An accounting error the federal government made last year has paved the way for $2.5 billion in additional loans for small businesses. This could mean more money on the horizon for every small medical practice that needs it.

In early 1997, the U.S. Small Business Administration (SBA) announced that it was installing a cap on its 7(a) Loan Guarantee program following high demand from businesses, which was running the program prematurely dry. But in June, the cap was lifted when the SBA announced that it and the Office of Management and Budget had made a mathematical error in calculating the program's subsidy rate. This rate anticipates the program's default rate and is calculated each year to make sure the agency has enough money to pay its lenders.

The error, discovered by the General Accounting Office, reportedly occurred when a federal employee accidentally moved a digit in the complex formula used to determine the program's subsidy rate. Correcting that error means that an additional $2.47 billion has been made available to the program. For family practices, then, it could be Christmas all year long.

So many options

Qualifying for any of the SBA's many financial assistance programs has long been the goal of many cash-starved family practices. Today, qualifying for SBA assistance is easier than at any time during the last 15 years.

The SBA's cornerstone is the 7(a) Loan Guarantee program, under which the SBA guarantees loans made by private lenders to small businesses that cannot obtain financing on reasonable terms through traditional avenues. Several years ago the SBA revamped this program to make it more responsive to the needs of small businesses. The results were two new programs available under the 7(a) program: Low Documentation (LowDoc) and GreenLine.

The LowDoc program addresses two primary concerns voiced by family physicians. One concern is that paperwork, especially for small loans, makes the loan application process difficult. The other is that commercial lenders are not, for a variety of reasons, willing to give business loans of less than $100,000.

LowDoc slashes the application paperwork to one page and aims for a two-day turnaround on requests for SBA guarantees on loans of less than $100,000, dropping pages and pages of bureaucracy from the process. A commercial lender, rather than the SBA, makes the actual loan, but the SBA can guarantee up to 90 percent of it, often making the difference between approval and rejection of a practice's application.

Another primary need medical practices have is finding reliable, short-term sources of working capital credit. The GreenLine program meets this need by providing SBA guarantees of up to 75 percent for revolving lines of credit extended by commercial lenders for as much as five years and $750,000. A revolving line of credit allows a medical practice to obtain funds as needed from a preapproved credit account and repay the borrowed funds on a regular schedule. GreenLine allows continuous borrowing and repayment during the maximum five-year loan period.

This program has helped many medical practices cover the revolving credit needs inherent in their day-to-day operations. For example, by financing receivables, a practice can bridge the gap between the time services are rendered and the time payment is finally received.

The SBA also has a program for practices that require major investments in equipment or facilities in order to grow. The 504 program is a fixed-asset financing program that helps practice owners get 10-to 20-year loans to buy real estate, finance new equipment and build, expand or renovate facilities.

The 504 program enables medical practices to borrow 90 percent of the money needed to cover expansion. This way, the practice must come up with only 10 percent of the project's cost, instead of the 20 percent lenders usually require. In addition to the lower interest rates possible with SBA involvement, this frees additional cash for working capital needs. Fifty percent of the expansion funding, excluding government funds, comes from the participating financial institution. That lender's investment is normally secured by a first security interest (a lien) in the facility or equipment. The remainder of the loan (40 percent of the total expansion funds) comes from Certified Development Companies (CDCs), local public or private partnerships organized as nonprofit entities.

Thus, for a $100,000 project, a local lender would fund $50,000, the CDC would lend $40,000, and the medical practice would put up the remaining $10,000. CDC loans are typically fixed-rate loans secured by a second lien and guaranteed by the SBA.

Naturally, there are restrictions. For every $35,000 in 504 funding from a CDC, a family practice must be able to show that it has created one job or retained one that would have been lost without the project. It is also possible to justify a loan by demonstrating that the project will have another beneficial impact on the local economy.

Any takers?

To qualify for an SBA-guaranteed loan you must first be turned down for a normal commercial loan. To take advantage of the SBA's newly discovered funds and guarantees, then, your first step should be to visit or call the commercial loan officer at your bank to find out exactly what is needed to apply for a regular loan. Be sure you have all their forms and know what supplemental information will be required.

The next step is to assemble the required information, either through your own efforts or with the assistance of an outside source, such as your practice's accountant. Be sure all questions on the lender's forms are answered and all supplemental information is provided.

Once you have your paperwork together, make a second appointment with the commercial loan officer to present your loan proposal and to discuss your practice's plans. Don't expect a credit decision at this time, though. It can take anywhere from a week to five weeks for the bank to make a decision, provided you have furnished complete information.

If your initial loan request is denied, ask your banker to help you provide other information or proposals to overcome the lending institution's reasons for declining the loan. If you still cannot get the loan approved, ask to participate in the SBA program. The banker will be the one to give you an SBA loan package, which will be added to the bank's application. The bank will then deal directly with the SBA to process your loan request and should give you an answer within just a few days.

If the bank declines your request for an SBA-guaranteed loan, you may still be eligible for direct funding from the SBA if you meet certain qualifications, such as these:

• You are a Vietnam veteran,

• You are a veteran with 30 percent or more compensatory disability,

• Your medical practice is located in a designated labor surplus area,

• Your medical practice is located in an urban or rural area with a high proportion of low-income individuals,

• You are eligible for a Handicapped Assistance Loan.

If you need assistance, the SBA's Business Development Division provides free counseling, although it does not provide loan “packaging.” You can reach the SBA's answer desk at 800-8-ASK-SBA, or visit its web site (http://www.sbaonline.sba.gov/).

SBA past, present and future

Several years ago, the SBA discovered that, of the almost $9 trillion in commercial loans made each year, only $843 billion, or under 10 percent, were approved for small firms — even though small firms employ 54 percent of the private-sector workforce. The SBA has since worked diligently to increase its financial assistance programs for small businesses.

The future looks especially bright for the 7(a) program. Last year, with $7.8 billion budgeted for the program plus the $2.5 billion windfall, the SBA approved a record $9.5 billion in 7(a) loan guarantees. The agency expects to approve $10 billion this year, another record, making the loan process friendlier for family practices needing a hand.