The Small Business Administration’s (SBA) lending program is a major part of U.S. business growth, and these loans can often be substituted for traditional commercial loans with some benefits to the borrower.
“With SBA loans, a business owner can increase his or her cash flow and sometimes get approved for higher loan amounts than traditional commercial loans,” says Steven Valiquette, second vice president and commercial loan officer at First State Bank.
Smart Business spoke with Valiquette about how SBA lending works and what business owners need to know.
What are the advantages of SBA loans versus traditional commercial lending?
The SBA allows for longer amortizations than most typical bank financing, so business owners can utilize extended terms. For instance, real estate can be amortized over 25 years with SBA financing, but the bank may only offer 20 years with traditional bank financing. As another example, equipment can be amortized over seven to 10 years with SBA financing, while traditional bank financing may be limited to five years.
Another advantage to SBA loans is lower out-of-pocket expenses when compared to traditional commercial loans. The SBA also allows the borrower to roll fees into their loan balance, which isn’t normally the case.
Lower collateral requirements are another benefit. The SBA has higher loan-to-value ratios compared to traditional commercial loans.
What type of loans will the SBA finance?
The SBA can generally finance the same types of business loans that a bank can, with the major exception of non-owner occupied real estate. Term debt such as real estate or equipment purchases are typically financed with SBA 7(a) or 504 loans, and lines of credit can be financed with a SBA Express loan or SBA CapLines.
How can a borrower increase its chance of being approved for a SBA loan?
First, talk to several financial institutions. Find financial institutions in your market that make loans to businesses similar to yours and work with bankers who understand your industry. Other best practices are:
• Develop a good business plan. Be ready to explain why customers are going to want to do business with you and how your business is going to compete in your market.
• Take the time to understand the risks associated with your business and provide mitigating factors.
• Provide realistic projections with best case, worst case, most likely case and break-even scenarios. Having detailed projections can help mitigate some of the risk associated with the loan request.
• Develop alternative ways the loan can be repaid if business is slower than projected or, in worst-case scenario, fails.
• Maintain a good personal credit history. Many bankers feel if your personal credit isn’t handled properly, there’s a good chance your commercial loan payments will not be either.
What else do business owners need to consider?
Take your time and develop a well thought out business proposal. For many small businesses, the bank is not only looking at the financial statements or the business projections, but also the person or people behind the company.
Always provide the information your banker is asking for because any information he or she is requiring is a tool used to evaluate your request.
It’s also important to put focus on management’s experience. If management can demonstrate a strong knowledge of the industry and the ability to handle adversity, this may help ease some of the risk of the loan request.
Finally, try to anticipate your future financing needs. Commercial or SBA loans take some time to close, so you need to plan for it. Remember, it’s easier and less stressful to seek financing prior to the actual need.
Steven Valiquette is second vice president, commercial loan officer, at First State Bank. Reach him at (586) 445-1058 or email@example.com.
Website: For more about SBA loans, visit www.thefsb.com/sba.
Small Business Administration (SBA) loan programs can fill needs that traditional bank lending does not.
“The key is going to a bank that is a preferred lender and has dedicated resources or an SBA specialist who really understands the eligibility requirements and programs,” says Tom Doherty, managing director and head of Business Banking at The PrivateBank.
Smart Business spoke with Doherty about how SBA loans can give your business access to vital capital.
How does SBA lending benefit businesses?
What the SBA offers fits into three categories:
• Collateral shortfall — Banks have certain advance rates on the collateral they lend against. If there’s a collateral shortfall, the SBA can provide a guarantee to enhance the financing.
• Lack of equity — Banks have down payment requirements, but the SBA will guarantee loans to allow for a smaller equity injection by the business owner.
• Need for extended terms — If the borrower needs to extend the amortization term of a loan beyond traditional bank financing, the SBA will step in. If, for example, you need financing for a piece of equipment, the bank might offer five years on the loan term. The SBA has a program where you could go seven to 10 years on that deal.
What are some misunderstandings about SBA lending?
What the SBA considers a small business differs by industry, and although there is no minimum, it goes larger than most would think. Visit www.sba.gov/content/small-business-size-standards to find qualifying cutoffs. The standards are expressed in either millions of dollars or number of employees. In some instances, a company can still qualify with 1,500 employees.
Then, there’s a perception that SBA is a lender of last resort. However, the SBA, like a bank, looks at cash flow. Recently, businesses have been returning to profit on their financial statements, so more are eligible for SBA programs.
Many borrowers also think SBA lending is a tedious process with a lot of paperwork. In part, this misconception may come when borrowers deal with an inexperienced lender. But the SBA has listened, too, and streamlined its processes, such as the small loan advantage program, which lends up to $350,000 on a very quick turnaround.
Are certain SBA loans not as well known?
