Small businesses laud benefits of SBA loans
It’s just after lunch and a couple of 2-year-olds cry loudly, resisting nap time as soft music — set at a volume that drowns out background noise — warms the darkened room. Teachers gently reassure the fussy tots, and within a minute or two, all is quiet.
Paul Prevo — "Mr. Paul" to the kids and staff at Tiger Tots Child Development Center — is unfazed by the predictable nap-time commotion. What does bother him was turning away parents of about two dozen preschool-aged kids who were looking for child care in the last few weeks.
There simply are not enough openings or space. Prevo’s parents also were foster parents, so he has an empathetic spot in his heart for those kids and parents.
It’s a continuation of the attitude Paul and Christy Prevo had almost 10 years ago when they started Tiger Tots.
"We got started at the beginning of one of the worst economic downturns" in recent history, he said. A year and a half into the business, there were 18 kids enrolled, and the Prevos were digging into their personal wallet for the cash to cover payroll.
Times have changed.
Now, approaching its 10th anniversary in February, Tiger Tots has 330 kids — representing as many as a dozen different languages — and is the largest day care and early childhood education provider in Central Missouri. Tiger Tots has a seven-building footprint in the 1600 block of Paris Road, and there are plans for further expansion. The Tiger Tots west location on Claudell Lane has two buildings.
Prevo insists his business is not "day care." He said Tiger Tots kids are learning to count to 10 in 10 different languages. When the 4 and 5-year-olds graduate in the spring, ready for kindergarten in the fall, they will recite the Pledge of Allegiance twice — once verbally and then in sign language.
Prevo said there will not be a dry eye in the room.
The child care center is hoping to become a fully accredited kindergarten, too.
As a result, Prevo is preparing to apply for his seventh Small Business Administration-backed loan.
Prevo is a staunch conservative who said he cringes at the old saying, "I’m with the government and I’m here to help you," but he heaps praise on SBA loan programs.
"It’s one of the few government programs that actually does what it’s intended to do," he said.
Local lenders are ratcheting up a focus on SBA loans — particularly the 504 loan program that allows refinancing traditional loans — as a way to help small businesses and startups be successful, hire more employees and generate more investment in the community.
RESOURCES FOR EXPANSION
Since 1983, the SBA 504 loan program has financed $30 million in projects in Boone County through 19 banks. The top SBA 504 loan producers are Central Bank of Boone County, Landmark Bank, The Callaway Bank, Commerce Bank, Missouri Bank II and Bank of Missouri.
The SBA announced in May that the 504 refinance program, which had been temporary, had become permanent. The 504 program allows eligible small business owners to refinance some fixed asset and business expenses as a way to ease their financial burdens and create incentives for potential expansion and further job creation.
"Paying off existing loans with a new loan at a lower cost can help increase cash flow, which can be especially helpful in a resurgent economy," SBA Administrator Maria Contreras-Sweet said in a news release.
Bank of Missouri is one of the SBA’s "preferred lenders" in Boone County, meaning the bank has the ability to make an SBA-backed loan within a day or two, rather than going through other SBA channels for a decision that might take more than a week. SBA loans require lower down payments, longer repayment terms and fewer restrictions than traditional commercial lending, said Karin Bell, senior vice president and SBA loan manager at Bank of Missouri, 3610 Buttonwood Drive.
"There’s so much more flexibility with an SBA loan," Bell said, adding that SBA also can guarantee loans for startups. "You’re not going to see a lot of commercial lenders do a startup" loan.
Bell is quite familiar with the Prevos and Tiger Tots. The business occupies an honored spot on the bank’s Wall of Fame and was a finalist for SBA small business of the year in 2015.
Interest rates can be 1 to 2 percentage points higher than traditional loans — "the risk is higher," Bell explained — but the flipside is a longer term to repay the loan. It’s also possible to "wrap" all financing into one loan. Typically, real estate, equipment, operations and other factors of business would require separate loans because the payback terms are different.
SBA loans give lenders the flexibility to "blend" the different needs into one loan: a building, renovation, equipment and working capital.
While Missouri Bank isn’t the only SBA preferred lender in Boone County, it has a dedicated staff that does just SBA lending, separate from the bank’s commercial lending department.
SBA has programs for general small business loans, disaster loans and real estate and equipment loans, with rates for traditional or 7( a) loans ranging from 5.75 to 6.25 percent and, for the past year, just more than 4 percent for the 504 refinance program.
The rate and term structures allow businesses "to have more working capital in their pocket," said Craig Meyer, vice president and commercial banking officer at Providence Bank, one of SBA’s newest local preferred lenders. "It gives them more stability." He repeated that a primary goal of SBA lending is to help businesses have better cash flow to expand the business or hire more employees.
