The Small Business Administration was created to provide an alternative to conventional lending and to encourage entrepreneurship. The SBA offers a variety of loans designed to help businesses who may not qualify for conventional financing. These businesses can include start-ups or more mature companies.
SBA loans are win-win. They can jump-start a new business, help to accelerate growth for an existing business and help preserve cash. These loans enable banks to make more loans to businesses that typically cannot qualify for conventional loans.
“A lot of businesses think they aren’t eligible for SBA loans, that they are only for weak businesses or start-ups,” says Gregory T. Pendzich, a business relationship manager with Wells Fargo Bank. “But SBA loans really are viable options for almost any type of small business.”
Smart Business spoke with Pendzich about SBA loans, what kinds of loans are available and how your business can benefit from them.
What kinds of SBA loan programs are available?
There are three loan programs that business owners should be aware of: the SBA 7(a) term loan, the 504 term loan and the SBAExpress line of credit/term loan.
The 7(a) term loan can be used to fund a variety of purposes including partner buyouts, acquisition of businesses, business expansion, working capital, purchasing real estate/land, inventory and equipment. The maximum loan amount is $2 million. This loan is partially guaranteed by the federal government through the SBA.
The 504 term loan is primarily used to acquire real estate and complete building/leasehold improvements. The 504 loan can also be used to purchase larger pieces of equipment/machinery. The maximum project amount is approximately $5 million. The 504 loan is funded jointly by the SBA and the lender.
The SBAExpress loan program is primarily a line of credit product. However, it can also be offered as a term loan. The aim of this program is to provide working capital to be used for day-to-day operations, such as paying payroll or buying inventory. The maximum loan amount is $350,000. This loan is partially guaranteed by the federal government through the SBA.
What are the advantages of SBA loans?
The biggest advantages are less cash down, smaller monthly payments and longer terms each benefits a business’s cash flow. For example, if you’re purchasing owner occupied commercial real estate using a conventional loan, you would typically have to put down 25 percent of the cost versus 10 percent for a 7(a) or 504 term loan.
SBA loans allow for longer terms/smaller payments: under the 7(a) program loan payments for a real estate loan can be stretched over 25 years and 20 years for a 504 loan. A similar conventional loan would generally allow a 10- to 15-year term.
What is involved in the application process?
To get started, you should contact your banker. You’ll need to provide cash flow projections, financial statements for the business and all owners, and the last three years of tax returns, both personal and business. In addition, you’ll need interim financial statements less than 90 days old, accounts receivable and accounts payable aging, if applicable. You also need to provide a summary and source of use of funds. This means you have to show how the loan proceeds will be spent.
What types of problems might you face when applying for an SBA loan in this economy?
Borrowers will need to have cash to put toward their project. The required amount will depend on the purpose of the loan. For example, a lender can require up to a 30 percent borrower cash investment for a start-up business. Businesses should make sure they understand all the requirements established by the SBA and their lender.
Character is an important component for obtaining any SBA loan. Business owners should have a clean personal credit history. All 20 percent or more business owners are required to complete a personal history form that asks if they have ever been arrested, convicted or put on probation. Background checks are completed and the findings could cancel a loan request.
It is also very important for a business to show that it has strong management and a solid business plan.
President Obama is working with Congress to continue certain enhancements from the American Recovery and Reinvestment Act of 2009 that were due to expire in February 2010. These enhancements are attached to the Small Business Job Creation & Access to Capital Act of 2009, a.k.a. ‘The Jobs Bill.’ The extension of these enhancements would run through Dec. 31, 2010.
For small businesses, the original Recovery Act temporarily eliminated SBA guaranteed 7(a) and 504 loan fees and offers tax benefits. For lenders, it temporarily eliminated loan fees on Section 504 loans. The Act also increased the guarantees on 7(a) term loans to qualified small businesses from 75 percent to 90 percent. This change reduced the risk of a loss from a loan and increased the banks’ willingness to make a loan, making more capital available to small businesses.
Gregory T. Pendzich is a business relationship manager with Wells Fargo Bank. Reach him at (281) 208-6226 or Gregory.T.Pendzich@wellsfargo.com.