Business leaders say new Small Business Administration (SBA) chief Linda McMahon needs to focus on lending in order to truly make a difference.
McMahon has presided over more than $53 million in guaranteed loans to North Central Florida’s small business owners. She’s also appointed four new Associate Administrators since she took the reigns including Allen Gutierrez to the Office of Entrepreneurial Development.
However, experts say changes to SBA’s 504 program will have far more impact on small businesses. The program deals with financing major fixed assets like real estate and equipment.
Like other major SBA programs, the 504 is not directly funded by the government. But the program does help connect small businesses with lenders and other agencies to make lending happen.
To find out how the SBA could boost small lending through this program, Small Business Trends talked with Chris Hurn, CEO of Fountainhead Commercial Capital.
SBA Changes That Would Boost Small Business Lending
Improve Data Collection
Reporting requirements for third party lenders need to tighten up. Transparency also needs to be front and center for SBA 504 performance history data collection.
“The Agency needs much better data collection so SBA 504 loans can be readily securitized,” Hurn says.
Introduce 25-Year Amortization
There are also calls for longer amortization terms. There’s a need to match the 25-year amortization on the permanent SBA 504 second lien loans to the terms for most first-lien loans in the SBA 504 loan product.
It makes sense to bring them into line with each other. This kind of tweak would be welcomed by the markets.
Speed Up Approvals
“There needs to be faster approval times at the SBA’s centralized processing center (SLPC),” Hurn says. “It’s 2017 — for the program to remain competitive in today’s commercial loan marketplace, approvals cannot take weeks; they must issue approvals in mere days.”
It’s interesting to note online lenders can approve loans in minutes. The SBA should be able to narrow that gap to regain a competitive edge.
Community Development Companies are a vital spark plug in the engine of these SBA 504 projects. These are the SBA’s partners for the loans. Their underwriting processes need to reflect the fact that qualified borrowers are now choosing the SBA 504 loans.
According to Hurn, at least part of the trick to this new mindset is letting go of the hesitation leftover from the last recession. He knows of at least seven SBA 504 loan projects that have been turned down in the last nine months. They were all approved as conventional loans instead.
Once again, the SBA needs to reverse their direction to flow with the new financial stream.
Make Changes in Loan Regulations
Another issue needs to be addressed and that’s the overlap between two programs — 7(a) and 504.
“There continues to be too much premium chasing in real-estate-only SBA 7 (a) loans,” Hurn says.
The issue lies in the way lenders try to convince small business owners to take a floating rate on their fixed assets. This is the way a lender maximizes secondary market premiums.
According to Hurn, any real estate only projects higher than $500,000 need to fall under the SBA 504 banner to prevent this type of abuse.
Look At Small Working Capital Proceeds
Small working capital proceeds need to be considered in the SBA 504 loan program, especially when these are tied to creating jobs. There’s a small cash out availability with the new permanent refinancing provisions. Hurn suggests a few other ways to open this door wider.
“ Caps on the amount of working capital allowed, based on loan size, is one way to accomplish this,” he says. “Another is simply using the precedent set by the new SBA 504 refinance loan regs: up to 25% of the total loan amount.”
Champion Loan Programs
The Great Recession has taken a bite out of the number of banks. There’s a real need for more lenders who will champion the SBA loan programs. The SBA 504 program often has better terms and conditions than conventional lenders.
Hurn suggests Linda McMahon work diligently to shape the perception these SBA loans are an effective alternative to conventional bank loans.