By ANGUS LOTEN
"Take Two" is an ongoing series about first-time business owners over 50 by Angus Loten, a small-business reporter for the Wall Street Journal.
Past Jobs: Television-news photographer, advertising and marketing director, public relations manager.
Current Job: Molly Maid franchise owner
Last year, Alan Green, a former TV news photographer turned ad pitchman, decided to buy a business that could also serve as his nest egg. But when the 59-year old couldn't get financing to purchase an ailing Molly Maid franchise in his hometown of Salt Lake City, he applied for a government-guaranteed loan through the Small Business Administration. "I was going to finance it with credit cards, but in just three weeks I had a check in my hands," Green says.
While banks remain the top source of lending for small business owners, the government agency has been increasingly backing their loans to folks like Green often deemed too risky by private lenders. This fiscal year, the agency's two main loan-guarantee programs have already exceeded a record-high $18.4 billion (50,000 loans), up from $8.3 billion (40,000 loans) in 2009, agency lending data show. And as much as $4 billion (14,600 loans) went to start-ups, which are typically riskier bets for lenders. The loans, which are issued through banks and the not the government itself, are guaranteed to up to 85% against default.
In recent months, some of the nation's largest banks have reported all-time highs in SBA lending. This month, Wells Fargo & Co. (WFC)
Still, banks aren't handing out cash. Small-business loan brokers say since the downturn SBA-backed loan officers have been demanding far more paperwork from borrowers. Last year, the agency waived its loan-guarantee fees and raised the lending ceiling from $3 million to $5 million -- meaning bigger companies are likely crowding out smaller, riskier borrowers, says Biz2Credit CEO Rohit Arora. "We have seen more extensive documentation requirements, high rates and longer processing times," Arora says.
Applying for a government-backed loan requires borrowers to make a water-tight case for their business, he says. Despite the guarantee, lenders still want assurance that they'll get their money back, in the form of a detailed business plan with projections two years ahead for new ventures, or years of financial statements and tax returns for existing businesses. Lenders also want to see a breakdown of products or services, target markets and customers, well as a firm grasp of cash flows and other accounting figures. While a prime consideration in SBA loan decision is the ability to repay from business revenue, lenders also gauge "character, management capability, collateral and owner's equity contribution," the agency says.
Meanwhile, banks set interest on most of these loans against the prime rate, or 3.25%, with the maximum margin lenders are allowed to charge of 2.75%. So depending on the loan amount, rates can be as high as 6%, on top off other service fees and charges.
Green was in a grocery store on New Year's Eve when the bank called to okay his application for a $130,000 seven-year loan at 6%. To qualify, he put up about 10% from his personal savings. "I don't think they would have approved it for a start-up," Green says. "This was a business that had and could be profitable, and I had strong management and marketing experience in my favor."
Since launching in January with 14 employees, sales at Green's Molly Maid franchise are up 22% from last year and are track to grow another 30% by the end of the year. Funds are withdrawn once a month from his business account toward the loan, which he now expects to pay off before seven years. He's already hired six more workers. "They felt this was a good investment," Green says of his government-backed lenders. "And they were right."