Small business owners got the break they’ve been hoping for when President Obama signed the Small Business Jobs and Credit Act of 2010 on Sept. 27. The legislation also affects thousands of SBA loans currently in the pipeline and offers business owners an affordable opportunity to expand or hire new employees by increasing the borrowing limits and waiving guaranty fees.
But owners may be left out in the cold unless they act quickly and prudently. The program is scheduled to run until Dec. 31, 2010, or until the funding is exhausted, and navigating the application process can be challenging. Loan officers are compelled to closely scrutinize applications and applicants because of the fragile economy and the lending standards set forth by the SBA and participating banks.
“The funds can only be used for certain purposes and banks are required to review documentation and assess the business owner’s character and creditworthiness,” says Anna Chung, senior vice president of the SBA Lending Group at Wilshire State Bank. “But the legislation still provides a great opportunity for business owners who do their homework, meet the qualifications and skillfully navigate the lending process.”
Smart Business spoke with Chung about this ripe opportunity for business owners and her tips for navigating the SBA loan process.
Why is this legislation beneficial for small business owners?
In the midst of a very tight credit market, the legislation provides $30 billion dollars more in funding and another $12 billion dollars in tax breaks to help small businesses expand and start hiring. Perhaps the best news is that the bill incentivizes both parties to consummate a deal. First, the program eliminates the loan guaranty fees that were previously paid by borrowers. That’s a substantial savings since fees average around 3 percent of the loan. Second, the SBA reduces the risk for banks by guaranteeing up to 90 percent of the exposure. Third, those businesses having a tangible net worth of $15 million and two-year average net income after federal income tax of $5 million are now eligible for the SBA program. The previous size standards were based on the number of employees or annual sales. Last, the new law permanently increases the limits on 7(a) and 504 loans from $2 million to $5 million, and the limits for manufacturers in the 504 program have been increased to $5.5 million.
Must the funds be used for specific purposes?
The funds must be used for business purposes such as advertising, hiring or purchasing capital equipment or real estate. In some cases, owners can use the funds to refinance high-interest loans or satisfy an upcoming balloon payment. It gets tricky when owners want to use the funds to meet operating expenses or start-up costs, because the business must be healthy enough to satisfy the underwriting standards and banks want to see a positive trend.
What should business owners know about the application process?
There are more than 2,500 banks nationwide that participate in the SBA program and the loan must fit the institution’s risk profile and credit appetite. You may be turned down by one bank and approved by another, so persevere until you succeed.
- Character counts. Start with a banker you know because the loan officer will consider tangible and intangible criteria when evaluating an application; he or she will be familiar with your business and will know your history when it comes to fiscal responsibility and debt management.
- Visit SBA.gov. All participating banks should accept the application forms found here, which request the same kind of information as the forms used by the banks themselves; you can download the forms and study the requirements. Some local SBA offices offer free classes in business plan or resume writing.
- Gather documentation. You’ll need to submit business tax returns from the last three years, YTD and current interim financial statements and a personal financial statement.
- Funding purpose. Bring a written statement describing how you’ll use the funds. Bankers need proof to satisfy the SBA requirements and down the road owners will need to verify that the funds were used properly.
- Business resume. A written business plan is great, but bankers really want to see a resume and a short business overview in order to evaluate the owner’s qualifications within the context of the current business strategy.
Are there other tips that will help owners navigate the process?
First, tell the banker how much money you need to execute your plan rather than asking how much you can borrow. Do your homework before the meeting by running financial projections and be prepared to sell your ideas, your qualifications and the ROI. You can always modify your plan if necessary. Second, run a copy of your credit report and bring it to the meeting. Every inquiry drives your score down, and your credit history will be closely evaluated by the loan officer. Third, know the facts. Small business loans aren’t just for women-owned or minority-owned firms and they’re not available to nonprofit organizations. Finally, act now because the window of opportunity is open for small business owners, but as we’ve seen before, it can close in a hurry.
Anna Chung is the senior vice president of the SBA Lending Group at Wilshire State Bank. Reach her at firstname.lastname@example.org or (213) 637-9742.