By Bill Thompson, Cardinal Points Network — Throughout the summer Congress bantered about the Small Business Jobs Act of 2010, touting it as the next brick to rebuilding our economy. The Act was finally signed into law in late September. Now the question is what does this mean to a boat dealership?
While the boat industry has concentrated discussion around expansion of the Dealer Floor Plan program, there are several changes for Small Business Administration programs that could impact your business. The DFP program is a small part of the legislation. Changes in what constitutes a small business, loan sizes, refinance options, guarantee percentages and fee waivers provide more tools for you and your banker to use to meet your financial needs.
Why the SBA?
Before we delve into the changes within the new SBA programs and guidelines, let’s talk briefly about what these programs are intended to do. Quite simply, the SBA guarantees loans so that lenders will provide financing to businesses that would otherwise not be able to obtain reasonable financing. Banks utilize these programs to limit risk.
Ultimately your bank needs to become comfortable in lending to your business. It will likely require debt to worth ratios in the 5:1 range with adequate working capital and cash flows. Regardless of whether they are using an SBA guarantee or not, the banker will need to be convinced that there’s little chance of losing money on a loan with you. This will be a function of your company’s profitability as well as the value of your assets.
Are you a small business?
Assuming your banker is comfortable enough with your business to move forward and they want to utilize the SBA guarantee, the next step is determining if you are qualified. Here is the first major change. A boat (or RV) dealership is now considered a small business if it:
- Has annual receipts LESS than $30 million.
- OR the tangible net worth is LESS than $15 million and the average net income after taxes (excluding carry-over losses) is LESS than $5 million.
If either of these criteria is met, your business has passed the initial qualification of a small business.
The liquid assets of any household owning 20% or more of a business must also pass as “small enough” to qualify for an SBA guaranteed loan. If your household (including spouse and any dependants) has an “excess” of liquid assets (cash or marketable securities, not including retirement accounts), you will be required to invest that excess into the business before the SBA will guarantee the loan for your business. These benchmarks are in relation to the loan amount versus your asset base and for:
- Loans $250,000 or less, the greater of 2X total financing package or $100,000.
- Loans between $250,001 to $500,000, the greater of 1.5X total financing package or $500,000.
- Loans over $500,000, the greater of 1.0X total financing package or $750,000, whichever is more.
Maximum Loan Amounts
The law permanently increases the maximum loan amount under an SBA guarantee to $5 million for the 7(a) and 504 loan programs. Small manufacturers can obtain 504 loans for up to $5.4 million. In the past the old limit of $2 million resulted in a lack of interest by lenders to enter the Dealer Floor Plan pilot and in some cases didn’t offer businesses enough loan power to support lending needs. This increase is impactful in covering many of your businesses lending needs.
Refinancing an Existing Mortgage
Until now, the only way a business could refinance an existing mortgage utilizing an SBA guarantee was through the 7(a) program. The 7(a) program only provides limited choices, rate structures, loan to value limits and the fact that loans were primarily obtained through banks. The new law will temporarily expand the 504 program to include refinancing for the next two years. This will make long term mortgages available at low fixed rates with up to a 90% loan to value.
Since the program was legislated, the SBA is completing the policies surrounding this law. Once in place, owner occupied Commercial Real Estate loans that will mature over the next two years will have a viable refinance alternative. Without this action, many of the loans with balloon maturities coming due would be facing a lack of available and willing lenders and ultimately foreclosure. The 504 loans are administered through your local Community Development Company and banks. If your mortgage is coming due, contact your local 504 lender today.
Fee Waivers and Increased Guarantees
The Recovery Act of 2008 allowed the SBA to temporarily increase the percent of a 7(a) loan that they guaranteed to 90% while waving the borrower fees for the 7(a) and 504 loans. The Small Business Act has once again extended these benefits until the end of 2010. With these provisions in effect, lenders have an incentive to provide loans while businesses avoid up to 2% in loan fees payable to the SBA for the guarantee.
The guarantee percentage does NOT increase for the Dealer Floor Plan program. While the initial fee for the 504 program is waived, there is still a 0.749% annual fee assessed for these loans. As in the past, these fee waivers are for a limited time and recurrence will depend on the whims of Congress.
Finally, the Dealer Floor Plan Program!
On September 30, 2010 the initial Dealer Floor Plan pilot under the 7(a) program expired. Since its inception in July 2009 only 79 lines were approved. With the Small Business Act of 2010, the DFP Pilot Program will be available until September 30, 2013. That is, once it is implemented.
Since the program will be new and is not an extension of the previous pilot, the SBA will need to construct new rules to administer the program. The new program will NOT be available until the new rules are developed. This will likely take a few months.
The trade associations are actively working with the SBA to make sure that the new program is more impactful than the previous version. This group includes RVIA, RVDA, NMMA, NMBA, MRAA, NADA and similar groups within the RV, Boat and Automotive industries. Once the program is developed, the second installment of this article will provide the highlights so you can make educated choices for your business.
Armed with the basics of these SBA guarantee programs, you should review your businesses lending needs. Pay particular attention to maturing mortgages as well as your working capital needs. You may be able to save your business from possible foreclosure due to a balloon mortgage or take advantage of these programs to expand your business.
Look toward your local CDC’s (Community Development Company) and SBA participating banks for detailed information and to apply. There are brokers and consultants who can help you through this process. Finally, keep your eyes open for more information on the upcoming DFP program.
Please share your stories about what your experience has been with trying to obtain SBA DFP lines of credit over the past year. How far did you get? What did the bankers tell you? Did you hear them tell you that “if the program from the SBA was better, we’d be more apt to help you”? This information will be helpful as we talk to the SBA about the new program. You can also e-mail Bill Thompson directly at WilliamRThompson@sbcglobal.net
Bill Thompson, a recreational lending expert, brings 20 years of experience in the financial services business. Recognizing the need to proactively cultivate lenders in the boat and RV industries, Bill founded Cardinal Points Network to advocate, broker, consult and educate dealers, manufacturers and lenders through their lending and financial needs. www.CardinalPointsNetwork.com.