Small business owners have long complained about the red tape, long waits, and prohibitive collateral requirements of Small Business Administration-guaranteed loans. This spring the agency will introduce two new SBA loan programs that will funnel capital to underserved entrepreneurs directly through nonprofit microfinance organizations, says Grady Hedgespeth, director of the SBA's Office of Financial Assistance in Washington, D.C. He spoke recently to Smart Answers columnist Karen E. Klein about the two new loans, as well as the brand-new 504 commercial mortgage refinance program and how they work. Edited excerpts of their conversation follow.
Karen E. Klein: What new loan programs is the SBA adding to its portfolio for 2011?
Grady Hedgespeth: The most exciting are our Community Advantage and Small Loan Advantage programs. They are a simpler and easier way for lenders to make smaller-dollar loans and get a full SBA guarantee of up to 85 percent.
What are the rules for these new programs?
They are open to borrowers who would regularly qualify for an SBA loan, with no geographical restrictions. The loan must be $250,000 or less.
What institutions will offer them and at what rates?
The Small Loan Advantage will be for 630 of our preferred lenders, including the largest banks, such as Wells Fargo (WFC), Bank of America (BAC), and U.S. Bank (USB), as well as regional banks.
Interest rates vary by the size of the loan, but generally they will be around prime plus 2.75 percent.
What about Community Advantage?
We're using the same process, but we're making it available for the first time to what we call "mission lenders." These are lenders who are primarily not-for-profits and have been engaged in community economic development.
Because they will provide technical assistance and take a bigger risk, their interest rates can go up to prime plus 4 percent.
Exactly. We want to get small dollar amounts into our underserved communities, especially women-owned and minority-owned businesses and those located in lower-income communities. We hope to reverse a trend from 2008 to 2010, when we had a 5 percent drop in SBA lending to those underserved markets.
A lot of those entrepreneurs do not own homes or other assets they can put up as collateral. How do they qualify?
That's one reason we're bringing in the mission lenders, who will spend enough time with those entrepreneurs to convince us that their businesses are good risks on a cash-flow basis.
Many of the businesses in these underserved markets have a story, but it takes a while to really understand it and get comfortable with it. Banks are high-volume businesses, and sometimes they don't have the ability to know who is a good risk and who is not.
What will the application process be like?
They fill out a one-page form, front and back. It's up to the lender if they want to see a business plan, but my counsel for any small business is that you always should have a good business plan. And the [borrower] has to justify the use of the proceeds and [his] ability to repay.
You've also just announced a refinancing program for commercial mortgages under the 504 loan program. How will that work?
It's a temporary program established last September as part of the Small Business Jobs Act. It allows for the refinancing of commercial mortgages for owner-occupied property and expires in 2012.
The 504 loan will allow a lender to take a first mortgage and refinance it, even if the collateral is not what it was and the property has declined in value. The new financing will be based on a current, fair market assessment of the property. The lenders will get our typical 504 loan structure, with the borrower putting up 10 percent equity, 50 percent coming from the first mortgage lender and the SBA taking on 40 percent as a second mortgage. So in essence, we will stand behind the lender on that property.
What do you expect the impact of that program to be and how will it work?
It will be extremely important, especially for companies with balloon payments coming due. It will take a lot of properties that are under water and make them attractive loans for the banks.
It's going to be open to companies that have been in business at least two years and have been paying monthly payments on time for the past year at a minimum. Applications will be available starting Feb. 28.
You mentioned having a business plan. What else do you advise small businesses seeking credit to do?
Call their SBA district office and ask for the list of resource partners in their community. There's a whole skeletal structure that supports small business, including Score and the Women's Business Centers. Those people are extremely good at helping entrepreneurs think through their business plans and get ready to put their best face forward with lenders.