Now may be the time for a Small Business Administration loan

Recent changes to the U.S. Small Business Administration’s financing programs may make the agency’s flagship 7(a) guaranteed and 504 Certified Development Company loan programs more appealing to both the small business community and the lenders that serve them.

The changes, which are provisions of the American Reinvestment and Recovery Act (ARRA), are designed to address the needs of both of these constituencies as they work to navigate this turbulent economic terrain.

The ARRA addresses the issue of costs associated with SBA loans head-on. In fact, as a result of the act, the guaranty fee on SBA 7(a) loans has been eliminated. This is significant, particularly in light of the escalation of these costs in recent years, and the premium that all small businesses place on retaining as much cash as possible in their operations. Prior to implementation of the change, the fee on the 7(a) guaranteed loans was between 2 percent and 3.5 percent of the guaranteed portion of the loan. As an example, a loan for the maximum allowable amount, $2 million would have had an associated fee of $53,750. That fee is now zero.

The Recovery Act also addressed borrower fees on the agency’s other financing vehicle, the 504 Certified Development Company loan program. Specifically, until implementation of the Recovery Act changes, the fee structure included a 1.5 percent Certified Development Company processing fee payable by the applicant. Pursuant to the act, that fee is now being paid directly by SBA. Like the 7(a) program, some 504 loans are for as much as $2, million. In such a case, this fee elimination would result in a cost savings of $30,000.

There are changes to the programs intended to address the needs of SBA’s lending partners as well. We all understand that there is a heightened sensitivity to risk in the commercial lending arena. The Act speaks to that concern by increasing the maximum guaranty percentage on the 7(a) guaranteed loan program to 90 percent. Up until now, SBA 7(a) loans over $150,000 (up to the maximum of $2,000,000) were subject to a maximum SBA guaranty of 75 percent. The act provides some relief to the lenders on the fee side as well. Specifically, under the 504 program, third party lenders that typically make a 50 percent first mortgage loan in front of SBA’s 504 loan, have been assessed a one time fee of .5 percent for the privilege of making that loan. This third party lender fee is now waived.

It should be noted that these changes are not permanent, but will be in place until the funding that supports the changes is exhausted. This is not likely to happen until at least the end of 2009.

These favorable changes can clearly yield significant cost savings to SBA borrowers and they come against the backdrop of historically low interest rates. So, if you are a small business owner thinking about pursuing an expansion, an acquisition, a refinance or any other strategic initiative, this may be the time to consider the SBA as a financing option.