supporter of small business. Since its inception in 1953, the SBA has guaranteed more than 750,000 loans totaling in excess of $100 billion. In recent years, the average volume has been about 40,000 guaranteed loans and more than $7 billion.

Advantages of an SBA loan
How can you tap into this financing resource for your massage-therapy venture? With the guaranty program, a bank actually extends the loan to the small business with the SBA providing a guarantee of repayment for a certain percentage of the loan amount (usually up to 75 percent).

The SBA offers four key advantages.

First, because the SBA assumes most of the credit risk, commercial banks generally are more willing to consider riskier deals that normally might not be considered bankable. For instance, approximately 25 percent of all SBA loans extended are to start-up entities, which are generally considered untouchable by conventional commercial banks.

Second, the terms of repayment generally are more favorable than those offered with conventional commercial financing. For real estate loans, the term can go up to 25 years. For fixed-asset loans (trucks, fixtures, etc.), the term may be as long as 10 years depending upon the useful life of the asset being purchased; and for working capital loans, the borrower may take as long as seven years to repay the loan. These terms compare favorably with the typical maximum terms for conventional business loans of seven years for fixed assets and four years for working capital.

Third, the program is very inclusive. While there are some restrictions in terms of how a small business is defined, the SBA estimates that more than 90 percent of all businesses in the United States qualify for SBA financing. And there is no minimum loan amount, with a maximum loan amount of $2 million and a maximum guaranty amount of $1 million.

The fourth key advantage is the relatively low cost of financing, compared to other high-risk capital providers, such as commercial finance lenders and venture-capital companies. The SBA charges a guaranty fee for term loans based on a sliding scale of 1 percent for loans up to $150,000; 2.5 percent for loans ranging from $150,001 to $700,000; and 3.5 percent on loans above $700,000.

For example, on a $667,000, 75-percent-guaranteed loan the guaranty level would be $500,000. This would result in a guaranty fee of $12,500 (2.5 percent x $500,000).

The maximum rates that can be charged for loans above $50,000 are prime (based on the Wall Street Journal-published prime rate, which currently is 4 percent) plus 2.25 percent for loans of less than seven years and prime plus 2.75 percent for loans of seven years or more.

For loans between $25,000-50,000, maximum rates must not exceed the prime rate plus 3.25 percent if the maturity is less than seven years, and the prime rate plus 3.75 percent if the maturity is seven years or more. For loans of $25,000 or less, the maximum interest rate must not exceed the prime rate plus 4.25 percent if the maturity is less than seven years, and the prime rate plus 4.75 percent, if the maturity is seven years or more. Many banks will even do fixed-rate SBA guaranteed loans.

What is required
The business owner works with her banker in filling out the paperwork to apply for the loan. So, finding a bank that has some experience in SBA lending is essential. How can you find out what banks are in the market for SBA loans? You can call the bank directly and ask. You can also check with the state SBA office. Additionally, you may want to ask your accountant if she has had any experience in working with banks that participate in the SBA guaranteed-loan program.

However, before finding a bank to handle the actual loan request, several documents should be prepared to expedite the process:

• A narrative business plan.

• Future profit-and-loss projections for three years.

• Résumés on key managers and owners.

• Outline of how the loan will be used, including a list of assets to be purchased.

• At least three years of historical financial statements on the company.

• Personal financial statements on all owners.

• Proposed collateral structure.

The business plan may require only four or five pages to summarize these areas, but the important thing is that the small-business owner demonstrates to the banker and the SBA that the idea and potential pitfalls have been thoroughly considered. Some of the sections that should be included are: background; products and services; marketing; management; operations; milestones you plan to reach; and funds required to run the business. Your local library should contain a number of good books to help you with the preparation of your business plan.

There are also a few basic financial requirements for the program. For existing operations, the SBA generally looks for a debt-worth ratio (total liabilities/total assets) of not more than 3:1 subsequent to the loan being made. A start-up must have at least 30 percent in equity invested by the owners.

In addition to the capital requirements, the SBA looks very closely at cash flow (both historical and projected) and the background and competence of management.

SBA's proactive program
The SBA Low Documentation Loan Program (LowDoc) is the best example of the agency's proactive attempts to provide lending programs that adhere to the needs of small businesses. Over the years the SBA has heard many complaints from small-business owners and bankers that the guaranteed loan program is too cumbersome. In response to these complaints and in an effort to reduce paperwork requirements, the SBA created the LowDoc loan program. The program was first offered as a pilot in 1993 in a few locations around the country and was so well-received that it is now offered to small-business owners nationwide.

The LowDoc program can be used for loan requests under $150,000. As with other guaranteed loans, the borrower works with his bank in formulating the loan request with the bank actually submitting the request to the SBA. The stated objective of the LowDoc program is to put the emphasis on the borrower's character, credit history and projected cash flow with less significance placed on percentage of equity and collateral. As an added incentive to banks to extend LowDoc loans, the guaranty level provided by the SBA can be as high as 85 percent.

"The SBA has made it easier than ever before to get smaller loans," says Stamler. "This program is new, but it has already proven to be extremely popular both with small businesses and banks."

The documentation requirements are far more manageable than those imposed for a standard SBA guaranteed-loan request, which typically involves the completion of 10 or more forms and/or narrative summaries from the borrower. The SBA requires only an application, with the borrower completing the front page and the bank filling out the back page. The lender completes the rest of the paperwork and submits the package to the SBA, which guarantees 36-hour turnaround time once the application is received.

Start-ups are eligible for LowDoc loans, as are existing small businesses. For an existing business to be eligible, it must employ fewer than 100 employees and have average annual sales for the preceding three years of less than $5 million. The restrictions for maximum interest rates, fees, terms and uses of loan proceeds are the same in the LowDoc program as for the standard guaranteed loan program.

 The SBA program is one of the best-kept secrets in the intricate world of financing. And according to Stamler we can expect to see the SBA continue to make its guaranteed loan programs more user-friendly for those operating a small business, such as massage therapists.

"You will see an SBA that continually examines and adjusts its product mix to handle various credit needs," he says. "We will continue to fine tune. It's an issue of adjusting to what the consumer needs."