Getting a bank loan can often mean the difference between growing a business or becoming stagnant. But many young businesses may not have the track record or collateral to get a traditional loan.
The Small Business Administration has a variety of programs to help smaller firms get the financing they need to achieve their goals, but the money can be just as hard to obtain as a traditional loan. The SBA does not lend money directly, but rather provides guarantees through banks. How do you know whether the SBA may be for you?
“If a company needs a loan that has a longer repayment period than banks like to make—more than three to five years—then it may be appropriate for SBA financing,” says George Dawson, a business consultant and author of “Borrowing to Build Your Business” (Upstart Publishing, 1997). “A relatively smaller business looking at the purchase of long-term fixed assets is probably not going to be able to get a commercial loan to buy a building, but a bank might make an SBA-insured loan.”
Having insufficient collateral for the bank is a common reason companies finance through SBA programs. Those seeking loans under $100,000 are also finding help through the LowDoc program. Because smaller loans are typically less profitable to banks, the SBA has tried to streamline the process banks use to get government backing to make smaller loans more accessible. Regardless of which SBA program is used, you probably won’t even realize the government is involved.
“Understand that if it goes well, you will never see the SBA and you will never hear from them,” says Dawson. “You do not approach the SBA directly, you go through banks.”
If you think your business may need extra help from the SBA to get a loan, contact your local SBA office and get a list of their lending institutions. The SBA classifies its lenders as preferred lenders or certified lenders. The office can give you the names of the banks and the contact people there.
“That person is where you start, because there is nothing worse than falling into the realm of a loan officer that doesn’t know anything,” says Dawson. “Preferred lenders are able to make the credit decisions themselves, while certified lenders are promised a prompt turnaround after receiving a completed application. Everyone else has to wait their turn. By using someone off the SBA list, you are getting knowledgeable people and a preferential place in the processing chain.”
There are also lenders which are not banks. One type is the Certified Development Corporation, public agencies charged with making economic development happen. CDC loans can be advantageous because the bank will lend 50 percent of the amount, while the CDC picks up 40 percent and takes a second lien on the property. The business must provide the remaining 10 percent, receiving a long-term loan at good interest rates.
The other type of nonbank SBA-approved agency is the licensed independent lender—one of the better known ones operates as The Money Store. These agencies typically don’t do loans under $100,000, and deal primarily in real estate and equipment.
“These agencies can be very aggressive, and may give you a loan more rapidly than a bank would,” says Dawson.
Regardless of which type of lender you prefer, be sure to shop around.
“It’s clearly worthwhile to comparison shop,” notes Dawson. “Even though all of them may be through the same SBA program, the fee structures may vary and the interest rates will vary within the program. Many owners spend more time negotiating for a car than they do for a loan to build their business.”
Getting the loan approved
“You should treat every loan as if it’s for $100 million,” says Dawson. “You want to be totally prepared. So many people do not treat the process seriously. If you do all the things you are supposed to do, you’ll stand out in the crowd. The worse thing you can do is look like too much work for too little money.
“Loan officers are under a lot of pressure. They have production and marketing goals. The person that makes them look good will find a favorable reception. There aren’t many people that understand or appreciate that. The loan officer does not have to lend to you. It is almost impossible for him to be punished for saying no to your loan, but saying yes could get him in trouble.”
There are certain situations that guarantee you will not get the loan. The SBA will not insure loans that repay a loan to the company from the owner; to buy out a partner; if the owner is bleeding the company with excessive cash withdrawals. Another factor to be aware of is that anyone who owns 20 percent or more of the company will have to guarantee the loan. If family members or friends are offered ownership stakes, make sure they own 19 percent or less, or else they will have to put their name on the line to guarantee the loan will be repaid.
“You can also be too rich or have too much accessible cash resources, in which case the bank will tell you to take your own money and put in the company,” says Dawson. The banks have a formula that is a multiple of the amount insured that determines if you have too much money.
“Spend time introducing yourself to bankers,” says Dawson. “If you know someone who’s gotten an SBA loan, ask them who they talked to and if they can introduce you. Ask among friends and business groups who they recommend. Bankers are paranoid about strangers.”