Small Business Today Magazine JUN 2014 MASTERWORD SERVICES INC | Page 28
EDITORIALFEATURE
Small Business
Loan Renewal Risk
By Bruce Hurta
S
mall business owners are
gamblers. They are continuously making decisions
based upon weighing the
risks involved in their choices.
In general, the greater the risk
assumed the more likelihood of
increased profit (or loss). When
taking on new debt or obligations for ones small business, the
small business owner wants to
balance their risk/reward ratio
for a satisfactory result. Will the
increased obligation increase
the company’s success or will
it become a burden? If interest
rates are variable, which way
will they move during the life of
the loan? If the interest rate is
fixed for the life of the loan, will
it be too high in comparison to
the variable rate option?
SBA vs. Conventional Bank Loans
The last question posed in the
above paragraph is critical. The
answer to that question is affected by the term of the loan
and that leads to one of the
greater benefits of SBA loans
versus conventional bank loans
for small business financing. The
SBA government-guaranteed
loan program provides longterm, permanent financing for
the small business. SBA loans
which are used to purchase,
construct, remodel, expand, or
refinance small business real estate have a repayment term of
25 years. SBA loans not used for
small business real estate have a
term of 10 years. Initially, it appears that conventional bank
financing provides similar repay26 SMALL BUSINESS TODAY MAGAZINE [ JUNE 2014 ]
ment terms. Banks, however, are
short-term lenders.
The Long & Short of Loans
Bank loans with long-term
amortizations are not longterm loans. The risks to the
small business owner are short
maturity dates combined with
a long-term amortization payment program. This means the
entire loan comes due in one
year, three years, five years, or
some other term shorter than
the full amortization of payoff of
the loan. If I am a small business
borrower whose twenty-five
year real estate loan comes
due in five years prior to full
repayment, my loan has what
is known as a “balloon feature”.
The balloon is the remaining
loan balance which all comes
due all at once. Usually, it is not
a problem. Banks want loans for
interest income and small businesses need the loan proceeds.
Why not just renew the loan
balance for another five years
and move on?
In many cases, the balloon balance is renewed and the bank
and small business borrower
do move on. There are, however, circumstances that create
renewal risk and circumstances
under which the bank will not
renew the loan. The small business borrower who took the
funds five years ago did not
know at that time some of the
following circumstances:
• Who will own the bank or
who will be in charge of
management of the bank
and its loan decisions when
the balloon feature comes
due?
• What will be the state of
the economy and what will
be the profitability of the
business when the balloon
balance comes due?
The loan renewal process is
like the new loan approval process. It requires a new credit
and financial evaluation on the
part of the bank to grant the renewal. Because of this, the small
business borrower is faced with
loan renewal risk. This is just
one more gamble the small
business owner encounters in
their daily management of their
business’ affairs. Sometimes it
is a relatively safe bet to accept
the bank’s offer of a short-term
loan with a balloon balance in
the short-term. This is usually
in cases where the business is
strong enough and has a sufficient track record to move the
loan to another bank if necessary. If, however, the small business owner wants long-term,
permanent financing without
renewal risk, SBA loans are an
excellent option!
You can learn more about SBA lending
and small business finance on Bruce’s
blog at brucehurta.wordpress.com. For
more information about SBA real estate
loans for small businesses, contact Bruce
Hurta, Business Lending Manager at
Members Choice Credit Union, at 281384-2595 or by email at bhurta@mccu.
com.