Asoft economy is a breeding ground
for start-ups, a product of experienced executives squeezed out of jobs. Then there are baby boomers, who
are breaking into new businesses rather
than planning retirement. Add to that a
young work force that will set the bar as
the most entrepreneurial generation ever,
according to an Intuit Future of Small
Business Report released earlier this year.
“Jobs are being squeezed, and that
inspires people to start their own businesses,” says Craig Johnson, president and
CEO, Franklin Bank in Southfield.
Small Business Administration (SBA)
loans present valuable borrowing opportunities for start-ups and growing businesses.
Over the years, the SBA has streamlined
the process for obtaining loans, and banks
are better equipped with in-house professionals who can answer questions, prepare
and process SBA loan applications.
“SBA loan products have evolved,”
Johnson says, noting that companies who
assume they do not qualify for loans
because of sales volume should look carefully at program parameters. “Depending
on the business type and industry, they
may very well qualify.”
Smart Business asked Johnson to offer a
roundup of SBA loan programs and outline
the benefits of this government-backed
financing.
What type of business can really benefit from
the flexibility and structure of SBA loans?
Typically, start-ups are ideal candidates
for SBA loans, as are existing businesses
that need longer-term loans to purchase a
piece of equipment or real estate. The
longer you amortize the mortgage, the
lower your payments. With SBA loans’
longer amortization periods, business owners won’t sacrifice cash flow as they
acquire capital to grow. There are specific
parameters that dictate what type of businesses qualify for SBA loans.
The Small Business Act states what constitutes a small business, and the definition
varies depending on the industry. The SBA
outlines size standards online at www.sba.gov. A bank will also help a business determine eligibility for SBA loans.
What types of SBA loans are available?
There are three main programs: the 7(a)
program with a maximum loan of $2 million; the SBA Express program, an off-shoot of the 7(a) for lines of credit and
smaller loans less than $350,000; and the
504 program, which is geared toward businesses that want to expand through capital
improvements.
Besides longer term limits, all of these
loans are designed with lower-percentage
down payments. The programs are ideal
for business owners who lack sufficient
collateral to meet conventional lending
guidelines. There are no balloon payments
on these loans.
When is an SBA Express loan or 504 program
appropriate?
The Express program can be used for
working capital lines of credit. If the borrower has a collateral shortfall that the
bank may not be comfortable with, the
SBA Express program provides banks with
a 50 percent guarantee. This allows banks to bundle this program with existing lines
of credit so they can offer a flexible product to small business owners. Banks can
approve SBA Express loans without obtaining a credit decision from the SBA, so
the processing turnaround is usually within 36 hours.
The 504 Program is structured somewhat
differently from the 7(a). It is designated
for capital improvements, such as purchasing real estate or equipment. The benefit to
this program is long-term, fixed-rate
financing. A borrower generally puts down
10 percent of the project amount, the SBA
covers 40 percent of the loan, and the bank
lends 50 percent. This provides interest
rate protection on 40 percent of the transaction, which is tremendous peace of mind
for small businesses.
How does the SBA loan approval process
work?
Depending on the loan that a borrower
applies for and the bank’s SBA lending designation, decisions are made either at the
bank or governmental level. Approval
through a Preferred Lending Program
(PLP) means the bank has delegated
authority to make initial eligibility and
credit determinations. For borrowers, this
translates to faster approval because applications are evaluated in-house.
Approval through an SBA General
Program (GP) requires the bank to gather
credit and eligibility information and expedite paperwork to the SBA. The SBA
reviews this information along with the
loan structure. What’s important for borrowers to know is that regardless of
whether approval is processed through a
GP or PLP, the result is the same. The difference is in how fast loans are approved
and whether decisions are made locally.
More new and growing businesses are
taking advantage of the SBA’s long-term,
fixed-rate financing today, and banks are
well equipped to answer questions and
process applications.
CRAIG JOHNSON is president and CEO of Franklin Bank in
Southfield. Reach him at [email protected] or (248) 386-9860.
