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 Brian.firstname.lastname@example.org.