For many businesses, the first line of
financing is a loan backed by the
Small Business Administration. Brian Barthelmas, vice president of FirstMerit
Bank in Columbus, notes that small business is a big contributor to the nation’s
economy, generating 50 percent of the private, nonfarm gross domestic product.
Smart Business asked Barthelmas for
help getting familiar with the SBA process.
Briefly, what is an SBA Loan?
An SBA loan is financing provided to a
business by a bank that is guaranteed in
part by the U.S. Small Business
Administration. Simply stated, the SBA
provides a guarantee to the bank, up to a
certain percentage of the loan balance, that
the bank will be made whole if the loan
defaults.
Does the SBA actually provide money?
All of the money is provided by the participating bank in the form of a commercial
loan to the business. The SBA provides a
guarantee that the bank will be repaid if the
loan is not paid as agreed. On the rare occasion that the SBA provides direct funding,
it is generally related to disaster situations,
like Hurricane Katrina.
You always start with a participating
bank. FirstMerit in Columbus has preferred SBA lender status. This indicates
that the bank is deemed to have the expertise to work with the client directly.
Is there an SBA prequalification program?
Experienced small-business bankers generally do a good job of prequalifying a business, but it is by no means a credit decision. The bank makes the initial decision
on the loan. If the loan is otherwise credit-worthy, but perhaps lacks collateral or is a
start-up enterprise, the bank may approve
the loan subject to an SBA guarantee. Then
the application is submitted to the SBA for
approval. Generally, if an SBA preferred
lender makes an initial approval, then the SBA will approve the deal as well.
Is a written business plan required?
A written business plan is very helpful to
the credit decision process, both for the
SBA and the bank. While it is not required
in every instance, any loan request that will
significantly impact the future income
statement of the business should have a
business plan that tells the story of the
company and includes pro forma financials
that are realistically predictive of the company’s future financial performance.
Situations where business plans and projected financial performance are definitely
needed include: loans to any start-up business, loans that represent relatively large
capital injections for buildings or equipment, and loans that help finance an existing firm’s expansion into a new line of business.
Customers can receive assistance in
preparing their business plans from local
Small Business Development Councils
(SBDC) or SCORE, which is an organization
of retired business executives who help
people start new businesses. Some universities also sponsor business incubators,
which perform much the same service.
Will they demand my personal property as
collateral?
The personal guarantee of the business
owner is a given. Banks and the SBA are
generally unwilling to lend to an entity that
does not have the guarantee support of its
owners. The SBA requires that all useful
collateral is pledged. If the owners are not
willing to carry the weight of risk personally, the bank and the SBA will not be willing
to take on all of the risk. Often, business
owners are asked to pledge their personal
residence as collateral. This is especially
important when lending for intangible
items or items that are difficult to secure.
These things include: franchise fees, goodwill on a transfer of business ownership,
inventory and receivables.
How do I know when I’m ready to ‘graduate’
to a non-SBA situation?
Once the bank is comfortable enough
with a loan request to approve it conventionally, they do so. Some of the conditions
to make that happen include: being an
established business, having a history of
making positive cash flow, having collateral and having experience in the industry.
It should be noted, however, that an SBA
loan should not be regarded as a substandard path for financing. It is a conduit for
quality businesses or individuals with realistic business plans to obtain needed funds
to grow or expand their business. Without
an SBA guarantee, the loan request would
contain an element of risk that would be
too high for most banks to do conventionally. Therefore, the SBA mitigates this element of risk and allows the bank to take
care of the client needs.
BRIAN BARTHELMAS is vice president of FirstMerit Bank in Columbus. Reach him at [email protected].