The SBA’s 7(a) loan is the general flagship program with which most banks and borrowers are familiar. The SBA 504 loan program is a little lesser known. It applies when, for example, you want to buy a piece of real estate and put 10 percent down. The bank then takes 50 percent of the loan, and a local certified development company sells the remaining 40 percent as a debenture on the secondary market. Bottom line, it can give the borrower a 20-year fixed rate deal that’s not available conventionally.
What should a borrower know about the SBA loan process?
The SBA website, www.sba.gov, is a great place to find background on the different programs. But the best option is to go to a bank that is a preferred lender with a dedicated SBA specialist. As part of the application, there are SBA requirements to be met and documents to be completed. Many times, lenders don’t do enough of these on a regular basis to have expertise in putting the package together.
Once the application is complete, the loan goes through the normal course of underwriting because the SBA, in essence, has delegated the approval authority to that preferred lender.
What would allow more SBA lending?
Under 504, as part of the stimulus package, the government allowed banks to refinance existing real estate debt where businesses could improve their terms or lock in a longer fixed rate. However, this ended in September 2012 and the level of 504 lending has dropped significantly.
The new congressional budget proposal has suggested this refinancing provision be extended out to September 2014. This provision is something small business owners should push for and keep an eye on.
Tom Doherty is Managing Director and head of Business Banking at The PrivateBank. Reach him at (847) 920-3180 or firstname.lastname@example.org.
Website: Learn more about financing opportunities for small businesses through our small business banking page at http://www.theprivatebank.com.
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If you run a small business that has had difficulties obtaining a loan, there is some good news. Preferred lenders can help businesses navigate through the U.S. Small Business Administration (SBA) loan programs to obtain financing needed for growth and expansion. The SBA loan process can be confusing, and small businesses may experience unknown challenges when applying, such as a collateral shortfall or not enough cash down payment to put into the transaction. However, preferred lenders, like community banks, can help small businesses with this process.
“We’re likely experiencing the lowest interest rates in history,” says Edward L. Wood, CTP, regional vice president of commercial lending for National Bank & Trust. “The ability to lock those rates in for a longer period makes today a compelling time to get an SBA loan.”
Smart Business spoke with Wood about SBA loans and how obtaining one could benefit your business.
What types of businesses can benefit from an SBA loan?
Typically, the SBA’s goal is assist small businesses with their growth and lending needs, rather than large corporations that do more than $100 million annually in sales. However, there are a variety of SBA rules that companies must abide by to qualify for an SBA loan. It is always recommended that the borrower find an experienced SBA lender who participates in the Preferred Lender Program (PLP) and can help you navigate the SBA requirements.
How do SBA loans differ from other loan products?
There are many advantages to SBA loans, including a lower down payment, sometimes as little as 10 percent, which is typical of two SBA programs known as 504 loans and 7A loans. You also can get extended payment terms with these loans. For example, lenders with working capital loans prefer to keep amortizations between 36 to 48 months. Under the SBA 7A guaranteed loan program, many lenders allow longer amortization periods, usually up to seven years, which provides an even greater benefit to the borrower.
Also with a SBA 7A loan, the bank is lending all of the funds for the project and the SBA provides the lender with a guarantee, generally around 75 percent of the total loan amount. These loans offer working capital to fund growth, accounts receivable and inventory.
The SBA 504 loan is geared toward equipment financing and/or owner-occupied real estate. With this type of transaction, the borrower has two loans — one with the SBA who finances 40 percent and the second with the lender who finances 50 percent. The borrower is only required to provide 10 percent equity in the project. Under the 504 program the lender maintains a first mortgage on the collateral while the SBA takes a second position. Additionally, with the SBA 504 loan, the borrower should be aware there are prepayment penalties within the first 10 years.
The effective rate for the SBA portion of the 504 loan in August 2012 was a fixed rate of 4.45 percent. The lender portion is usually handled with a five-year adjustable rate.
What is the process to obtain an SBA loan?
The process starts when a borrower contacts his or her preferred lender. The lender will assist him or her through every step of the process. The lender drives SBA 7A loans and capital lines of credit from start to finish and submits the transaction to the SBA for approval. For SBA 504 loans, the lender will also work with a third-party non-profit entity that will underwrite and submit the transaction to the SBA for approval.
To apply, simply provide the same information you would for any other type of loan. Lenders are looking for the last three years of business and personal tax returns of the guarantors and accountant-prepared financial statements covering the three previous years. A personal financial statement from each year and an aging of the business accounts receivable and payables are also needed.
Why is now a good time to apply for an SBA loan?
The uncertainty in the interest rate market makes today a compelling time to apply. Because of this uncertainty, the SBA loan becomes an incredibly viable product that could allow you to fix part of your total debt service for up to 20 years. Getting longer amortizations on working capital loans are compelling because it allows the borrower to stretch payments out over a longer period of time, thus reducing your debt service requirements.
