The stimulus package enhanced three loan programs that are part of the Small Business Administration (SBA)’s traditional offerings.
The dominant narrative around U.S. small businesses throughout the pandemic has been one of doom and gloom. But there’s another side to the small-business story that is emerging. A story of determination, perseverance and new opportunities.
Many firms have shown incredible creativity and ingenuity to take advantage of opportunities arising from the pandemic and are moving into growth mode as a result. Perhaps they invested in new technology to adapt to a contactless world or shifted a production line to make hand sanitizer or protective equipment. As a result, they are now thriving and need capital to expand.
The good news is that these businesses have some very attractive financing options through the Small Business Administration (SBA) thanks to the stimulus package passed in December. The bill enhanced three key loan programs that are part of the SBA’s traditional offerings, creating very generous lending terms. Many businesses should be looking at how they can take advantage.
The changes to these programs took effect Feb. 1 and haven’t received the publicity that expansion of the Paycheck Protection Program has. What’s more, these provisions are in place for only for a limited time — until September — so business owners need to act fast.
For the SBA’s traditional 7(a) loans, businesses borrowing under $4.15 million can now get a government guarantee of up to 90% of their loan amount, making it easier for banks to approve SBA loans. But there are several changes that benefit borrowers directly. One is that the guarantee fees have been waived, resulting in savings of up to $150,000 for larger loans. In addition, the SBA will cover three months’ worth of principal and interest payments for any loan approved by the end of September, up to $9,000 per month.
Any business seeing growth opportunities right now should seriously consider an SBA 7(a) loan.
Take a restaurant business client that I know that was shut down by the first wave of COVID-19, but has since transformed into a delivery-only service and redeployed its servers to become delivery drivers. Having stared disaster in the face, the business’ year-end revenues ended up about the same as in 2019. Its main challenge now is to reach more customers, so the restaurant is considering adding “ghost kitchens” to meet the demand. It’s just the kind of candidate that the new rules are designed to benefit.
Express loans are another SBA offering that has become significantly more generous. These lines of credit were previously capped at $350,000 and came with a 50% government guarantee.
Now they go up to $1 million and lines of up to $350,000 are able to get a 75% government guarantee. Like 7a loans, guarantee fees are waived and the SBA covers the first three months of interest payments. This offering caters best to growing businesses that need working capital to get them over short-term bumps in the road. They may be dealing with buyers who aren’t paying as quickly as usual, or they need to buy more inventory in advance because of delays in the supply chain.
The third channel where business can reap new benefits is the 504 loan program. Generally, these loans are used for owner-occupied commercial real estate or to buy manufacturing equipment. The SBA is now waiving a 1.5% fee on its part of the loans, plus a 0.5% fee that must be paid by the bank. The SBA will also pay the first three months of principal and interest.
A 504 loan is best suited to companies looking to expand by buying real estate, but will soon be available to businesses needing to refinance an existing loan on an owner-occupied property. The refinance program could become a great fit for businesses that suffer a drop in property values as their conventional loan matures, something that may affect businesses that own their retail or office space in coming months.
With many states starting to reopen as vaccinations increase and COVID-19 rates decline, small businesses that survived the pandemic are considering reinvesting in their enterprises.
After such a tough year, it’s encouraging to see SBA loan policies that will help businesses thrive. Based on the ingenuity and drive I’ve seen over the last 12 months, there will be no shortage of businesses that can take advantage of these offerings and accelerate their growth.