A new quick fix for small business borrowing can help the pet industry.
By Mark E. Battersby
The White House recently announced a $15-billion, multi-pronged plan to help ease the credit crunch affecting so many pet-product businesses. One program earmarks extra funding for loans and technical assistance by the U.S. Small Business Administration’s (SBA) “microloan” lenders.
In addition to extra funding for microloans, new ARC Stabilization Loans offer 100-percent guaranteed deferred payment of loans up to $35,000, which helps viable small businesses facing immediate economic hardship make payments on existing loans.
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 primarily be used to buy loans, and free up lending by community banks, credit unions and other small business lenders. With these financial institutions accounting for 40 percent of all SBA-backed lending, the SBA’s announcement provides assurance to secondary markets that the government stands ready to purchase 7(a) and 504 first-lien securities.
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.
Come and Get It
The SBA does not actually make loans to pet-product retailers and other businesses; it is primarily a guarantor of loans made by private banks and other institutions. SBA-backed loans do, however, carry lower interest rates and fees than their commercial counterparts, making them more affordable for entrepreneurs and small-business owners.
The SBA estimates that under their guidelines more than 25 million businesses nationally qualify as “small,” which is about 90 percent of all businesses. That encompasses everything except gambling-related businesses, non-profits, businesses that restrict patronage and some franchises that are on the SBA’s “watch list.”
The Basic 7(a) Loan Guaranty Program
The SBA’s 7(a) Program 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 and renovation, as well as new construction), leasehold improvements and even debt refinancing. Working through commercial lending institutions, loans up to 10 years for working capital and up to as many as 25 years for fixed-asset funding are available.
The temporary elimination of fees for 7(a) loans can mean substantial savings. Typically, those fees have ranged from 2 percent to 3.75 percent. On a $300,000 loan with a 75-percent guarantee, for example, the guarantee would normally be 3 percent. With the temporary elimination of fees, the pet-product business borrower would save $6,750 ($300,000 x 75% x 3%). With the new 90-percent guaranty, savings would be $8,100 ($300,000 x 90% x 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 pet-product businesses requiring “brick-and-mortar” financing. The 504 Program provides long-term, fixed-rate financing to small businesses to acquire real estate, machinery and equipment for expansion or modernization. The 504 Program, however, cannot 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 small: The pet-product operation cannot have a tangible net worth in excess of $7.5 million and cannot 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-percent application fee frequently charged to a pet-product business applying to the CDC for a loan has been eliminated. For a typical $600,000, Section 504 loan, 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 1⁄2 percent of the first mortgage in a Section 504 loan transaction.
Microloans, The 7(m) Program
The SBA’s microloan program provides short-term loans of up to $35,000 for use 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) that, in turn, make loans to eligible borrowers in amounts up to a maximum of $35,000. The average loan amount is about $13,000. Unfortunately, the proceeds from microloans are not useable 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 generally asks for the personal guarantee of the business owner, while requiring 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 since 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. For most purposes, the SBA’s maximum guarantee for any borrower remains at $1,500,000, or 75 percent of a $2 million loan.
A pet shop or pet-product business in need of 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, a representative typically responds—to the lender—within a few business days.
Today, thanks to the newly announced program, a pet-product business owner immediately benefits from a 90-percent loan guarantee, sees reduced fees for 7(a) loans and notices 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. <HOME>
Mark E. Battersby is a long-time expert and writer on news and developments within the ever-changing tax and financial arenas.
Industry Professional Site: Comments from non-industry professionals will be removed.