Beating the Credit Crunch

When the government enacted the American Recovery and Reinvestment Act in February 2009, it expanded the lending powers of the Small Business Administration (SBA), an often underutilized and previously criticized government agency expressly designed to help small businesses thrive. Initially, the infusion of funds and expansion of lending programs did little to ease the small business credit and lending crunch. Most banks and many businesses stifled the urge to lend or to borrow, waiting to see how deep the recession would cut into the economy.

“Access to capital is always a challenge for businesses even in the best of times,” said Penny Pickett, associate administrator for entrepreneurial development at the SBA. “When there is an economic disruption, then the challenge is even greater.”

The Recovery Act gave the SBA expanded tools to meet the financial challenge. To ease the credit lockdown and encourage lending by secondary markets for small business expansion, the SBA immediately increased the guarantee to banks on 7a loans from 75% to 90% of the loan’s value to lessen the bank’s risk; reduced or eliminated fees associated with the 7a and 504 loans; and eliminated fees and interest on smaller ARC loans (which expired at the end of September 2010) to help small businesses that were struggling to pay their bills, said Pickett, who was once a small business owner herself.

These measures have had their intended effect, increasing SBA’s loan numbers to pre-2008 levels. “By the end of 2009, we were well above our average loan rate for the previous couple of years,” Pickett said. And with credit risk reduced to banks, the agency has seen the return of 1,200+ active lending partners who, until now, had not been offering SBA loan products since 2007.

For some small businesses, such as Red Wing Dental Arts, with locations in Red Wing and Cottage Grove, Minnesota, the SBA’s loan initiatives provided the low-interest loan needed to build a new facility. Gary Iocco, Red Wing’s owner, did not hesitate in 2010 to take advantage of the SBA’s 504 asset purchase loan with its low 10% equity contribution of the borrower. “The SBA was our first choice as a lender,” said Iocco. “Otherwise, through a conventional bank loan, we would be looking at 25% down and much higher interest rates.”

Borrowers like Iocco do not work directly with the SBA for needed funds. Rather, a portion of the funds come through an SBA lending partner, with the local community bank working with the third-party SBA lender. In Iocco’s case, the local community bank lent 50% and the SBA lending partner 40% of the loan value, leaving Iocco with 10% down to secure the loan.

“Our local bank handled all the paperwork as well as negotiating the deal with an SBA lending partner and loan disbursements. All I had to do was sign the papers,” Iocco said. Once he submitted the blueprints for the new facility, plus 5 years of business and personal financials, it took a mere 6 weeks for the loan to be approved. Thus far, Iocco has taken six draws on the loan during the construction phase of his new facility, each approved by the SBA lending partner.

Although Iocco and his staff are occupying the new facility, there are still minor parking lot curb and gutter issues as well as landscaping that must be completed. Once the facility is completely finished, Iocco will close on the bank portion of the loan, which is locked in for 3 years at a 6.5% interest rate and renegotiated every 3 years until repaid. Then 90 days later he will close on the SBA portion of the loan, locking in a 20-year fixed interest rate at the time of closing.

Whether small business owners need money to buy new equipment, build a new facility, pay off existing loans, start up a new business, or rebuild after a declared disaster, the SBA has a wide array of financing options and resources that small businesses can tap into (see sidebar). The most important element to gaining access is establishing a close relationship with a local community bank. Iocco had a 20-year history with his bank.

“We encourage businesses to form a relationship with a local bank long before they ever need the money,” said Pickett. If you are having trouble finding a lending institution that is willing to participate in SBA lending programs or have been turned down previously for an SBA loan, Pickett suggests contacting an SBA District Office or an SBA Resource Partner in your state, including Small Business Development Centers, Women’s Business Centers, or a SCORE Chapter in your state (www.sba.gov/localresources/index.html). They can help walk you through the process and provide a list of banks in your area willing to work with the SBA. “Our banks tell us that approximately 60% of businesses who were previously turned down for an SBA loan through a local bank may be approved after working with a district office or receiving technical assistance from a trained resource provider,” Pickett said.

It is also important to pay attention to details when working with your lending partner. Iocco thought he had all the details covered until an hour before closing the deal with the bank, when he discovered the city had raised the building permit fee that morning by an additional $11,000. “I would suggest that if you are building a new facility or expanding your existing laboratory, you contact every city department individually so there are no surprises along the way,” he said. He also narrowly escaped a minor disaster when he contacted the fire department to ensure the building was in code. The inspection resulted in moving the propane supply outside the building, which would have been a major headache had the sheetrock phase of construction been completed.

“We are excited and a bit nervous. Everything in this new facility as well as my personal assets are collateral on this loan, which is as it should be to prevent the borrower from simply walking away,” Iocco said. “But we are confident this was the right business move for us. With the economy still slow, construction costs are down. This allowed us to build a larger facility for $200,000 less than it would have cost us 3 years ago when we first explored the project.”