But it’s a misnomer to think of SBA financing as "a lender of last resort," Meyer said. "It’s a great option."
For businesses that already own or have equity in their building, a no-money-down loan sometimes is a possibility, said Donna DeLong Hamilton, director of Enterprise Development Corporation, the SBA representative in Boone County since 1983.
"It helps those businesses that are doing well but just need a little breathing room," Hamilton said. The 504 refinance option is especially attractive to business owners "who see uncertainty ahead," she added.
Perhaps the most appealing, hard-to-beat feature of SBA lending is the ability to have a fixed interest rate over the 20-year life of a loan. Most conventional loans will fix the interest rate for three or five years, Hamilton said.
"There is great security to the small business owner in knowing that their loan payment amount with SBA will remain the same amount for the life of the loan," she said.
TAKING RISKS
A primary reason for banks to be an SBA lender is that SBA will guarantee loans up to 85 percent, meaning the SBA will repay the bank if the borrower defaults.
The SBA loan default rate was the topic of a recent report in Forbes magazine, with
OpenTheBooks.com detailing the SBA’s bad loan portfolio from 2000 to 2015: $24.2 billion written off as the result of 160,000 defaulted loans.
The defaults in Columbia and Boone County during that time included 75 loans totaling about $13 million.
"Because SBA is a higher risk, you’re going to have more defaults," Bell said. "There’s no doubt about it. But you have more successes than you have defaults."
It’s also important to understand, she said, that SBA loans are backed through a zero-subsidy program, meaning the defaults are not paid out of federal tax dollars. All SBA loans include a "guarantee fee" — paid by borrowers — that goes into a fund to pay off bad debt.
Bell quickly points to the Prevos and Tiger Tots as a sterling example of success, from helping children develop emotionally, socially and academically and through jobs created to increasing the beautification of the Benton-Stephens neighborhood along Paris Road.
"The financing that he has received ... has impacted in more ways than you can imagine," Bell said.
Prevo is convinced the growth of the child development and early learning center has sparked other renovations and improvements along the south section the Paris Road corridor, from new roofs and siding to landscaping. One of the Tiger Tots buildings is a renovated historic structure that dates back to the 1890s.
"We’ve seen an increase in value in this neighborhood," he said. "Part of that success goes back to SBA loans."
INVESTING IN THE COMMUNITY
Meyer said Providence Bank’s active participation in SBA lending is motivated by the kind of results Prevo champions.
"We are looking to market ourselves to reinvest in the community that we are part of," he said.
The three owners/chefs at Barred Owl Butcher and Table at 47 E. Broadway financed their new restaurant through SBA loans and private investors. Co-owner Ben Parks said the group was referred to SBA programs from others in the restaurant business, which is one of the "high-risk" industries that have much stricter financing requirements from traditional lenders.
"I don’t think most banks would be willing to take a risk on a project like this without the guarantee of an SBA loan," Parks said, noting the process "was fairly straightforward" and "working out really well."
After several months of renovation and planning, Parks and his partners have opened a new rustic-feel restaurant and butcher shop in the building that formerly housed Inside Columbia Magazine.
Lazer Lanes at 3412 Grindstone Parkway also has benefited from extra cash flow and more flexible lending requirements, said owner Ron Sterchi, the former owner of The Market Place antiques and gift mall at 1100 Business Loop 70 W. The popular antique store closed in March 2014 to make way for Ferguson Plumbing and Columbia Pool and Spa.
Sterchi used an SBA loan to buy the shop at 1100 Business Loop 70 W. and another SBA loan to buy the building that now houses Lazer Lanes. He was particularly grateful to Hamilton.
"Donna is amazing how she puts all that together," he said. "I couldn’t have done it with a regular bank."
Sterchi took over ownership of the video arcade/lazer tag and bowling venue in 2012 after his renters, who operated as Galactic Fun Zone, piled up an arears total of more than $100,000. He thought the recreation venue was "a great idea" and decided he knew enough about the recreation industry to make the business work. Sterchi was the former tennis pro at Club Woodrail and was a former men’s tennis coach at the University of Missouri.
Lazer Lanes opened a café at the first of the year and might soon add other entertainment features. The place is booked up for birthday parties through November, and there is a steady flow of corporate events for MU, Veterans United, Carfax, Shelter Insurance, Home Depot and others. Last weekend, there was a two-hour wait for bowling.
"We don’t think we’ve hit our stride yet," Sterchi said. "This is a great location. There’s so much traffic."
There might be some other development plans brewing for the business and the surrounding property, but for now Sterchi is keeping mum. But he’s certain he will call Hamilton about SBA lending when the time is right.
"It’s the only way to go," he said.