You need operating cash to grow your business, but securing a traditional commercial loan hasn’t been easy, especially for small business owners. Bank loans to businesses grew 10 percent in 2011; however, commercial lending has not returned to pre-recession levels, largely because companies that experienced a decline in sales or profitability can’t meet today’s strict underwriting standards.
Fortunately, Small Business Administration (SBA) loans are a worthwhile financing option for small to mid-sized companies. An SBA loan typically offers longer terms and more competitive interest rates than other commercial loans and, best of all, bankers can be more lenient when considering your request because the government guarantees up to 75 percent of the loan amount.
“An SBA loan is a sensible option for businesses that experienced a decline in sales and profits during the recession,” says Santiago “Chico” Perez, SBA sales manager for California Bank & Trust. “Bankers can consider your financial projections, along with historical data, when evaluating your loan application.”
Smart Business spoke with Perez about the growth opportunities for small to mid-sized business through an SBA loan.
When should small business owners consider an SBA loan?
New ventures traditionally have a hard time securing working capital, but you may get $100,000 to $5 million through a government-backed SBA loan, as long as you’ve run a similar enterprise in the past and propose a viable business strategy. You can also use SBA funding to expand by purchasing another company or using the proceeds to procure equipment or inventory to fulfill a new contract. Businesses that use an SBA loan to pay off or restructure an existing mortgage or other business debt can free up cash for other investments, such as hiring or purchasing supplies.
How do SBA loans differ from traditional commercial loans?
Generally speaking, SBA loans can offer more favorable terms than traditional commercial loans. For example, you only need 10 percent down to purchase real estate and you don’t need to come up with a lot of cash because the SBA lets you roll the fees into the loan balance. SBA loans feature higher loan-to-value ratios, longer repayment periods and no balloon payments; consequently, companies often qualify for higher loan amounts because they can amortize the purchase of buildings over 25 years or equipment over the remaining economic life, and therefore need less cash flow to service the debt. In addition, owners can use the funds to buy raw materials, as well as finished goods or equipment, which gives manufacturers the flexibility to expand into new markets.
How does the SBA’s underwriting criteria differ from traditional commercial loans?
Bankers will review standard requirements such as financial statements and credit reports, but some criteria differ from traditional commercial loans.
*Projections. Bankers can consider future sales as well as historical data when evaluating your loan application, but be sure your projections are realistic and correlate with your current financials and forecasts. For example, earnings won’t automatically double if you purchase a larger facility or new equipment. Instead, explain how the equipment will boost the bottom line by lowering operating costs or how you’ll use the extra space to increase revenue by adding a new production line. Finally, substantiate your claims by furnishing copies of customer agreements and contracts.
* Resumes. Tout your management team’s industry experience and track record, particularly if you plan to start a new business.
* Ownership. Owners with more than a 20 percent stake in the business must submit signed personal financial statements and tax returns.
* Down payment. Lenders must determine the source of a borrower’s down payment, even if the funds have been deposited into an escrow account.
* Collateral. The need for collateral hinges on the loan purpose and program, so be sure to review the underwriting criteria at SBA.gov and specifically state the need and purpose for the funds in your proposal.
* Tax returns. Owners must supply three years of tax returns, financial statements and balance sheets instead of two to qualify for an SBA loan.
Does the SBA offer other support to small business owners?
The SBA provides myriad tools and support to help business owners create a loan proposal and navigate the underwriting process. Small Business Development Centers offer free assistance with financial, marketing, production and feasibility studies, and many centers engage local CPAs, retired executives and consultants to advise small business owners.
The SBA also provides mentorships, free counseling and business plan expertise through a nonprofit organization called SCORE, which helps business owners across the country with various aspects of their business.
What else can owners do to successfully navigate the SBA lending process?
Loan approval hinges on an accurate, thorough proposal, so it behooves you to take your time and seek expert advice because you only get one chance to make a great impression. Bankers want to hear the story behind your numbers, so be ready to explain how you overcame adversity during the recession and how you’ll use an SBA loan to take your business to the next level. Help your banker understand your customers and add value to your proposal by including links to your company’s website, LinkedIn page or Facebook page in your loan proposal. Finally, it may be possible to accelerate the process by selecting an approved Preferred Lender’s Program lender because they have the authority to approve your loan without submitting the entire package to the SBA.
Santiago “Chico” Perez is the SBA sales manager for California Bank & Trust. Reach him at [email protected]
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