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504: the SBAs Shining Star (Page 1 of 2)
The U.S. Small Business Ad-ministrations (SBA) loan programs have garnered much criticism over the years. Some complaints may have been warranted in the past, but these days, the SBA is different.
Increased accountability and newly implemented efficiencies are a terrific development for U.S. taxpayers and for Americas small-business owners. As we see these changes, I think industry members should work to remove the stigma that exists about certain SBA loans.
Many entrepreneurs and far too many brokers, ironically dismiss the SBA because of its more well-known 7(a) lending program. This program is most often in the news and nearly always seems to be in crisis or in need of supplemental appropriations. Whether or not the 7(a)s reputation is deserved, its negative attention has managed to tarnish other effective and lesser-known SBA programs. But 7(a)s parameters do not apply to all SBA programs, despite some brokers thinking otherwise.
In my opinion, the SBA deserves its budget more than $22 billion because of one program: the SBA 504 loan program. It is for small-business owners who want to acquire or construct their own facilities. Despite fallacies surrounding it and the SBA, this little-used program can be an important tool.
The 504 program provides small-business owners with 90 percent loan-to-cost financing for most commercial real estate projects. These loans are structured with a conventional mortgage for 50 percent of the total project cost, combined with a government-guaranteed bond for 40 percent. The remaining 10 percent is the borrowers equity and is usually half as much as traditional lenders require. This lowers the risk for small-business owners as opposed to lowering the lenders risk profile with more capital injected into the real estate.
These loans are meant to finance total project costs. The first mortgage is typically a fully amortizing 25-year term at market rates, while the second mortgage is a 20-year term but with the interest rate fixed for the entire term at below-market rates. For small-business owners, these loans and terms can provide the highest cash-on-cash return available in the commercial-mortgage industry. Still, myths about it exist.
Myth No. 1: SBA loans take too long The SBA is aware of small-business owners time and of how busy they are. Its certified development companies (the SBAs representatives on these loans) now move quickly. They often can examine borrowers underwriting documents in only 48 hours. Once lenders scan their borrowers documents, they can actually drag and drop them onto some of the certified development companys or SBAs secure servers. This technological innovation saves the time of doing overnight mail and is a huge improvement in the slow-adapting commercial-mortgage industry. If an SBA loans approval process takes more time than this, it may be that a particular lender is holding it up.
Myth No. 2: SBA loans have too much paperwork There have been great efforts to streamline the overall application process. In some cases, they can nearly match the paperwork of what any ordinary 80 percent loan-to-value conventional commercial lender would need to approve a loan. Some borrowers find this paperwork is far less than what they had to complete when they refinanced their home loan. Specialized commercial lenders have helped this along, too.
How do you feel about money?
The recession is teaching us all some hard new lessons about respecting money.
We all know that the love of money is the root of all evil. Yet we think of it as unclean:
o We call it filthy lucre,
o Too much of it means you are stinking rich
o Too little and you are dirt poor.
We dont talk about money openly and we treat it as if it is a vulgar subject. We routinely ask strangers what they do for a living, but would never dream of asking how much they earn. And that applies equally to family and close friends.
Its not always like that
Some cultures feel differently about money. When I tell people that I write about money for a living, it evokes little interest and they dont pursue the conversation. I wonder if it would be the same if I said I was a sports or travel or food writer.
Now theres a change
The recession has brought the subject of money out into the open and is making us love the stuff more than we did before. Most of us now believe that money is more important than it was prior to the recession. This thinking is also reducing how we value possessions. Money is a great tool and also a measure of value and a form of exchange. It buys food and clothes for us and our families; it keeps a roof over our heads, pays our bills and if were lucky, buys a few treats as well. So why is it so notoriously hard to earn and unbelievably easy to spend?
A lesson from the recession
Along comes a recession and changes our attitudes towards money. It teaches us to look after it and how to use it and invest it wisely. If we werent caught by the recession or by investing in one of the huge money frauds, we know how lucky or clever we were compared to others.
Charity keeps going
Surprisingly, research shows that people are maintaining their charitable donations and are helping family in these difficult times. It is a fact that charitable donations in the US doubled after the 1930s Great Depression because people witnessed the trauma of poverty.
More money lessons
One of the tough lessons of the recession is that of staying out of debt. Moreover, it is teaching us that saving money is good, and borrowing too much is dangerous.
We will always feel funny about money but until somebody develops an entirely different social structure, or we return to a barter system, we just have to learn to live with money. We should learn to love it, not because its money but for what it can do for us if we use it properly.
One of these days, man should start work on evolving a new financial system. Thats probably got about the same chance of success as developing a substitute for water!