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Bank tips for entrepreneurs
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November 9, 1998: 3:20 p.m. ET
When considering small business loan applicants, lenders examine character
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NEW YORK- No matter how strong your business plan may be, securing a long-term business loan is often a matter of character.
The first thing a lender is going to look at is "the character of the business owners, how they pay bills, both personally and in business," says Don Fracchia, senior vice president of the business banking group of Wells Fargo bank.
To many lenders, in fact, there is no separating business from personal finances.
"When we look at underwriting, we can't -- and don't -- separate individual income and the small business (income)," says Fracchia. "Some owners retain wealth in the business, others retain it personally."
When it comes to borrowing money for commercial property, a lender gives close scrutiny to the payment habits and behaviors of small business owners. The tough criteria for conventional loans has led scores of owners to seek the support of loans backed by the U.S. Small Business Administration.
The SBA, rather than lending money directly, guarantees loans made by SBA-approved lenders across the country. It is up to the lender to decide whether a borrower needs a government-guaranteed loan. Dealing with lenders who have SBA loan experience can result in speedy prequalification, or advice on how to get a financial house in shape to qualify for a loan.
Small business lending is booming
There's nothing small about small business lending. The Business Loan Center, just one of the SBA's preferred "non-bank" commercial lenders, reported making loans of $96 million in 1997, more than double the year before, says David Redlener, manager of the servicing department at the New York-based lender, which has regional offices in the South and Midwest.
"The bulk of our business is in SBA loans," he said.
What do banks need to see in order to agree to a loan? Lenders start with a financial history, usually three years for the business and two years for the individual owners. They also look at credit history, owner equity in the business, collateral and cash flow.
As when obtaining a home mortgage, a real estate appraisal is required. Commercial property is generally financed at a 75 percent loan-to-value (LTV) ratio. As with homes, the biggest stumbling block is often the 10 percent to 25 percent cash down payment, which on a $1 million property could be as much as $250,000.
Commercial loans typically come with no prepayment penalty and can have fixed or adjustable interest rates. In October, Fracchia says Wells Fargo reported fixed rates from 7.5 percent to 7.8 percent; and adjustable rates of 7.3 percent to 7.7 percent. Rates are also driven by the term of the loan, whether 5, 10 or 15 years. Lenders generally charge a 1 percent or 2 percent loan fee.
However, a SBA-backed loan can have a term of up to 25 years, says SBA spokesman Mike Stamler. "A SBA-guaranteed loan is also based on cash flow more than collateral."
Two SBA programs
There are two SBA programs that can be used for a business property purchase.
The basic 7(A) Loan Guaranty Program carries a maximum 25 year term, with a 75 percent guarantee up to $750,000. For long-term loans over $50,000, fixed or adjustable rates can run as high as 2.75 percent above the lowest prime rate. There are also no balloon payments, prepayment penalties, application fees or points permitted with 7(a) loans.
The other option is the 504 Certified Development Company Program, which involves a nonprofit corporation set up to contribute to the economic development of its community or region. CDCs work with the SBA and private-sector lenders to provide financing for small businesses and help create and retain jobs in the community.
The SBA's Stamler explains that the 504 program involves a financing deal in three parts:
- A 10 percent down payment.
- A private lender loan covering 50 percent of the purchase price.
- Or a 40 percent second loan secured from the CDC and backed by the SBA, up to $1 million in some cases
Interest rates are based on the current market rate for 5-year and 10-year U.S. Treasury issues. Ten- and 20-year loans are available. Fees total about 3 percent of the debt and can be financed with the loan. 
-- by Bank Rate Monitor for CNNfn
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