Many business owners and entrepreneurs think that U.S. Small Business Administration (SBA) loans are exclusively for startups. However, these loans can also help existing businesses.
“A business simply has to show that it has the need for the expansion, which can be justified through projections that a bank will use to determine if the loan makes sense,” says Daniel Minick, Akron Metro Area manager and vice president at Consumers National Bank.
“If a company doesn’t have enough income, but buying equipment can help the business take off, the company may be a good candidate for the loan.”
Smart Business spoke with Minick about the common SBA loan misconceptions and what banks need from applicants.
What are the documents needed to complete a SBA loan application?
The two most common SBA loans are 7(a), which are meant to establish a new business and to assist in acquisitions and expansions of an existing business, and 504 loans, which are used to purchase real estate and fixed assets such as equipment. Regardless of which type is sought, banks want detailed information during the application process. Specifically, they want to know the history of the business, its current needs, details about the key players in the business, a break down of the costs for the purchase and financial projections for the business.
It’s also important for the business owner to provide three years worth of personal financial information for the banker. That’s because all loans must be guaranteed by the ownership of the business. Therefore, all guarantors or owners must provide personal financial statements. It’s a big piece of the equation.
When it comes to personal finances, bankers are looking for an individual with a decent financial history. A banker wants to see that a business owner has been able to maintain a good lifestyle while owning and operating a business, and that he or she is not carrying lots of personal debt.
For startups seeking SBA loans, bankers want to see that the individual or his or her spouse has enough income to be supported while the business gets off the ground.
What are some common misconceptions about SBA loans?
The biggest misconception is that the process can take months. The truth is most banks have streamlined the process so that it’s much shorter now. Really, the actual time it takes to get approval comes down to whether or not bankers have a full package of information from the applicant. If they do, the loan request can be processed and approval can be granted in two to three weeks. Real estate loans, however, will likely take longer because there are environmental and other reviews that must be completed before loans are granted.
The SBA guarantees the loan from a bank, which lowers the qualification threshold because banks are facing less risk. Even so, bad credit will be an impediment to getting an SBA loan because it can give bankers the impression that the owner is financially irresponsible. Student loans that have been charged off will automatically disqualify someone from getting a loan, for example. A felony will also disqualify someone.
What are the pros and cons of SBA loans?
Looking at the pros, SBA loan rates are close to those of traditional bank financing, whereas not too long ago those rates were higher.
Another positive is that the SBA can help with a collateral shortfall. Typically, a commercial loan from a bank would be 80 percent loan to value. An SBA guarantee could mean going higher because the SBA may mitigate a shortfall all together.
Also, SBA loan products have a greater chance of bank approval because of the guarantee that’s provided.
Looking at the cons, many banks making SBA loans have variable rates, so those seeking loans should choose their bank carefully. It’s best to find a lender offering fixed rate loans.
Another issue is that the SBA fees, depending on the product, can be higher than traditional financing.
Finally, business owners need to find a bank that supports SBA products because not all of them do. It’s also important to find a banker who is educated on the SBA loan process because they’ll be an advocate for the success of their customers.
Insights Banking & Finance is brought to you by Consumers National Bank