WASHINGTON – The decision of whether a credit union will move a business loan through the SBA's channels rather than underwrite it on its own are varied but mainly have to do with thwarting risk. To come to a credit decision on a loan request, the SBA evaluates a business in the same way a credit union does. However, if a credit union is hesitant about lending to a business because there is insufficient collateral or there is risk inherent in the particular industry or the age of the business, then the credit union will turn to the SBA to obtain a loan guarantee. For those applicants that meet the SBA's credit and eligibility standards, the agency can guaranty up to 85 percent of loans of $150,000 and less, and up to 75% of loans above $150,000 for its popular 7(a) loan and other variations of the program. Credit unions also like the amortization rate which is longer that most commercial loans. Working capital loans 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 is not going to make it good,” Veeland said. “It's not going to make a bad loan good.” Veeland said if there's an applicant who's committed, had enough of a down payment and cash flow but collateral may be a little weak, an SBA loan makes sense. “Like buying a home, the down payment can be a stumbling block for business loans,” Veeland said. “Another scenario might be you have enough collateral, good character and work ethic but it's a little shy on the down payment. The SBA can help minimize the risk.” In the two years that Fox Communities has been offering SBA loans, one common characteristic has proven the test of time: like any good loan approval, “there still have to be some real fundamental, solid structural issues to make them a doable deal,” Veeland said. The SBA makes it clear that its 7(a) loans are available on a guaranty basis, meaning they are provided by lenders who choose to structure their own loans by SBA's requirements and who apply and receive a guaranty from SBA on a portion of this loan. But the SBA does note fully guaranty the loans. The lender and SBA share the risk that a borrower will not be able to repay the loan in full. The guaranty is to protect against payment default and it does not cover imprudent decisions by the lender or misrepresentation by the borrower. SBA's 7(a) loan program has a maximum loan amount of $2 million dollars with a maximum exposure of $1 million. This means if a business receives an SBA guaranteed loan for $2 million, the maximum guaranty to the lender will be $1.0 million or 50%. There are a number of factors to go into approval of a 7(a) loan but by far, the repayment ability from the business's cash flow is a primary 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 $270 million Progressive Credit Union in New York can be considered one of the veterans in SBA lending with its portfolio going back more than a decade, said Michael Dee, vice president of commercial lending. Dee, who worked for the SBA for 19 years and nine years at a bank before coming to Progressive in January, said it's all about the risk in determining to send a loan down the SBA route. “If it's an industry that has traditionally suffered losses such as restaurants, construction or start-ups and if there's a lack of collateral, we have to look at the SBA route,” Dee said. Often an applicant may have all the right qualifications but lack just enough collateral to pass the finish line. “They may fall short under the risk acceptance criteria,” Dee said. “They may have just 80% (collateral) to fully secure the loan or perhaps it's a start-up. The SBA loan can push them over the bump and you have the guarantee and you can go longer.” Dee said over the past year, Progressive has been more aggressive with its SBA loan program but in many cases, applicants will get two choices – the conventional and the SBA loan offered so that they can see the differences. At its Oct. 21 board meeting, NCUA approved a final rule that aims to align its member business lending rules with SBA's “less restrictive” collateral requirements. Member business loans previously used collateral requirements according to maximum loan-to-value ratios, which were inconsistent with the collateral requirements of the SBA's guaranteed loan programs. The amendments exempt SBA-guaranteed loans from the requirement, allowing credit unions to follow the SBA's “less restrictive” collateral rules. And even though the SBA had to raise its fees to borrowers and lenders to 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 better way to do it conventionally,” said Bill Beardsley, president/chief lending officer at Michigan Business Connection, a member business lending CUSO owned by five credit unions. Still, even with the increase in fees, “the SBA can be an effective way to lower the risk,” said Beardsley. On February 14th, 2003 the SBA expanded its lending program to allow greater access to capital for small businesses. For many years, only community-chartered credit unions were able to participate in SBA's 7(a) program. That has since changed with more than 100 credit unions now considered SBA lenders. The SBA backed 74,825 7(a) loans totaling $12.5 billion to small 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, people will apply at several different places and “pipeline attrition” is a much bigger factor than with consumer loans. “Once you approve a consumer loan, chances are between 95-98% the loan will go through,” Beardsley said. “That's not always the case with business loans for a number of reasons.” Those reasons run the gamut from a real estate loan that has to contend with municipality restrictions to shaky industries, Beardsley said. Still, credit unions that choose the SBA route have much more on their side. “A lot of members are relieved that they've found something that works for them,” Beardsley said. “And that translates into a win for the credit union.” -

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