SBA Offers Mortgage Lifeline
As the SBA recently marked how the Small Business Jobs Acts of 2010 has helped it approve more than $10.3 billion in loan guarantees since the legislation was signed back in September, credit unions and other lenders could reap some unexpected benefits.
The Small Business Jobs Act included an array of provisions aimed at helping small businesses gain access to capital, compete for federal contracting opportunities, expand exporting opportunities and obtain other assistance to help them grow and create jobs.
"The new bill enables banks and credit unions to make larger SBA-backed loans to larger businesses," said Barbara Morrison, CEO of TMC Development, a certified development company in San Francisco. "For the first time ever, middle-market bankers have access to the lower rates and attractive terms of SBA financing to help small and mid-size companies grow their businesses."
Morrison said TMC had provided more than $5.7 billion in financing to more than 3,600 businesses in California and Nevada. She serves on the Federal Reserve Bank's small business task force.
Many business owners purchased a property for their businesses utilizing a loan from a commercial lender, Morrison said. Typically these loans were 75% loan to value, meaning that the borrower's down payment was 25% of the purchase price and the terms of these loans were often five years. Today, many of these business owners face the prospect of refinancing a property that has decreased in value, she said.
To illustrate, Morrison said a property purchased five years ago for $1 million may have a loan of $750,000 that is now due. The problem for the property owner is that the amount that the lender can refinance is less than the amount that is currently owed. If the property's value has decreased and is valued at $750,000 today, the lender cannot refinance a $750,000 loan. Morrison said most likely the lender would be able to offer a loan of 75% of the current value or only $562,500, which would be a short fall of $187,500.
"The new SBA 504 refinancing program would provide the business owner with the ability to refinance the entire $750,000," Morrison said. "The exact details aren't available yet as SBA has not written the new SBA regulations. We hope to have them before the end of the first quarter this year."
Many credit unions offer SBA 504 loans. They are structured with two loans-a first mortgage from a conventional lender and a second mortgage from a CDC. The breakdown is generally 50% from the lender, 40% from the CDC/SBA and 10% from the borrower.
Through new legislation, SBA business-size standards and loan limits have increased. Morrison said now, virtually any privately held company can be eligible for SBA financing, and they can finance commercial real estate purchases in excess of $20 million.
"With more banks and credit unions offering the SBA 504 loan program, we might see a boost in commercial real estate," Morrison said. "This program helps save businesses from going into foreclosure, and is an opportunity for making a potentially profitable loan to businesses that had previously been considered too big."
The SBA program also offers lenders a way to avoid additional loan defaults, which could result if a client was unable to raise cash for refinancing, she added.