There is also uncertainty in the market, not only in terms of where interest rates will head but also where inflation will be and the debt level the U.S. has taken on. While interest rates will rise no one can be sure when that will happen, so it is to a company’s benefit to act now.
How can working with a community bank to obtain an SBA loan be beneficial?
A community bank has the ability to better execute an approval. There are fewer people at the top involved in the approval process than at a larger bank.
Depending on the type of transaction, it could take three weeks to get an approval once the lender receives all necessary information. Community banks are well suited to obtain all the necessary information upfront, which can help avoid delays.
Edward L. Wood, CTP, is regional vice president of commercial lending and the HCDC (Hamilton County Development Corporation) 2011 lender of the year. Reach him at (800) 837-3011 or email@example.com.
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At some point, nearly all small business owners will need to borrow money, whether it’s to purchase, expand or renovate commercial real estate, finance the purchase of an existing business or grow organically. One viable option for small businesses in need of financing is to apply for a loan backed by the Small Business Administration.
While the SBA doesn’t provide direct loans, it does provide guarantees on loans that originate from the agency’s partnering lending institutions, says Angela Freeman, second vice president at First State Bank.
“If you partner with the right bank, preferably an SBA Preferred Lender, the bank will complete the application for you and make the process as painless as possible,” says Freeman.
There are several common misconceptions about SBA loans. The first is the belief that they require a lengthy application process and that it takes too long for funding to be secured. In reality, because loans are handled through lending institutions, the process isn’t much different than applying for a conventional loan and, in some cases, can be even easier.
Smart Business spoke with Freeman about SBA loans, the common misperceptions associated with the program and the benefits of working with a preferred partner.
What are some of the most common myths associated with SBA loans?
There are many misconceptions about SBA loans that might prevent business owners from inquiring or applying. Some mistakenly believe that SBA loans are only for the smallest of small businesses. However, the maximum amount of a loan has increased from $2 million to $5 million.
While it is true that the SBA used to have a very structured definition of what a small business is, it has now expanded the definition and opened the parameters so that more businesses can apply. Government data show that 98 percent of all businesses in America would qualify for an SBA loan under the current definition.
Another common misconception is that because the SBA is a government program, all SBA lenders are the same. In reality, each lender has its own credit philosophy. For example, credit criteria such as historic cash flow, collateral loan-to-value percentages and management experience vary from lender to lender.As a result, it is important to build a strong relationship with a top SBA lender, again preferably an SBA Preferred Lender, in your market to learn about its credit parameters.
Another myth is that SBA loans take forever to be credit approved and funded. Over the last several years, the SBA has worked hard to speed up processing times, reduce paperwork requirements and, in general, make it easier for banks to provide small business customers the capital they need. Many of the myths and rumors about the SBA are rooted in previous bad experiences that simply don’t hold true today.
While in the past, the agency has struggled with slow processes and arduous requirements, a great deal has changed. The SBA is now investing in people and technology to create an agency that is more efficient and responsive.
How can working with a preferred SBA lender help expedite the loan process?
A preferred lender is an institution that the SBA has designated as its agent. Most of these lenders have dedicated staff who specialize in SBA loans and can process these loans as efficiently as conventional loans. There are a number of rules involved with SBA loans, which cover who is eligible for financing, what can be financed and what interest rate can be charged.
A lender who is not intimately familiar with SBA loans might not know all of the stipulations, or not have necessary processes and procedures in place to comply. You can go to www.sba.gov to find information on your local SBA district office and the top lenders in your market.
How would you address the myth that an SBA loan is a last resort for financing?
The SBA program is designed for credit-worthy borrowers who have difficulty getting access to financing at reasonable terms. It is true that there is a requirement that stipulates you are unable to get a conventional loan. However, it is also true that many times a bank can’t consider a request for a conventional loan but may be able to look at an SBA loan differently.
Take, for example, a company that needs a $200,000 loan, but the equipment is only valued at $150,000. In this instance of a collateral shortfall, a business won’t be eligible for a conventional loan, but through the SBA 7(a) program, 75 percent of the loan is guaranteed by the government, and the bank only has to rely on the 25 percent on the collateral remaining.
What are the fees and up-front costs associated with SBA loans?
The SBA program is resolute in the fact that small businesses are not to be charged an application fee, or a bank management fee. Guarantee fees — typically 2 to 3.5 percent of the guaranteed portion of an SBA loan — allow the program to operate at an efficient cost for taxpayers. Fees are not usually a barrier to borrowers because they can be financed over the term of the loan, which may be longer than a conventional loan.
In addition, SBA loans have flexible interest rate policies and can be made at fixed or floating rates, and pegged to a prime, LIBOR or SBA peg rate. SBA rates are competitive with other forms of financing and are a much better value than credit cards and other alternative financing mechanisms that many small businesses use when they are unable to access conventional credit.
Angela Freeman is second vice president at First State Bank. Reach her at (586) 498-7465 or AFreeman@thefsb.com.