Anthony J. Aveni, first vice president at Rockland, Mass.-based Rockland Trust Co., was recently named “banker of the year” by the South Eastern Economic (SEED) Corp. for making six U.S. Small Business Administration 504 loans to local businesses in the last year.
Aveni, hired by Rockland in October 2008, answered a few questions about the 504 program and the process for making those loans.
PBN: Can you outline the types of businesses that you made SBA 504 loans to in the past year?
AVENI: Businesses that I worked with over the last year for SBA 504 financing include manufacturing companies, heavy construction contractors, professional services companies and retail businesses. However, most for-profit small businesses will qualify.
PBN: How does a 504 loan work? What’s the difference between 504 and 7(a) loans?
AVENI: Through the SBA 504 program, a small business can obtain up to 90 percent long-term financing for a fixed-asset project, such as the purchase of a building or heavy equipment. The SBA 504 Program is a two-tiered financing program that involves a bank and a certified development company (CDC). A bank such as Rockland Trust Company is selected by the applicant and finances 50 percent of the project at conventional rates and terms and receives a first lien on the project’s assets. The bank loan does not have an SBA guaranty. The SBA, through the issuance of a debenture that is sold to investors, provides up to 40 percent of the project’s financing with a loan provided by the CDC that is secured by a subordinate lien on the project’s assets. The CDC’s loan terms are very attractive to borrowers with a below market, fixed rate and a loan term up to 20 years.
Whereas, for a 7(a) loan, the SBA guaranties a bank loan up to 90 percent of the gross amount of the loan depending on the loan size and 7(A) program. Currently, the SBA maximum guaranty is $1.5 million and the maximum 7(A) loan size is a $2 million loan. The SBA guaranty enables a lending institution to entertain a loan it might not otherwise make due to a defined borrower risk such as a start-up, collateral and/or existing cash flow.
PBN: Can you explain how you work with SEED to make loans to area businesses?
AVENI: During the process of meeting with a prospective borrower I try to emphasize the importance of forging a meaningful relationship with the client. This is done by providing as many resources and options that are available for a particular situation. In most cases that involve fixed-asset or real estate financing I have the discussion about the SBA 504 loan program and mention SEED. I will then make the formal introduction to one of the loan officers at SEED and we will jointly process our respective pieces of the loan. Through constant and open communication with the borrower we address any issues or concerns up front. Once the bank and SEED have approved the loans, we work with closing attorneys who can close both the bank and SBA loans. This helps to save costs for the borrower and keeps the closing less confusing.
PBN: I read that the SBA is running out of stimulus money to fund loans. What does that mean for small-business lending in the area?
AVENI: Unfortunately, the SBA stimulus funding that provided the waiver of SBA guaranty fees paid by borrowers using the SBA’s 7(a) and 504 loan programs has been exhausted as of the end of November. However, SBA loan funding itself remains unchanged except that new SBA loans are now again subject to the original SBA guaranty fee structure. The important thing is that access to SBA loans has not changed but will make closing on a loan a little more expensive. The guaranty fee charged by the SBA and passed onto the borrower can be included in the loan proceeds and is modest compared to the overall risk that is typically associated with an SBA guaranteed loan.
PBN: What’s your forecast for the coming year? Will businesses rely more or less on SBA loans and why?
AVENI: At Rockland Trust we believe the upcoming year will present opportunities for some businesses and challenges for others. We have been very fortunate to avoid a lot of the issues that have affected our peers. Our outlook is positive with increased loan demand and a focus on forging stronger relationships with our existing customers and developing lasting relationships with new customers. The SBA financing is always a desirable option, although obtaining an SBA loan still requires the borrower to exhibit the ability to repay the loan. The program does not alleviate this essential component of the underwriting process. It is hard to say if demand will be greater than it is already for SBA loans but I think that the more borrowers are educated about the benefits the more appealing it becomes.