There may, however, be help in sight. In recent years, the Small Business Administration's (SBA's) guaranteed-loan program has become an attractive potential solution to business owners facing capital restrictions. The problem is, many shop owners have little knowledge of the program's advantages or believe it to be too complicated.

"The SBA was formed more than 40 years ago to help small businesses get started in business and to help them grow once they are in business," says Mike Stamler, an SBA spokesperson. "I think we're accomplishing that from year to year.

"The SBA is a good potential source of financing for any business owner, particularly if he can't get conventional financing from a commercial lender."

"Wait just a minute," you say. "I've heard that the SBA creates a mound of paperwork and months worth of headaches for even the smallest loan request. This SBA guy must be talking about a different program!"

Same program. New rules.

The Transformation Begins

Up until the late 1980s, the SBA's reputation as a bogged-down government bureaucracy was well-founded. It wasn't unusual for a loan request - consisting of several inches of paperwork - to take months to process.

That's no longer the case.

The SBA has undergone a number of radical changes in recent years that make it one of the most user-friendly government agencies for small-business owners. Not only has the program been revamped to allow easier access, but a number of new guaranteed-loan programs have been started to meet the financing needs of more small-business owners.

In October 1995, President Clinton signed into law The Small Business Lending Enhancement Act of 1995, which made the SBA's guaranteed-loan programs more user friendly. "This is not your father's SBA," Administrator Philip Lader was quoted as saying.

What Have You Done for Me Lately?

The facts appear to support Lader's claim that the SBA has become a proactive supporter of small businesses. Since its inception in 1953, the SBA has guaranteed more than 610,000 loans, totaling in excess of $83 billion. In fiscal 1996 (the government's fiscal year end is Sept. 30), the SBA guaranteed more than 45,000 small-business loans, which resulted in $7.7 billion being injected into U.S. small businesses. This was slightly lower than the records established in fiscal 1995 for the number of loans (55,590) and the total amount ($8.2 billion); however, the agency was essentially closed for a month in fiscal 1996 due to the much-publicized government shutdown.

The SBA also has played a prominent role in providing financing for body shops. In fiscal 1995 (the most recent year for which an industry breakdown is available), the SBA guaranteed 457 loans, totaling more than $70 million, to body shops around the country. For the five-year period ending in fiscal 1995, the SBA had guaranteed more than 1,300 loans, totaling in excess of $248 million.

Advantages of an SBA Loan

How can you tap into this financing resource for your body shop? With the guarantee program, a bank actually extends the loan to the shop owner, with the SBA providing a guarantee of repayment for a certain percentage of the loan amount (usually 75-80 percent).

The SBA offers four key advantages. First, because the SBA assumes most of the credit risk, commercial banks generally are more willing to consider riskier deals that normally might not be considered "bankable." For instance, approximately 25 percent of all SBA loans extended are to start-up entities, which are generally considered "hands off" for conventional commercial banks.

Second, the terms of repayment generally are more favorable than those offered with conventional commercial financing. For real-estate loans, the term can go up to 25 years, which might be just the ticket for a shop owner who needs extra capacity but can't work a loan payment into existing cash flow on the 15-year payback of a conventional commercial real-estate loan.

For fixed-asset loans (spraybooths, frame machines, fixtures, etc.), the term may be as long as 10 years, depending upon the useful life of the asset being purchased; for working-capital loans, the borrower may take as long as seven years to repay the loan. These terms compare favorably with the typical maximum terms for conventional business loans of seven years for fixed assets and four years for working capital.

Third, the program is very inclusive. While there are some restrictions in terms of how a small business is defined, the SBA estimates that more than 90 percent of all businesses in the United States qualify for SBA financing. And there's no minimum loan amount, with a maximum guarantee amount of $750,000. In other words, a loan could be as high as $1 million with a 75 percent SBA guarantee.

The fourth key advantage is the relatively low cost of financing. The SBA charges a guarantee fee for term loans based on a sliding scale of 3 percent on the first $250,000, 3.5 percent on the next $250,000 and 3.875 percent on the remaining guarantee amount. For example, on a $625,000/80 percent guaranteed loan, the guarantee level would be $500,000. This would result in a guarantee fee of $16,250 (3 percent x $250,000 plus 3.5 percent x $250,000).

The maximum rates that can be charged are prime (based on "The Wall Street Journal" published prime rate, which currently is 8.75 percent), plus 2.25 percent for loans of less than seven years and prime plus 2.75 percent for loans of seven years or more. Many banks will even do fixed-rate SBA guaranteed loans.

