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Steve Windhaus Ask the Small Biz Adviser

Loan options for a disabled veteran

Dear Small Biz Adviser:
I am a combat disabled, Special Forces officer (Major) who has been on the veterans administration disability rating of 100 percent for seven years. I had two businesses previously that rapidly expanded under my control. I sold both due to medical necessity, but am now doing much better and have the opportunity to purchase a seafood wholesale-distribution company that has flourished. It is above the Small Business Administration's magical $2 million mark. My credit is OK, and I have a four-year degree in business, as well as practical experience in running two financial operations. Will the SBA consider financing this type of entity? Since Congress no longer funds HAL-2 loan programs, what else is there?
Thank you.

Dear David:
You are on the money about the Handicapped Assistance Loan program. The same thing happened a few years earlier with the SBA's Direct Loan Program. They were the only programs under which the SBA made loans directly to the applicant. However, the HAL program did require issuance of funds and oversight of the loan through nonprofit agencies.

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As for the magical mark of $2 million dollars, you are equating this to the maximum loan proceeds under the 7(a) loan program. However, I have some sad news for you. On Oct. 2, the SBA announced that the maximum allowable guarantee under 7(a) has been reduced to $500,000. This is a temporary initiative in place until the federal government comes to a 2003 budget resolution.

But you may still have options. Having worked with bankers over the last couple of decades, I have learned that when a loan application is very attractive to the bank, the loan officer attempts to combine loan proceeds from 7(a) and the 504 Certified Development Company loan program.

CDC loan details
The maximum loan amount under the 504 program is $1 million and the loans are processed by Certified Development Companies. Check the SBA's CDC directory to locate the one nearest you.

The loan money cannot be used for speculation, investment in rental real estate, working capital, inventory, consolidating or repaying debt or refinancing. Rather, the SBA requires that proceeds from 504 loans be used for:

  • Purchasing land and improvements, including existing buildings, grading, street improvements, utilities, parking lots and landscaping;
  • Construction of new facilities, or modernizing, renovating or converting existing facilities; or
  • Buying long-term machinery and equipment.

Priority is given to business district revitalization, expansion of exports, expansion of minority business development, rural development, enhanced economic competition, restructuring because of federally mandated standards or policies, changes necessitated by federal budget cutbacks, expansion of small business concerns owned and controlled by veterans or women. One job must be retained or created for every $35,000 of loan proceeds.

To qualify for a 504 loan, the business must be defined as small. That means tangible net worth cannot exceed $7 million and the average, after-tax income of the business for the last two years cannot exceed $2.5 million.

Interest rates for these loans are pegged to a specific increment above five and 10-year Treasury issues. The loans mature in 10 or 20 years. There is a 3 percent fee, which can be financed in the loan proceeds.

Generally, the project assets suffice for collateral purposes. However, the applicant must provide a personal guarantee to repay the loan. In short, you are placing personal property, if need be, available for access by the SBA should you default on the loan. This is known as Form 148, Unconditional Guarantee.

Combination loan leverage
As you can see, the maximum load of combining 7(a) and 504 financing can possibly reach $1.5 million. This may allow leverage to find additional funding sources given a SBA guarantee on the first $1.5 million.

Experience has taught me you should begin your application process with a preferred or certified SBA lender in your area. You will need the 7(a) program before proceeding to the local CDC. I have no personal working experience with HAL. You also may want to view the SBA loan documents to become familiar with what will be requested from the lender and the CDC.

By the way, being a vet, being a successful entrepreneur and investing in a type of business that is more recession-proof than most adds greatly to your ability to apply for the combo of loans.

I sincerely wish you well. And thank you for serving our country's defense needs.

-- Posted: Oct. 10, 2002

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