The federal government has backed nearly 34,000 small business loans in Michigan over the past 25 years. ©Thinkstock.com
Congress has passed and President Barack Obama recently signed legislation ensuring the Small Business Administration’s 7(a) main lending program will be able to meet the increasing demand in the waning months of the current federal fiscal year.
Demand for 7(a) loans has increased from $15.2 billion in FY2012 to $19.2 billion in FY2014, including $1.2 billion in lending to more than 2,145 small businesses in Michigan, according to the Washington office of U.S. Sen. Gary Peters (D-Michigan).
The bipartisan bill introduced by Peters will increase the SBA’s lending authority to $23.5 billion for the current fiscal year — plus, he said, it tightens standards to promote loans to those who truly need them and includes robust reporting requirements to keep Congress updated on the pace of SBA lending going forward.
“The fact that demand for 7(a) loans is increasing at a faster rate than we anticipated is a promising sign as our economy continues to bounce back,” said Peters.
Peters’ office said the 7(a) Loan Guaranty program is funded entirely through fees paid by borrowers and SBA lenders, so increasing the authorization level to $23.5 billion will have no cost to taxpayers.
The SBA does not lend money; rather, it guarantees bank loans to qualifying small businesses, encouraging banks to make loans they might otherwise not consider worth the risk of default.
In Michigan, “we are the prepper” that helps small businesses prepare their SBA loan applications, said Keith Brophy, the new executive director of the Michigan Small Business Development Center, which is headquartered at Grand Valley State University’s L. William Seidman Center at 50 Front Ave. SW in downtown Grand Rapids.
The MSBDC has 11 offices throughout Michigan and played a role in helping small businesses and start-ups raise more than $264 million of capital in 2014, according to SBDC Regional Director Dante Villareal.
The SBA’s 7(a) loan program for small businesses and entrepreneurs is designed to help with the establishment or acquisition of a business, a business expansion, and the purchase of equipment, machinery or supplies, as well as for short-term and long-term working capital.
The maximum gross loan amount for any one 7(a) loan is $5 million, with up to $3.75 million maximum guaranty. In FY2014, the average approved 7(a) loan amount was $368,737.
In Michigan, more than 33,850 7(a) loans have been made since 1990, according to Peters’ office. Over the past decade, 7(a) loans have supported at least 23,632 Michigan small businesses, totaling more than $10.1 billion.
Brophy, a well-known Michigan entrepreneur who was named to head the statewide MSBDC in March by GVSU, recalled he was able to get an SBA-guaranteed loan from a bank when he was expanding his first business, Sagestone, about 15 years ago.
A software engineering firm, Sagestone was growing rapidly but had no outside investors.
“We talked to about a dozen banks at the time,” said Brophy, but he was not successful until one of the banks worked out an SBA loan for Sagestone.
“The majority of banks across our community are SBA lenders,” said Brophy, noting Huntington Bank is the leader statewide in SBA lending. Chemical Bank is another major provider of SBA loans, he added.
Villareal said the impact of the Great Recession is still being felt among small businesses, where “balance sheets are a little bruised.”
Larger, established companies generally have a track record that makes them more attractive to bank loan officers, but “the economy is coming back. People are getting purchase orders,” said Villareal.
That extends to smaller businesses, too, including some that now need to invest in more equipment to help them fill those orders.
Villareal said the returning economy has banks busy making loans to the larger businesses, making the competition even stiffer for the little businesses that need loans.
He estimates about half of SBA-backed loans are 7(a), but others are the SBA 504, which is focused more on investments in equipment and property.
The SBA guaranty does not help the small business borrower receive a discount on the loan interest rate, noted Villareal. What it does is make banks less worried about the SBA-backed loans going into default.
“These loans are not cheaper than a traditional conventional loan,” said Villareal, adding if the small business could get the traditional bank loan, “they’d go for it right away.”
While advance preparation is key when the would-be borrower has little or no prior experience in borrowing capital, Villareal also pointed out the MSBDC stands by to link the borrower with professional business consulting should the borrower begin to experience difficulty in repayment of the loan.
If the deal was a traditional loan involving only the small business and a bank, a default on the loan might happen too quickly to “work out” before the borrower was able to get help that might enable the business to stay afloat and make the payments, he said.