A prequalification program helps those who might have been turned down for bank loans get the expansion money they need.

Rhonda Cline launched her manufacturing business--whirlpool baths and spas--on a shoestring three years ago. Demand for her products grew quickly; revenues for aqua Life Industries in Helena, Mont. went from $52,000 in 1994 to $400,000 last year. But Cline's lack of expansion capital began to pose a serious threat to the company. Some customers, frustrated by delays, canceled their orders.

As a fledgling entrepreneur and single mother of two, Cline figured that her chances of securing a bank loan were slim. Then she read in the local newspaper about a pilot U.S. Small Business Administration loan program for women-owned businesses.

Cline followed up and this past February obtained an SBA-guaranteed bank loan through the Women's Prequalified Loan Program she had read about. The loan financed relocation to a larger facility, additional equipment, and supplies. And there was enough left over for working capital. Cline expects 1997 revenues for the firm--which has four full-time and two part-time employees--to be $500,000.

The Women's Prequalified Loan Program began in 1994 in 16 SBA offices around the country. It went nationwide in October 1996 and is now offered by 55 of the SBAs 68 district offices.

From the program's inception through this past June, the SBA issued 871 prequalification letters, and 674 loans totaling $71.6 million were closed.

Through the program, women business owners can receive SBA prequalification for a bank loan guaranteed by the agency. The guarantee means that in the event of a default, the SBA will cover most of the unpaid loan balance.

Unlike other SBA programs that guarantee bank loans, the women's program enables the borrower to get the guarantee before approaching a bank. The bank becomes involved only after the SBA has signed off. This is a big advantage for young firms because banks are more likely to approve a loan that has been prequalified by the SBA.

"I had been turned down several times by banks due to a lack of collateral, even though my business was profitable," says Cline. "The Women's Prequalified Loan Program places less emphasis on collateral. It has been vitally important to my business that I was able to obtain one of these loans. It has helped me expand my business to a whole new level."

Sherrye Henry, assistant administrator for the SBA's Office of Women's Business Ownership in Washington, D.C., says: "This program has been received enormously well. The SBA and Congress together devised this program for women. It has worked particularly well for women with service businesses who do not have widgets to offer as collateral."

Before the program began, Henry says, a woman seeking financing was likely to be stiff-armed at the bank as soon as she walked in the door. "Most women never even got to the part about the ongoing positive history and good track record of their company," she says. While prequalification "does not ensure that the bank will make the loan," Henry adds, "it does enable most owners to get a good look at the loan request from the lender."

How The Program Works

The program focuses primarily on the credit history, character, and experience of the borrower. Consequently, there are no stated equity or collateral requirements.

The maximum loan amount is $250,000. The SBA provides banks with guarantees of up to 80 percent on loans up to $100,000 and up to 75 percent on loans of more than $100,000

To be eligible, a small business must be at least 51 percent owned, operated, and managed by women, its annual sales cannot exceed $5 million; and it must employ no more than 100 workers.

For loans under $100,000, the SBA requires only a one-page application from the borrower. For loans over $100,000, the borrower must submit an expanded application, a business plan with projections, resumes on the principals, a copy of the most recent year-end business financial statement or tax return, and a personal financial statement.

Loan maturities are based on the ability of the business to repay, on the purpose of the loan proceeds, and--for loans for fixed assets--on the "useful life" of the assets, or how long they can be expected to last.

For real estate, the term can go to 25 years. Maturities of loans for other fixed assets, such as equipment and machinery, usually are limited to seven to 15 years.

For most working-capital loans, the borrower can take up to seven years to repay--although in some instances the repayment period can be as long as 10 years.

These terms compare favorably with the typical maximum terms for conventional business loans: 15 years for real estate, seven years for other fixed assets, and four years for working capital.

Interest rates may be fixed or variable and are negotiated between the borrower and the lender. The rates are subject to SBA maximums. The maximum rate for loans of $50,000 or more is prime (based on the prime rate published in The Wall Street Journal, which recently has been 8.5 percent) plus 2.25 percent for loans of less than seven years, and prime plus 2.75 percent for loans of seven years or more.

For loans of less than $50,000, the maximum rate can be as high as prime plus 4.75 percent

The SBA charges guarantee and servicing fees to offset the cost of the program. These fees are paid by the lender but usually are passed along to the borrower.

When the guaranteed portion is $80,000 or less, the fee is 2 percent of the guaranteed portion. For loans with a guaranteed portion exceeding $80,000, a 3 percent guarantee fee is charged. In addition, all loans are subject to a 0.5 percent annualized servicing fee, which is applied to the outstanding balance of the SBAs guaranteed portion of the loan.

Processing fees, origination fees, application fees, points, brokerage fees, bonus points, and other such fees are prohibited.

The Intermediary's Role

Prospective borrowers in the Women's Prequalified Loan Program start by going to a local nonprofit organization that has been designated to serve as an intermediary in the program. There are more than 60 intermediary offices in 36 states, Puerto Rico, and the District of Columbia. To locate one near you, call your state SBA office.

Intermediaries often provide their services to women business owners at no charge--although they are allowed to charge up to $500 for application and packaging costs--and help steer them through the application process. In addition to direct assistance with the prequalified-loan application process, the intermediaries offer information on microloan programs--which provide small-business loans of less than $25,000, from a variety of funding sources--contacts with sources of private funding, and bank-loan services.

Jim Plum, chief credit officer with the Montana Women's Capital Fund in Helena--one of the intermediaries--was Cline's primary contact. "Rhonda had been a [microloan] client, so we had some previous contact with her," says Plum. "We saw some good growth in her business and the potential for more growth in this area."

Plum calculated financial projections for Aqua Life Industries based on its financial history. The information reflected positive financial trends, and Plum forecast that growth would benefit the company.

"We can provide some assistance in the business-plan preparation, but the owner must write it," explains Plum. "We make suggestions for phrasing, and we help with the cash-flow projections, which can be difficult for the average business owner. But we want the client to have ownership in the finished product and to understand what it means."

Besides helping with the business plan, intermediaries are required to complete the application package for the prequalified-loan request.

A Source Of Capital For You?

The SBA's Henry says the agency will continue to work to expand services available to women in business. Among those services are the 63 Women's Business Centers operating in 36 states, Puerto Rico, and the District of Columbia.

Sometimes doubling with the intermediary offices, the business centers offer a wide range of assistance. The SBA provides funding support to private partners for the first three years of operation of each center, and Henry says the SBA's goal is to have a center in every state.

An online Women's Business Center offering information, counseling, and mentoring groups in a "chat-room" format is to be launched soon at

Aqua Life Industries is only one of many examples of how the Women's Prequalified Loan Program and other sources are helping women-owned ventures expand. "The program definitely has helped me in expanding and improving my business," says Cline.

This story is part of a continuing series on ways for small companies to locate the financing they need to run their businesses.

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