Cutting red tape at the SBA

By Deborah L. Cohen

CHICAGO (Reuters.com) -- Many small- to mid-sized companies eschew government-lending programs, holding fast to the fear that the rewards of wading through a  bureaucracy aren't worth the effort.

Yet much has changed in the past decade. Today, the application for a government-backed business loan can often be handled by the lending institution and doesn't require direct contact with the U.S. Small Business Administration, the independent agency set up by the federal government in 1953 to help smaller companies get a leg up.

The SBA operates within 10 regions in the United States and works in tandem with banks, local chambers of commerce and business development groups to promote entrepreneurship.

Judith A. Roussel, the SBA's Illinois district director since 1999, and an agency veteran, spoke with Reuters about SBA initiatives in Chicago, most of which operate the same way throughout the country. Find details on SBA in your area here

How is SBA doing in today's tough economic environment?

Roussel: Our lending is down in Illinois, as well as the rest of the country. We think there are a number of reasons. One of the things is the notion, real or perceived, that the downturn in the economy makes businesses fearful of stepping out and seeking capital. A lot of the commercial lenders that would participate with us or do small business lending were involved in some sub-prime lending and it's had an impact across the board. So they're tightening credit standards a bit.

How can the SBA help during this kind of liquidity crunch?

Roussel: We help not only to mitigate the risk of (commercial) loans but it's actually very good for a lender to participate with us because it helps them with their liquidity. They're able to sell the guaranteed portion of their loans in the secondary market. It doesn't count against their capital reserve requirements.

Can a small business come directly to the SBA for a loan?

Roussel: No, we don't do direct lending anymore. That's the way we used to operate. We finally got smart enough to realize, why are we making these loans when that's what all of these banks do? So we let them do what they do best and we work with them to give them the guarantee to enhance the likelihood of small businesses getting the capital that they need.

So your function is to collaterize the loans of lending institutions such as banks?

Roussel: That is what we do. On a loan of up to $150,000, we will guarantee 85 percent and over that we'll guarantee 75 percent up to a maximum loan of $2 million.

What is the SBA doing to break down the application process?

Roussel: In the last number of years, we have worked toward making it more conducive for banks to make loans by making the programs simpler, less paperwork, especially for smaller loans --  $250,000 or less. We now allow certain lenders to be express lenders, just using their normal paperwork, their normal application procedures, whatever they would normally do, and we'll automatically give them a 50-percent guarantee. We have several versions of this express program.

How many types of loan programs does the SBA offer?

Roussel: We have two major different loan programs. 7(A) is general purpose -- for almost any legitimate business need - equipment, supplies, working capital, to renovate a building. For those that really need larger amounts to do long-term financing of fixed assets, maybe some major equipment systems, or maybe to buy land or construct a building, we give them long-term financing through a program called 504.

How does a small business qualify?

Roussel: (There are) very few prohibitions in terms of types of business. We won't fund anything that's speculative. They have to be of good character. Then we expect a lender to do its due diligence. They're looking for what kind of equity does this business have. They look at repayment ability - and of course collateral. That's where  we say, 'Look, even if they don't have collateral, or collateral to the level that we'd normally want, we're giving you the guarantee.' We enhance the likelihood they'll get the money they need.

Do you jointly market with banks?

Roussel: We're constantly marketing through chambers of commerce and partner organizations such as small business development centers and SCORE, and every entity that works directly with small business. We're out there marketing to make the businesses aware that this is an option for them and at the same time we encourage and work with the lenders. The very large lenders have entire departments that deal with SBA lending.

What kind of rates can customers expect with an SBA-backed loan?

Roussel: We allow the lender and borrower to negotiate the rate. We will cap the amount of interest the lender can charge. If it's a loan over $50,000, we allow them to charge no more than 2 3/4 points over prime. If it's a smaller loan, there are different variations where they might charge as much as 4.5 percent over, but in recent years, it's been very competitive. Some lend at prime, and there have been instances where they made an SBA loan at prime minus a few basis points. They can do fixed, they can do variable, as long as they stay within the parameters that we've set.

What's a typical time frame?

Roussel: That's another reason for a small business getting SBA loans. It allows the lender to extend their normal repayment terms. Generally we say for a working capital loan, seven to 10 years, closer to seven in most cases. Normally a bank is not going to do more than a year to three years. We can extend up to 25 years if there's real estate involved.

What is the "Emerging 200" program?

Roussel: This in part came out of a study by our Office of Advocacy. They determined there were certain inner-city areas, particularly in larger cities, that had a wealth of potential in terms of creating economic opportunity and job growth but actually (had) negative job growth over the past five or more years. If we worked with them and really focused on putting a lot of attention and resources toward businesses, particularly ones that had high growth potential and employee potential, then we could start the process of revitalizing economically distressed areas and also create more jobs. We're (Chicago) one of the 11 cities selected.

Who benefits under this program?

Roussel: We're trying to keep it about to 20 (Chicago) businesses, it could be more. We set the criteria at having been in business at least three years and currently generating at least $400,000 in annual revenue and they have to be located in the inner-city area. We will give them what's considered MBA-level formal training, in addition to hands on coaching, mentoring, preparation for and access to capital sources - debt or equity capital. We have a number of partner organizations. We're going to commit to doing this for a year to help them reach that next level of growth.

(Deborah Cohen covers small business for Reuters.com. She can be reached at smallbusinessbigissues@yahoo.com)