||Ask the Small Biz Adviser
Loan options for a disabled veteran
Dear Small Biz
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?
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
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
- 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
I sincerely wish you well. And thank you for
serving our country's defense needs.
-- Posted: Oct. 10, 2002