SBA streamlining loans for vets

By Cyndia Zwahlen

June 20, 2007 12 AM PT

Special to The Times

The Small Business Administration is launching a loan program for the military community that promises faster and cheaper access to money.

The discounted Patriot Express loan, which will be available June 28, marries the faster processing time of the SBA’s existing express loan program with the lower interest rates and higher guarantees of its traditional loans. The limit on the new loan is $500,000.

Veteran business advocates welcomed the initiative, but some worried that capital, collateral and credit score requirements, which vary by bank, might be too high a hurdle for many veterans, especially the young people now returning from active duty.

“We need to determine performance -- how many actually get the loan,” said Vietnam War veteran Bob Mulz, owner of Video Electronics, a wholesale and retail business in San Diego.

“Then, if [the program] doesn’t perform, is there any retribution?” said Mulz, who is also chairman of the Elite Service Disabled Veteran-Owned Business Network (www.elitedvbe.org).

Eric Carlson, a former Navy Seal and the owner of a small business in La Mesa, Calif., believes that SBA loans are geared toward larger, existing companies rather than the very small enterprises that young returning vets might launch.

He tried to get a standard SBA express loan for $250,000 but was turned down for “falling outside the credit box,” despite apparently good credit, he said.

“Right now I believe they are doing a disservice to the returning vets because it’s hard to get through the maze and ultimately the banks don’t lend to the small guy,” said Carlson, owner of Bullseye Custom, a five-employee promotional products firm launched in 2004.

The SBA said its pilot program, which is one of several steps it’s taking to boost veteran-owned businesses, was its most attractive loan product and could save a borrower $8,400 on a six-year $100,000 loan compared with its regular express program. Almost 2,000 lenders will be eligible to offer the loan.

“I think we’ve created a compelling product for them, and that’s going to help us reach a large number of aspiring and current military community entrepreneurs,” SBA Administrator Steven C. Preston said during the program’s June 13 launch.

The Patriot Express program will operate at least through 2010. Bankers probably will require a borrower to supply at least 25% of the amount needed for the business, depending on the size and purpose of the loan.

“If somebody just comes back and they have an idea and don’t have any capital to do it, that’s going to be a tough deal to do,” said David Bartram, San Diego-based president of the SBA division at U.S. Bank.

“Maybe they are going to have friends and family that are going to put in money, or they’ll put away seed money for the future,” he said.

Bankers have some incentive to market and use the program because, like the regular SBA Express loan, they are allowed to use their own loan processes and documents, and that makes it faster and cheaper for them. At the same time, the Patriot Express gives them a higher SBA guarantee, as much as 85%, compared with the 50% guarantee for regular express loans.

That higher guarantee is usually reserved for the SBA’s basic small-business loan, the 7(a). But that kind of loan, Bartram pointed out, can require a 4-to-5-inch-thick file of SBA forms and take a month or two to fund.

The new loan program is one of many steps taken by federal agencies after the April recommendations by the Interagency Task Force on Returning Global War on Terror Heroes. The group was formed in March by President Bush after the reports of problems at Walter Reed Army Medical Center in Washington.

The Patriot Express loan is also the latest development in the veteran business movement that has gained momentum in recent years.

California is credited in large part with starting the push in the late 1980s, when it began to require at least 3% of state contracts to go to business owners who are veterans with service-connected disabilities.

The federal government followed in 1999. Both entities have struggled to consistently meet their goals.

Chris Hale, publisher of the monthly Veteran’s Business Journal, is attempting to cast a wider net for vets. He wants to bring more of corporate America to the table, which would vastly increase the opportunities for contracts.

And he wants to include all veterans, not just those with service-connected disabilities.

Access to capital remains a barrier for vets who own or want to own a small business.

“Hopefully, this SBA announcement is not symbolic and has some teeth to it. That remains to be seen,” said Hale, who in March helped launch the National Veteran-Owned Business Assn. (www.navoba.com). He also is the organization’s president.

The SBA has made the new loan available to a wider group than just vets. It is available to active-duty service members participating in the military’s Transition Assistance Program, members of the Reserve and National Guard, the spouses of those eligible and the widowed spouses of service members or veterans who die while in the service or of a service-connected disability.

It will carry the SBA’s lowest interest rates for business loans, generally 2.25 points to 4.75 points over the prime rate. The current prime rate is 8.25%, which would put the loan’s interest at 10.5% to 13%.

Borrowers who qualify can use the loan for most business purposes, including start-up, expansion, equipment purchases, working capital, inventory and business-occupied real estate purchases, the SBA said.

The $500,000 limit is higher than the standard Express loan limit of $350,000. By comparison, the primary SBA loan program, the basic 7(a), has a limit of $3 million. The 504 loan program will lend as much as $4 million to buy fixed assets such as land and buildings.

U.S. Bank, which makes about 6,000 small-business loans a year, expects its typical Patriot Express loan to be much smaller, probably about $45,000, which is the average for its current SBA express loans, Bartram said. Those smaller loans are usually unsecured and three-fourths of them are lines of credit, he said.

For those who wind up in the Patriot Express bucket, one benefit will be the higher SBA loan guarantee: 85% for loans under $150,000 and 75% for loans of $150,000 or more. That higher level, and the SBA’s allowance of banks’ conventional lending practices on the Patriot Express loans, will give bankers some flexibility, Bartram said.

His bank, for example, plans to allow start-up ventures to apply for the loan, because of the higher SBA guarantee level. That isn’t allowed under the sister Community Express loan program. Also, it may not require any collateral on a Patriot Express loan under $100,000.

For Patriot Express loans over $350,000, the SBA requires lenders to have a borrower pledge all available collateral. The agency understandably wants to protect taxpayer dollars from the risk of default.

At least one veteran advocate, Mulz, believes military veterans have already shouldered enough risk.

“By God, if they have to give them a grant or they have to forgive them something, they should,” he said. “I’m not saying [vet borrowers] shouldn’t be monitored for performance but ... they did something above and beyond. They’ve earned the right.”

cyndia.zwahlen@latimes.com

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1.2 million

Active-duty men and women in the armed forces

1.8 million

In reserves and National Guard

1.5 million

Deployed to Afghanistan or Iraq since war on terror began

200,000

Honorably discharged active-duty personnel, each year

100,000

Honorably discharged reservists and National Guard members, each year