While the fees were increased in the Small Business Lending Enhancement Act of 1995 (from a flat rate of 2 percent of the guarantee amount) and rates charged are somewhat higher than those charged for conventional commercial loans, they're much lower than those charged by asset-based lenders and venture-capital

concerns.

How Do I Get One?

Shop owners work with their bankers to fill out the paperwork to apply for the loan; therefore, finding a bank that has some experience in SBA lending is essential.

How can you find out which banks are in the market for SBA loans? Call the bank directly and ask. You can also check with your state's SBA office. Additionally, you may want to ask your accountant if he's had any experience in working with banks that participate in the SBA guaranteed-loan program.

Before finding a bank to handle the actual loan request, several documents should be prepared to expedite the process:

• A narrative business plan;
• Future profit-and-loss projections for three years;
• Résumés on key managers and owners;
• An outline of how the loan will be utilized, including a list of assets to be purchased;
• At least three years of financial statements on the business entity;
• Personal financial statements on all owners; and
• The proposed collateral structure.

The business plan may require only four or five pages to summarize these areas, but the important thing is that the small-business owner demonstrate to the banker and to the SBA that the idea and potential pitfalls have been thoroughly considered. Some sections to include are background, products and services, marketing, management, operations, milestones you plan to reach and funds required to run the business. Your local library should contain a number of good books to help you with the preparation of your business plan.

There are also a few basic financial requirements for the program. For existing operations, the SBA generally looks for a debt-worth ratio (total liabilities/total assets) of not more than 3:1 subsequent to the loan being made. A start-up must have at least 30 percent in equity invested by the owners. In addition to the capital requirements, the SBA looks very closely at cash flow (both historical and projected) and at the background and competence of management.

SBA Low Documentation Loan Program

The SBA Low Documentation Loan Program is the best example of the agency's proactive attempts to provide lending programs that adhere to the needs of small businesses, such as your shop. Over the years, the SBA has heard many complaints from small-business owners and bankers that the guaranteed-loan program is too cumbersome. In response to these complaints and in an effort to reduce paperwork requirements, the SBA created the Low Doc loan program. This program was first offered as a pilot in 1993 in a few locations around the country and was so well-received that it's now offered to small-business owners on a national basis.

The Low Doc program can be used for loan requests under $100,000. As with other guaranteed loans, the borrower works with his bank in formulating the loan request, with the bank actually submitting the request to the SBA. The stated objective of the Low Doc program is to put the emphasis on the borrower's character, credit history and projected cash flow, with less significance placed on percentage of equity and collateral.

"The SBA has made it easier than ever before to get smaller loans," says Stamler. "This program is new, but it's already proven to be extremely popular both with small businesses and banks."

Stamler's point is well-supported. The Low Doc program went national in July 1994, and in fiscal 1996, the SBA processed 20,728 Low Doc applications, representing 45 percent of the SBA's total loan volume for the year.

The documentation requirements are far more manageable than those imposed for a standard SBA guaranteed-loan request, which typically involves the completion of 10 or more forms and/or narrative summaries from the borrower. For a loan of $50,000 or less, the SBA requires only a completed one-page application form; for a loan amount of $50,000 to $100,000, the SBA requires a completed one-page application form, copies of income-tax returns - Schedule Cs or the front page of the corporate return - for the last three years (if applicable), personal financial statements from all 20 percent or more stockholders, and a brief internal loan report prepared by the lender.

Start-ups are eligible for Low Doc loans, as are existing small businesses. For an existing business to be eligible, it must employ fewer than 100 employees and have average annual sales for the preceding three years of less than $5 million. The restrictions for maximum interest rates, terms and uses of loan proceeds are the same in the Low Doc program as for the standard guaranteed-loan program. And the guarantee fee is only 2 percent, which is lower than those imposed for larger SBA guaranteed loans (outlined earlier).

Women's Prequalification Loan Program

Another relatively new loan program for the SBA is the Women's Prequalification Loan Program, which recently became available to every SBA district in the United States. "The SBA seeks to improve on the number of loans to women-owned businesses," says Stamler, in response to why this program was started.

According to SBA literature, this program "allows a woman-owned business owner to receive prequalification from the SBA for a loan guarantee before going to a bank."

The key word here is before.

The women's loan program is the only SBA guaranteed-loan initiative that allows the borrower to go directly to the SBA for approval. The bank becomes involved only after the SBA has signed off. This is a big advantage because a bank is more likely to consider a request for a new or young body shop that's already been approved with an SBA

guarantee.

