Magazine article Journal of Commercial Lending

Small Business Spotlight ... SBA Loans for Community Banks

Magazine article Journal of Commercial Lending

Small Business Spotlight ... SBA Loans for Community Banks

Article excerpt

The rules of American business are changing, and the number one rule has become: Never underestimate the power of small business.

Generally, small- and medium-size businesses are making a stronger recovery from the recession than larger corporations. In fact, according to the Small Business Administration (SBA), there are approximately 18 million small businesses nationwide, and small businesses are responsible for half of the U.S. gross domestic product. Small businesses accounted for more than 60% of the new jobs created in 1992 and probably 80% in 1993.

It is foolish for a community bank to overlook this vital sector of the economy. And it is shortsighted for a bank (or a borrower) to neglect the opportunities afforded by the SBA loan program.

Recent SBA History

For the SBA, 1993 was a tumultuous year. In May 1993, because of increased numbers of participating banks making record numbers of loans, SBA loan program funds were depleted. In October 1993, Congress responded, and with some program changes, the SBA fund was replenished. Notwithstanding, the SBA is expected to have had its most successful year in 1993, with loans topping the $6 billion record set in 1992.

New Demand for SBA Loans

Our bank, First Capital Bank of Norcross, Georgia, is within the SBA's very active Atlanta district. According to Wilford A. Stone, manager of the Atlanta district, the increasing number of small businesses and the demand for loans may be, in part, a result of corporate downsizing. Stone says, "With the downsizing of American business, we are seeing more and more healthy opportunities for small business development. Many corporate jobs are not coming back. Because of new technology, they are gone forever. Rather than seeking reemployment within the corporate structure, many people in management and middle management positions are starting their own businesses, and small business lending is definitely on the rise."

Stone notes that one in four new business start-ups in the past few years has been by a person who has lost a corporate job. He adds, "Typically, that person is 45 to 50 years old and can bring good experience, proven skills, and some working capital to the table."

Our Bank's Experience

First Capital has been an active participant in the SBA 7A and 504 programs for five years. In 1993, First Capital made 16 SBA loans totaling almost $7.9 million. This activity increased the bank's SBA portfolio to more than 100 loans totaling $38 million. Our level of involvement places us among metro-Atlanta's top 10 small business lenders.

First Capital is an enthusiastic SBA participant for one simple reason: Although it is not perfect and is in need of updating and improvement, the program makes sense--and dollars--for our bank and for our small business customers. SBA Program Benefits

For the small business owner, the benefits of the SBA program are fairly obvious. Owing to the extended terms (maturity can be as long as 25 years, depending on the type of loan), an SBA loan is a cash flow loan, and cash flow often makes or breaks a small business.

In fact, according to the SBA, undercapitalization and improper capitalization are the two most common reasons for small business failures. Most small or start-up businesses do not have an abundance of working capital. The SBA loan, with its extended terms and enhanced cash flow, affords the small business owner the opportunity to expand the business without the worry of meeting payroll or making a monthly payment. Yet if the borrower wants to accelerate the reduction of principal, it can be done--up to 20% with no notification.

Consider your own small business customers. A loan with no application fee, no balloons, no call options, and no prepayment penalty would be highly attractive. During the lean times, it enhances the company's cash flow, and during the good times, it gives the small business owner the choice of expanding the business or prepaying the loan. …

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