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A last resort financing fix and more

July 1st, 2009 / By: / Management

A recently announced $15 billion, multi-pronged plan is designed to help ease the credit crunch affecting so many marine fabrication businesses. One part of the plan 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 to help viable small businesses facing immediate economic hardship make payments on existing loans.

The recently announced plan will also reduce small-business lending fees and increases the amount the SBA will guarantee on some small business loans. However, the new program does not stop there.

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 assurances to secondary markets that the government stands ready to purchase 7(a) and 504 first-lien securities.

Since banks depend on the secondary markets for liquidity, a local community bank may now be more willing to lend to a marine fabrication business because it will have the confidence that the U.S. Treasury will be a ready buyer of the loan in the secondary markets.

The SBA is immediately raising guarantee levels on some of its loans and temporarily eliminating certain loan fees. Microloan intermediaries are already providing loans ofup to $35,000 to start-up, newly established and growing small businesses.

Expansion of the SBA’s Surety Bond Program will allow more small businesses to compete for contracts by raising the maximum amount for contracts that qualify for SBA surety bonds to $5 million, and up to $10 million forcertain contracts.

The SBA does not actually make loans to marine fabricators or 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 lower fees than their commercial counterparts, making them more affordable for entrepreneurs and small business owners.

An SBA guarantee gives marine fabricators access to the same kinds of reasonably priced, long-term financing available to large businesses by virtue of their size and economic clout. Borrowers apply for loans directly with a lending institution, such as banks, credit unions or Small Business Lending Companies.

Remember, however, only lenders approved to participate in SBA lending programs can help with SBA-guaranteed loans. It is the private lender who determines whether a borrower’s application is acceptable. If it is, the lender forwards the application and its credit analysis to the SBA.

Who uses SBA loan guarantees? In 2008, of the $18 billion in SBA backed loans, 35 percent went to start-up businesses, nearly 32 percent went to minority owned businesses, and nearly 23 percent went to women-owned businesses. The most-frequently financed industries in 2008 were services,retail trade, accommodation/food service, construction firms, and manufacturing.

The maximum loan amount for a 7(a) loan is $2 million. For 504 loans, 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 $1.5 million, or 75 percent of a $2 million loan.

A marine fabrication 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, they typically respond—to the lender—within a few business days.

It should also be noted that the U.S. Small Business Administration is itself an excellent resource (www.sba.gov) for small businesses. It has a host of resource partners (www.sba.gov/localresources/index.html), including many participating lenders all too willing to assist a marine fabricator and his or her business reap the rewards of this newly expanded SBA program and its other programs.

Considering how tough it is for marine fabrication businesses to find affordable financing, you would think those who oversee government-subsidized funding would be overwhelmed. Surprisingly, while many marine fabricators find themselves caught in the middle of the credit crunch and economic downturn, few have been turning to the country’s so-called “lender of last resort,” the U.S. Small Business Administration.

Today, thanks to the newly announced program, a marine fabrication or upholstery business owner will immediately benefit from a 90-percent loan guarantee, see reduced fees for 7(a) loans and notice 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.

Maura Keller is a freelance writer and author based in Plymouth, Minn.

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