As with the Low Doc program, the Women's Loan Program focuses primarily on the credit history, character and experience of the borrower. Consequently, there are no stated minimum equity or collateral requirements.

The maximum loan amount in the women's program is $250,000. The SBA will provide the bank with a guarantee of up to 80 percent on loans up to $100,000 and up to 75 percent on loans between $100,000 and $250,000. To be eligible, a small business must be at least 51 percent owned, operated and managed by women; have annual sales not exceeding $5 million; and employ fewer than 100 people.

For loans under $100,000, the SBA requires only that the borrower submit a one-page application. For loans of $100,000-$250,000, the borrower must submit an expanded application, résumés on the principals, a copy of the most recent year-end business financial statement or tax return, and a personal statement. The restrictions for maximum interest rates, fees, terms and uses of loan proceeds are the same in the Women's Loan Program as for the standard guaranteed-loan program.

Loans Made Easier

The SBA program is one of the best-kept secrets in the intricate world of financing. And, according to Stamler, we can expect to see the SBA make its guaranteed-loan programs even more user friendly - helping to make shop owners a little less leary.

"You'll see an SBA that continually examines and adjusts its product mix to handle various credit needs," he says. "We'll continue to fine tune. It's an issue of adjusting to what the consumer needs."

Writer J. Tol Broome Jr. is a contributing editor to BodyShop Business.

Check It Out

Since the Small Business Administration (SBA) has been revamped to be more user friendly, you might want to consider an SBA loan.

• Because the SBA assumes most of the credit risk, commercial banks generally are more willing to consider riskier deals, such as business start ups.
• The terms of repayment generally are more favorable than those offered with conventional commercial financing, and the SBA estimates that more than 90 percent of all U.S. businesses qualify for SBA financing.
• Financing costs are very low. The SBA charges a guarantee fee for term loans based on a sliding scale.
• Before finding a bank that handles SBA loans, prepare a business plan, future profit-and-loss projections for three years, résumés on key managers and owners, an outline of how the loan will be utilized, three years of shop financial statements, personal financial statements on all owners and the proposed collateral structure.
• For existing operations, the SBA looks for a debt-worth ratio (total liabilities/total assets) of not more than 3:1 subsequent to the loan being made. A start-up must have at least 30 percent in equity invested by the owners.
• The SBA Low Documentation Loan Program can be used for loan requests under $100,000. Start-ups are eligible. For an existing business to be eligible, it must employ fewer than 100 employees and have average annual sales for the preceding three years of less than $5 million.
• The SBA Women's Prequalification Loan Program is the only SBA guaranteed-loan initiative that allows the borrower to go directly to the SBA for approval. To be eligible, a business must be at least 51 percent owned, operated and managed by women; have annual sales not exceeding $5 million; and employ fewer than 100 people.

CAPLine Revolving Line of Credit Program

The SBA's CAPLine Revolving Line of Credit was yet another pilot program tested in 1992-'93 that became a permanent part of the SBA's 7(A) program in fiscal 1994. The CAPLine program is designed to help small businesses with short-term, working-capital needs with a line of credit.

The CAPLine application process is the same as that of the 7(A) term-loan process, but the structure for interest rates and fees differs. As with the term-loan program, rates are negotiated between the borrower and the lender, but they may not exceed prime plus 2.5 percent. The fee to the SBA is 1/4 percent if the line is set up for one year or less, using the same sliding-fee scale as the one used for the 7(A) term-loan program if the line is set up for more than a year.

Other major provisions of the CAPLine program include:

• Maximum guarantee to the bank is 75 percent or $750,000, whichever is less. In most cases, banks will cap a CAPLine revolving line at $1 million.
• Advances on the line are generally limited to 50 percent of the eligible inventory level and 75 percent of eligible receivables. In other words, if your inventory level is $100,000, you could borrow $50,000 against your line of credit. If your receivables are $100,000, you could borrow $75,000 against your line.
• The inventory and/or accounts receivable are pledged as collateral along with other business assets. The SBA/bank also may require the pledging of personal assets from the owner(s) as part of the collateral structure.
• Lines can be set up for as short as a few months or as long as five years.
• The borrower must have been in business for at least one year.
• The line cannot be used to refinance long-term debt.
• Taxes must be paid current.
• All owners with a stake of 20 percent or more will be asked to guarantee the line.
• Quarterly financial statements must be submitted by the borrower.
• A borrowing base certificate must be submitted regularly by the borrower. This provides information on the eligible inventory and accounts-receivable levels that are available as collateral.
• The restrictions are somewhat lower for CAPLines of $200,000 or less.