Small business lending is coming back. The Small Business Administration reported that it was issuing more loans now than in the previous 12 months. The government agency revealed lending data that shows its fiscal year 2012 lending was stronger than anticipated.
The Small Business Administration reported lending $30.25 billion in the fiscal year of 2012. The fiscal year ends before the calendar year – the SBA is now working on loans in its 2013 fiscal year, despite the fact that there are more than two months remaining in 2012.
The SBA’s lending volume was the second highest since 2010, when the program was super-charged with incentives from an economic stimulus package passed by Congress. Excluding extraordinary events the SBA’s 2012 lending volume was the best on record after a temporary slowdown in 2011.
504 Loans Lead the Charge
The Small Business Administration was most aggressive in making 504 loans, one of the best lending facilities in the entire program. As part of a 504 and 504 refinance, business owners can purchase land, buildings, or other real estate with a loan backed by the SBA. The SBA provides 40% of the total project cost with banks providing 50% and the borrower providing a 10% down payment. In only select circumstances are borrowers asked to provide 20% down payments.
The SBA also allows for the purchase of long-lived capital goods through the 504 program. Funds can be used to modernize or improve existing structures, or make capital improvements such as a new pizza oven in a local pizza store. The loans are popular for their range of applications and high maximum borrowing limits.
Financing through the 504 program is issued with longer amortization periods and fixed rates, compared to short amortization periods and variable rates from completely private lenders. Under the program, borrowers essentially have two loans – one from the SBA and one from the private lender. The SBA finances 40% of the project under terms that include a 20-year amortization with an interest rate that is fixed for the life of the loan. Borrowers can select a lending period of only 10 years if desired. A shorter maturity brings a lower interest rate, but might not fit within the capital needs of a small business.
The maximum lending size is $5 million, which can be made only to businesses that have less than $15 million in net assets and less than $5 million in post-tax net income in the past two accounting years. As one would expect, most small businesses fit within the confines of 504 lending. In select cases, projects used for energy production are given a $500,000 increase in the maximum lending amount.
Small Business Growth
Small businesses are primed for years of growth as consumers come back to spend after spending much of the past 5 years paying down balances and working off mortgage and car loan debt. Going forward, analysts expect impressive small business growth and a renewed sense of confidence in the banking community about loans made to small business owners.