WASHINGTON – The decision of whether a credit union will move abusiness loan through the SBA's channels rather than underwrite iton its own are varied but mainly have to do with thwarting risk. Tocome to a credit decision on a loan request, the SBA evaluates abusiness in the same way a credit union does. However, if a creditunion is hesitant about lending to a business because there isinsufficient collateral or there is risk inherent in the particularindustry or the age of the business, then the credit union willturn to the SBA to obtain a loan guarantee. For those applicantsthat meet the SBA's credit and eligibility standards, the agencycan guaranty up to 85 percent of loans of $150,000 and less, and upto 75% of loans above $150,000 for its popular 7(a) loan and othervariations of the program. Credit unions also like the amortizationrate which is longer that most commercial loans. Working capitalloans can go up to seven years; fixed asset loans up to 10 years;and real estate or construction of a building up to 25 years. At$464 million Fox Communities Credit Union in Appleton, Wis.,there's no question that the SBA program is a valuable addition,but it can't wave a magic wand, said Russ Veeland, vice president.“If the loan is not structurally sound, putting an SBA tag on it isnot going to make it good,” Veeland said. “It's not going to make abad loan good.” Veeland said if there's an applicant who'scommitted, had enough of a down payment and cash flow butcollateral may be a little weak, an SBA loan makes sense. “Likebuying a home, the down payment can be a stumbling block forbusiness loans,” Veeland said. “Another scenario might be you haveenough collateral, good character and work ethic but it's a littleshy on the down payment. The SBA can help minimize the risk.” Inthe two years that Fox Communities has been offering SBA loans, onecommon characteristic has proven the test of time: like any goodloan approval, “there still have to be some real fundamental, solidstructural issues to make them a doable deal,” Veeland said. TheSBA makes it clear that its 7(a) loans are available on a guarantybasis, meaning they are provided by lenders who choose to structuretheir own loans by SBA's requirements and who apply and receive aguaranty from SBA on a portion of this loan. But the SBA does notefully guaranty the loans. The lender and SBA share the risk that aborrower will not be able to repay the loan in full. The guarantyis to protect against payment default and it does not coverimprudent decisions by the lender or misrepresentation by theborrower. SBA's 7(a) loan program has a maximum loan amount of $2million dollars with a maximum exposure of $1 million. This meansif a business receives an SBA guaranteed loan for $2 million, themaximum guaranty to the lender will be $1.0 million or 50%. Thereare a number of factors to go into approval of a 7(a) loan but byfar, the repayment ability from the business's cash flow is aprimary consideration in the loan process, according to the SBA.That's followed by good character, management capability,collateral, and the owner's equity contribution. All owners of 20%or more are required to personally guarantee SBA loans. The $270million Progressive Credit Union in New York can be considered oneof the veterans in SBA lending with its portfolio going back morethan a decade, said Michael Dee, vice president of commerciallending. Dee, who worked for the SBA for 19 years and nine years ata bank before coming to Progressive in January, said it's all aboutthe risk in determining to send a loan down the SBA route. “If it'san industry that has traditionally suffered losses such asrestaurants, construction or start-ups and if there's a lack ofcollateral, we have to look at the SBA route,” Dee said. Often anapplicant may have all the right qualifications but lack justenough collateral to pass the finish line. “They may fall shortunder the risk acceptance criteria,” Dee said. “They may have just80% (collateral) to fully secure the loan or perhaps it's astart-up. The SBA loan can push them over the bump and you have theguarantee and you can go longer.” Dee said over the past year,Progressive has been more aggressive with its SBA loan program butin many cases, applicants will get two choices – the conventionaland the SBA loan offered so that they can see the differences. Atits Oct. 21 board meeting, NCUA approved a final rule that aims toalign its member business lending rules with SBA's “lessrestrictive” collateral requirements. Member business loanspreviously used collateral requirements according to maximumloan-to-value ratios, which were inconsistent with the collateralrequirements of the SBA's guaranteed loan programs. The amendmentsexempt SBA-guaranteed loans from the requirement, allowing creditunions to follow the SBA's “less restrictive” collateral rules. Andeven though the SBA had to raise its fees to borrowers and lendersto make its 7(a) loan program less reliant on taxpayer's monies,going the SBA route is still a reasonable choice for credit unions.“You really shouldn't make SBA loans if you can figure out a betterway to do it conventionally,” said Bill Beardsley, president/chieflending officer at Michigan Business Connection, a member businesslending CUSO owned by five credit unions. Still, even with theincrease in fees, “the SBA can be an effective way to lower therisk,” said Beardsley. On February 14th, 2003 the SBA expanded itslending program to allow greater access to capital for smallbusinesses. For many years, only community-chartered credit unionswere able to participate in SBA's 7(a) program. That has sincechanged with more than 100 credit unions now considered SBAlenders. The SBA backed 74,825 7(a) loans totaling $12.5 billion tosmall businesses, and 8,168 loans worth $3.9 billion under the 504,or Certified Development Company, program for fiscal year 2004,which ended on Sept. 30. Beardsley said with business loans, peoplewill apply at several different places and “pipeline attrition” isa much bigger factor than with consumer loans. “Once you approve aconsumer loan, chances are between 95-98% the loan will gothrough,” Beardsley said. “That's not always the case with businessloans for a number of reasons.” Those reasons run the gamut from areal estate loan that has to contend with municipality restrictionsto shaky industries, Beardsley said. Still, credit unions thatchoose the SBA route have much more on their side. “A lot ofmembers are relieved that they've found something that works forthem,” Beardsley said. “And that translates into a win for thecredit union.” -

[email protected]