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SBA loans have many advantages.

Question: How do SBA loan guarantees help a surprisingly large number of businesses get the deal done?

One key to helping businesses move forward with their expansion plans is to solidify their financing necessary to acquire a new property. Frequently, the prospective purchaser is generally a sound company, with the exception of a few blemishes and some fears associated with the traditional five-year mortgage.

Management knows the company will thrive with the new real estate acquisition, but traditional commercial lending streams are encumbering the deal's progress. In an effort to help American business prosper, the SBA guaranteed over 40,000 business loans in FY 1998, many of which were used to finance real estate purchases for business purposes.

The SBA Loan Programs offer distinct advantages over standard commercial mortgages:

* Unlike the typical five-year commercial mortgage with a balloon payment, the SBA encourages longer term business financing. A borrower can select financing of their real estate acquisition with a loan maturity of up to 25 years;

* There is no prepayment penalty (if the borrower gives 21 days prior notice): As the business grows and prospers, they can opt to prepay the loan in part or in it's entirely;

* Save on Refinancing Fees: Few businesses can pay off their entire balloon payment in five years, and that creates a cycle of continually refinancing every five years. With refinancing, of course, comes additional financing fees, legal expense and closing costs, as well as the stress of reentering the financing process every five years. The SBA process eliminates each of those expenses and headaches because of the longer loan term;

* Smaller Monthly Payments: Having the loan amortized over a 25-year period allows for significantly smaller monthly payments. This is a convenience buyers in the residential marketplace have used for years to make ownership an affordable reality;

* More Building for Your Buck: Taking 25 years to repay the loan obviously creates smaller payments. This also means a small business can confidently move forward on getting approved for a larger mortgage and get more bang for the dollar.

There is a myth that SBA financing is only for loans up to one million dollars. Well, let us dispel that myth right here.

SBA lenders can lend up to their legal lending amount plus the guaranteed portion of each loan they make (the guaranteed portion cannot exceed $750,000 or 75 percent of the whole loan). Let's say that the banks lending limit per borrower is $1 million. The lender in this example could lend $1.75 million to that borrower, because the additional $750,000 is guaranteed by the SBA and is not at risk by the lender.

Just as above, if a bank's lending limit is $3 million, the bank can lend $3.75 million to the borrower. The advantage of utilizing the SBA guarantee is that the lender can exceed their lending limit and the borrower can be in the position to obtain a larger loan at no additional risk to the lender - making it significantly easier for a small business to get approved for larger amounts.

While a bank is able to make a loan in excess of $1 million, that does not mean that they want to. It is always their choice. However, there are other methods available to lenders to help the borrower obtain a loan in excess of $1 million.

Some Examples: Lenders can make a participation loan or they can make what we call a "Piggyback" loan. In either case, the idea is that the primary lender is limiting their risk.

In a participation loan, lenders will "partner up" in making a loan. One lender (the lead lender) will manage the entire transaction, but will only lend a percentage of the entire loan, while the other lender will provide the remaining portion of the loan. In most cases, this "partnership/participation" is rather seamless to the borrower.

In the other alternative, the Piggyback loan, the SBA lender will make a second position loan and arrange for a non-SBA lender to make the remainder of the loan in a secured first position. Each loan will have its own terms, and generally the borrower will make two monthly payments, each for their respective portion of the entire loan.

It is not unusual for a borrower to obtain $3 million or even more using either of the two methods described above. Now that the myth is dispelled, the question then becomes, why won't most lenders use these or other methods to help their applicants? Well, that will be one of the topics in our continuing weekly series. In addition, we will be responding to your individual questions that you fax to us.

Steven Kravitz is one of a handful of experts who own and operate both a Small Business Lending Company (SBLC) and a Small Business Investment Company (SIBC), both licensed by the SBA. Steve is the president of The Loan Source, Inc., one of only 14 Small Business Lending Companies. Mark Anthony is a business development consultant advising businesses, Realtors and property owners. Steve and Mark welcome your questions via fax at (212) 683-3692 or send inquires to Ask The Lender, 347 Fifth Avenue, Suite 310, New York, NY 10016.
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Title Annotation:Small Business Administration; Focus on: Banking and Finance
Author:Anthony, Mark
Publication:Real Estate Weekly
Date:Mar 17, 1999
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