Applying for a Government Sponsored Loan
Submitted by John Lenahan, Vice President of Lending, Philadelphia Commercial Development Corporation
Despite the general public perception to the contrary, applying for credit from a government sponsored loan program is not all that different than seeking financing from conventional private sector lenders. Whether the loan program is federally sponsored (such as the Small Business Administration’s 7a loan guarantee or 504 fixed asset loan programs), state sponsored (such as the Pennsylvania Industrial Development Authority (PIDA) or Pennsylvania Small Business First (SBF) loan programs), or operated by one of the City’s economic development agencies (such as Philadelphia Commercial Development Corporation (PCDC) or Philadelphia Industrial Development Corporation (PIDC), it is critical that the application address the lender’s primary concern – reasonable assurance of repayment from business earnings.
The principal difference between conventional private sector loans and government-sponsored programs generally lies with the risk associated with the project. For the most part, private sector lenders avoid financing start up businesses and instead look to extend credit to firms with a solid track record of earnings established over several years. Moreover, these lenders seek to have their loans fully collateralized (on a liquidation basis) as a secondary source of repayment. On the other hand, government sponsored loan programs are usually designed to stimulate economic development within a certain business sector (e.g. small businesses), to create new jobs, or to benefit a particular segment of the population (e.g.; low to moderate income individuals). While reasonable assurance of repayment is still the paramount criteria in the credit evaluation process, the government may weigh the projected economic development benefits of the project against the risks associated with a start up business or a project that offers less than full collateral for the loan. Loan guarantees or junior lien positions are often offered by the government as an inducement for the private sector lender to extend a loan or participate in the project financing.
In applying for any government sponsored loan program, the application should include a well thought out business plan as well as financial projections and assumptions which demonstrate the firm’s ability to repay the loan from earnings. The business plan should address in detail what products and/or services are offered by the company, how these products/services will be marketed, the organizational structure of the business, staffing requirements, management expertise, the proposed uses of the loan proceeds and the impact the financing will have on the business operations. Applications should also contain supporting documentation such as signed personal and business tax returns, financial statements, resumes and personal financial statements on the principals, and other appropriate documentation depending on the nature of the project (e.g. agreements of sales, copies of leases, franchise agreements, construction and equipment quotes, etc.). To avoid unnecessary delays, all forms supplied with the application packet should be fully executed and signed and dated by the responsible parties.
To reemphasize, applicants should keep in mind that a government sponsored loan program is not intended to be a grant program; the government entity operating the program is using tax dollars and therefore has the same repayment expectations as private sector lenders. As such, the application and business plan should be prepared in a manner that will address the key areas of concern from the lender’s perspective and, whenever possible, offer secondary sources of repayment.
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