Two Ways to Get a Loan in Tight Market

Small-business owners, tired of dealing with bankers afraid to lend a penny, are arming themselves with two trusted financial tools: Small Business Administration loan guarantees and asset-based financing.

Once considered a last resort for high-risk borrowers, the SBA’s current $3.5-billion loan guarantee program has become the darling of bankers across the country.

“The banking industry likes SBA loans these days,” said Daniel Feiman, vice president of Western Bank in Beverly Hills. “In the last few years, the stigma of getting an SBA loan has been blown away.”

Chuck Hertzberg, assistant administrator for financial assistance for the SBA in Washington, said bankers are much more receptive to making the loans in today’s tight lending climate. “As the bank regulators get tougher, the lenders see more value in the SBA program,” Hertzberg said.

Between Oct. 1, 1990, and June 30, 1991, the SBA guaranteed 14,049 small-business loans, up from 13,475 for the same period the previous year.

Nationally, Hertzberg said 93% of all SBA-guaranteed loans are current and performing--a percentage that would make many bankers envious.

Under the SBA program, the government guarantees 80% to 90% of the loan value. The participating banks can also sell the guaranteed portion of the loan on the secondary market for a premium price, although they continue to service the loan.

Small-business owners who qualify like SBA loans too. The interest rates are competitive, and you often have up to 10 years to pay off a machinery or working capital loan and up to 25 years for a real estate loan.

“Usually loans are such a pain in the neck, but this one went very smoothly,” said Scott Webley, who obtained an SBA-guaranteed loan to buy the 13,000-square-foot building that houses his Van Nuys-based ShowBiz Enterprises.

“When I started looking for money, most banks only wanted to lend me 75% of what I needed,” said Webley, whose firm posted about $2.5 million in sales this year. “With the SBA guarantee, I got 85%.”

Webley put down 15% and borrowed $840,000 to buy the building where he and his 20 employees make theatrical draperies for television shows, rock tours and other attractions.

His loan was packaged and presented to General Bank by Jennifer Leathers, an SBA loan specialist and president of Money Source in Huntington Beach.

“It’s the bank you have to sell on lending you the money, not the SBA,” said Leathers, who is paid by the bank, not the borrower, for putting together SBA loan packages.

Despite the growing popularity of SBA loans, Leathers said there are still myths to be dispelled. One myth is that struggling start-ups can qualify for the loan guarantees. Not so. In most cases, your business must be stable and profitable to qualify for SBA approval.

“Another myth is that it takes a long time to get the money,” said Leathers. “When I’m working with the SBA office in Los Angeles, I can get verbal loan approval in a week.”

Leathers said small-business borrowers must be willing to put up virtually everything they own to collateralize the loan.

“The SBA has a mission to help small-business owners, but the program has to make sense for the bank or they won’t do the loan,” said Leathers, who has seen about 10 new banks begin handling SBA loans in the past year.

Mechanics National Bank is the No. 1 SBA lender in the Los Angeles area. “We have been quite busy,” said Kiyo Kaneshiro, senior vice president of the bank’s SBA division. “There seems to be quite a demand.”

For the first nine months ended June 30, Mechanics National Bank processed 103 SBA-approved loans, with the SBA guaranteed portion totaling $29.7 million. (Mechanics’ SBA division is at 8225 Alondra Blvd. in Paramount.)

About 64 banks are listed by the SBA as participating in the Los Angeles area. Government Funding, a non-bank lender, ranks second in SBA-guaranteed loans and American Pacific State third.

For information on SBA loan guarantees, ask your banker or contact your nearest SBA office.

If your business doesn’t qualify for an SBA loan guarantee, join the thousands of business owners around the country turning to asset-based lenders. These lenders, who are not subject to state and federal bank regulations, make higher-risk loans if you have the collateral to secure them.

“We are busier than we were a year ago, and I think we will be even busier in the next few years,” said Bron Hafner, president and owner of Celtic Capital Corp. in Santa Monica.

Celtic and other asset-based lenders act as middlemen, borrowing money from their banks and lending it out at higher rates. Most of Celtic’s loans are in the $500,000 range, and the money is not cheap. Borrowers pay 2% to 3% interest on the average balance each month, compared to a commercial bank loan made at a few points over the prime rate.

But for companies with credit or cash-flow problems, asset-based lenders provide an alternative to selling off a piece of your business to an equity investor or--even worse--going out of business.

“Once people get over the psychological barrier of paying higher interest rates, companies like ours can be a good source of funds to help their business grow,” said Hafner, who is lending funds to a temporary help agency, a hot dog manufacturer, a few trucking companies and a plastics manufacturer. Typically, the amount of money advanced is based on a borrower’s accounts receivable.

Hafner said most clients repay their high-interest loans within 18 months and improve their financial picture enough to move on to bank financing.