The U.S. Small Business Administration (SBA) has been loaning money to Americans to start, build and grow businesses since 1953. However, many business owners may not realize that these loans do not require a lengthy approval process or a long-distance relationship with a faceless loan processor.
Through its Preferred Lender Program (PLP), the SBA grants some banks the authority to underwrite and approve loans for small businesses. And while borrowers must qualify, SBA loan authorization can take as little as 24 to 48 hours, which is great news for small business executives, given the current lending climate.
“Preferred lenders have full authority to underwrite and approve government-sponsored SBA loans because they are charged with looking out for the SBA’s interest,” says Albert Lee, vice president of Business Banking for Fifth Third Bank, Tampa Bay. “SBA loans were designed to facilitate access to credit for businesses that might otherwise have trouble securing funding.”
Smart Business spoke with Lee about why SBA loans are a viable option for business owners.
What types of business loans are available through the SBA?
Business owners can receive funding to grow or expand their business, including purchasing equipment, property, making leasehold improvements or just meeting operating capital requirements through the SBA’s loan program and portfolio of loan products. The SBA’s 7(a) loan program, for example, has a maximum loan amount of $2 million. Sometimes new companies don’t have a lot of assets or collateral to borrow against, so this program was designed to help those companies succeed.
What are the qualifications?
In some respects, the term ‘small business’ is misleading, because a company can qualify for one of the SBA loan programs if its after-tax income is less than $2.5 million or its tangible net worth doesn’t exceed $7.5 million. There are at least 1,200 businesses that fit that profile in the Tampa Bay area. Applicants must meet the bank’s lending criteria, and business owners must not be under indictment or on parole or probation. Other qualification criteria include loan size, type of business, use of proceeds and the availability of funds from other sources.
Is there a business ownership requirement for borrowers?
The borrower is required to have a cash investment stake in the venture. The SBA has a minimum requirement of 10 percent equity, although the local bank’s loan requirements take precedent, and those will most likely require the borrower to have 20 to 25 percent equity ownership in the business or even a higher amount.
How does the loan approval process work?
Business owners may apply through their local bank. A checklist is available that outlines the necessary documentation borrowers must furnish, and there’s also an eligibility questionnaire that helps borrowers gauge their ability to qualify. After the borrower completes the application, the local banker underwrites and approves the loan, using the bank’s lending criteria, and then submits the package electronically to the SBA. Authorization is usually issued within 24 to 48 hours, after which the banker will put together the loan terms for the borrower, including how the funds will be used. If the business needs to use the funds for a different purpose down the line, the banker has the authority to modify the loan documents to meet the business need.
How do SBA loans differ from traditional loans?
In theory, the SBA does not decline loans based upon a lack of collateral, whereas traditional loans require the borrower to demonstrate sufficient cash flow and collateral and execute personal guarantees. SBA loans do not necessarily have to be fully collateralized as long as any and all available collateral has been offered. The term of the loan is driven by the use of the proceeds, although the lending terms can be stretched to accommodate a longer time period than most conventional loans.
Historically, SBA loans have been unfairly characterized as cumbersome, when, in fact, the SBA loan process has become very user-friendly. Today’s process is highly streamlined and banks have authority to meet the needs of small business owners without the red tape.
ALBERT LEE is vice president of Business Banking for Fifth Third Bank, Tampa Bay. Reach him at (813) 306-2414 or email@example.com.