Gregory Gould, vice president and SBA relationship manager at Webster Bank, joined the bank four years ago after working at the U.S. Small Business Administration as a lender relations specialist. Webster is the leading SBA lender by dollar volume in Rhode Island and New England for 7(a) loans, and one of the 100 most active 7(a) SBA lenders in the country.
PBN: Briefly describe how an SBA 7(a) loan works, with respect to the borrower, the lending institution and the federal government.
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Learn MoreGOULD: SBA 7(a) loans are government-guaranteed loans made by a qualified lender. They mitigate the risks that would otherwise preclude a borrower from accessing funds to start or expand a business. They’re similar to an insurance policy that protects the bank.
PBN: What can a borrower expect in interest rates, fees and repayment periods? How is an SBA-backed loan better than loans on the private market in these areas?
GOULD: Generally, interest rates don’t differ between SBA and conventional loans, since they’re based on the level of risk of the borrower. The higher the risk, the higher the rate. SBA programs have certain caps that banks must adhere to in order to prevent predatory lending. The SBA’s 504 program for fixed assets fixes 40% of the loan for the entire maturity, 10, 20, or 25 years. Fixed rates for this program are currently around 3.75%.
There are minimal fees for a government-guaranteed loan – a small percentage of the guaranteed portion, calculated on a sliding scale based on the loan amount and loan program. You can pay them as part of the closing costs or finance them as part of the loan.
Depending on the use of proceeds, borrowers can take advantage of extended maturities to enhance available cash flow. For example, conventional real estate loans have a maximum maturity of 20 years; the SBA will allow 25 years.
PBN: What type of business or business situation is a good candidate for an SBA 7(a) loan? How does a borrower find the right bank or other lending institution?
GOULD: Any young business, typically less than 3 years old, is a great candidate. A new business is riskier than a mature business with a proven track record and customer base. It is worth noting that an acquisition is almost always considered a new business; even though the business may have been operating for a while, the borrower is a new entrepreneur. Service or trade-related businesses – anything from a plumber to a dentist – are also great candidates because they often don’t have enough hard assets to collateralize a loan.
Finding the right lender shouldn’t be too difficult, but it is an important step in the process. Your local SBA office publishes a listing of top-performing SBA lenders. I always suggest speaking with a few competent bankers, making sure they’re comfortable with SBA loans. Ask, “How many SBA loans have you made this year?” You want experience. If problems arise during the underwriting period, you’ll be dealing with an institution that’s well-equipped to resolve them efficiently.
Also, you want a lender who asks you questions, wants to learn about your business and is eager to find ways to help you based on your unique situation.
PBN: SBA loans require a personal guarantee from business owners and people in top management. Is that a risk that many borrowers are not able to accept?
GOULD: The SBA will approve loans that are not fully collateralized, in the interest of economic development, job creation and helping entrepreneurs who might not ordinarily qualify for reasonable rates and terms. However, the government still needs to protect taxpayer interests. Hence, the SBA requires anyone who owns 20% or more to personally guarantee a loan. Borrowers usually realize this and are almost always willing to pledge their assets to fulfill their small-business dreams.
PBN: Why is SBA lending growing in R.I.? What conditions of receiving these loans may be new in 2020?
GOULD: The average SBA 7(a) loan size in Rhode Island is up 67% this year. At Webster Bank, we are seeing more business acquisitions as baby boomers retire, often selling their enterprise to a long-standing manager to ensure a strong legacy.
Mary Lhowe is a PBN contributing writer.