SBA loan guarantees -- are they any good for lawyers?

In an earlier "Coach's Corner" we discussed how to qualify for and seek a loan from your bank. There are, however, additional tactics for solos or small firms needing additional operating capital. Smaller law firms should definitely consider engaging the assistance of the Small Business Administration (SBA) as a means to facilitate commercial bank loans.

The SBA was created 50 years ago as a vehicle for programs designed to give small businesses greater access to capital. The SBA does not make direct loans itself; instead, it provides loan guarantees that enable banks to create profitable relationships with growing businesses.

Under SBA lending programs, banks fund 100 percent of the loan and get the government's guarantee on repayment for stated portions of the loan. Financial institutions use this program when they can't take full risk but really like the borrower and want to work with them - a typical bank/law firm dynamic. This is a great program when there is a shortfall of collateral for a conventional loan, which can be typical for law firms.

Here are some general but pertinent highlights.

Three types of SBA loan programs are of most direct application to law firms:

• The SBA 7a loan program, which can be either in the form of a term loan or a letter of credit, for a maximum loan of $1.5 million (of which up to 75 percent is guaranteed, at a 3.75 percent guarantee fee). More typical is a loan of $150,000 or less, with an 85 percent guarantee and 2 percent fee.

• The 504 Loan Program provides long-term, fixed-rate financing that enables small businesses to acquire real estate or capital equipment, to a typical maximum of $1.5 million.

• The CAPline Program involves asset-based revolving loans that most typically are used by seasonal businesses such as contractors. However, law firms that have seasonal business peaks (for example, tax law specialists) might consider this option. Most 7a loan features apply, with a maximum guarantee amount of $1.5 million and percentage of 75 percent.

SBA requirements for loan eligibility and proceeds use are generally of the common sense variety. Eligible businesses must be for-profit, have "reasonable" owner equity to invest and must be "small" according to SBA definitions by type of industry category (for law firms and other professional service businesses, the criterion is $6.5 million or less in annual revenues).

Loan proceeds can be used to fund real-estate purchases, new construction, capital equipment and furniture purchases, or startup expenses.

The maturity and interest rates of SBA-guaranteed loans depend on loan amount and maturity. Typically, the larger the loan and shorter the maturity, the smaller the interest rate will be.

And anyone owning 20 percent or more of the borrowing entity must personally guarantee an SBA loan. This is an unlimited guarantee and requires a pledge of collateral (real estate or financial assets).

As should be obvious, SBA loan guarantees are a means toward securing financing, and not an actual source of funds. But especially for firms working to establish a banking relationship, they can be an excellent means of getting a foot in the door to secure the capital you need.