What options do small-business owners have when expansion is the only way to survive, but a lack of sufficient collateral means they fail to qualify for a standard business loan? According to Rob Holden, New Resource senior vice president, commercial lending, one of four government-guaranteed loan programs that New Resource offers may be the answer.
“If a client needs to expand their business, but lacks the guarantor support or adequate collateral to qualify for a loan, we can often offer them financing through one of these programs,” says Holden. With a guaranteed loan, the government pledges to purchase a portion of the unpaid balance from the bank if the borrower defaults.
SBA programs provide essential capital
The most common loan of this type is a Small Business Administration (SBA) 7(a) Loan, which provides working capital and long-term financing to businesses that don’t qualify conventionally. These loans can be up to $5 million (but are usually under $1 million) and provide a 75 percent government guarantee, with the bank managing the loan. “It’s a way for the bank to help viable businesses that have a credit weakness,” says Holden.
Another SBA loan, the 504 Guaranteed Loan, provides long-term, fixed-rate financing for fixed-asset purchases (such as real estate or equipment) that help a business expand or modernize. “These are designed for small businesses requiring brick-and-mortar financing to purchase the property in which they are located,” says Holden. “This program helps businesses achieve ownership and control of their facility and overcome the risks and uncertainty of being a renter.”
The SBA 504 loan offers low fixed rates that are subsidized by the government, but not guaranteed. The bank partners with the SBA to fund the loan. “Typically, the customer puts in as little as 10 percent, the bank provides a 50 percent first deed of trust, and the SBA finances the balance through a long-term debenture,” says Holden.
USDA loans fund rural businesses
Another financial lifeline, the USDA Business and Industry loan program, was designed to support rural economies with loan guarantees for business purposes other than agriculture. “These are loans to businesses in rural areas that don’t have great access to bank lending or find it difficult to get loans,” says Holden.
Small businesses may use USDA loan proceeds for working capital, machinery and equipment, or for buildings and real estate. A winery, for example, could qualify for a loan to upgrade its infrastructure for making wine, but not for growing the grapes.
California offers flexible loans
The fourth option for businesses that fall outside conventional underwriting standards is the California Capital Access Program (CALCAP). Through this program, the bank can lend up to $2.5 million and obtain matching funds to offset potential loan losses. The client pays a 2 percent premium to obtain the loan, which is placed in a segregated loan-loss reserve account. The bank contributes 2 percent to the fund and the CalCap program contributes 4 percent. As the CalCap loan-loss reserve fund grows through additional enrolled loans, it provides an insurance policy against potential losses. The CalCap program is very flexible: loans can be short- or long-term, secured or unsecured, and have fixed or variable rates.