More than 90 percent of American businesses are classified as small, but don’t under-estimate their power. Collectively, these enterprises employ more than half of all private sector workers, generate more than half our nonfarm gross domestic product and have created 64 percent of our economy’s net new jobs in the last 15 years.
In fact, the success of small business owners is so integral to the health of our overall economy that back in 1953 Congress created the U.S. Small Business Association (SBA) to serve as their personal advocate.
“The SBA offers owners a bounty of resources to help their small business grow,” says Anna Chung, senior vice president and SBA manager at Wilshire State Bank. “They not only help owners find funding, they’ll even help them write a business plan and navigate the lending process.”
Smart Business spoke with Chung about the opportunities to grow your small business through an SBA loan.
When should small business owners consider an SBA loan?
The SBA offers a number of financing programs to help small businesses grow. Established business owners usually apply for a 7(a) or a 504 loan. A 7(a) loan offers financial help for businesses in many different areas while a 504 loan provides long-term, fixed-rate financing to purchase major fixed assets for expansion or modernization. Although 504 loans can’t be used for operating capital, many owners use the funds to purchase a large building or second location, which helps free up money for expansion by allowing them to lease out the extra space. If you sign a large contract that requires purchasing additional inventory or equipment, call your banker right away so he or she can review your credit history and contract to see if you can finance the purchases with an SBA loan.
Do SBA loans offer better terms than other commercial loans?
An SBA loan is a standard commercial instrument that offers some very favorable terms. For example, the loans feature higher loan-to-value ratios, longer repayment periods and no balloon payments, yet still allow owners to partner with their local banker. Borrowers can purchase property by putting 10 percent down and pay back the loan over 25 years, which is better than most commercial mortgages. An SBA loan is ideal for growth as long as small business owners anticipate their future needs. Because if you wait too long to apply you could end up running out of cash, and owners need to show adequate working capital to qualify.
How does the SBA support banks in granting loans to small businesses?
SBA loans were designed to help small business owners who couldn’t qualify for a standard commercial loan, either because they have a smaller net worth or less working capital. So if an owner has access to other financing at reasonable terms he may not qualify for an SBA loan. The SBA guarantees up to 75 percent of the loan amount, which encourages a banker to lend, but the banker is responsible for meeting the SBA’s strict underwriting guidelines that are designed to mitigate risk.
How does the SBA qualification process differ from other commercial loans?
Owners still need to furnish a business plan, resume and copies of tax returns and financial statements, but these guidelines differ from standard commercial loans.
- Collateral. The loan must be collateralized if the borrower has collateral to offer, because the SBA requires bankers to mitigate risk whenever possible.
- Ownership. If the borrower owns several companies or controls several affiliates, lenders must review tax returns for those enterprises in addition to the owner’s primary concern.
- Down payment. Lenders must determine the source of a borrower’s down payment, even if the funds have been deposited into an escrow account. So owners need to provide documentation tracing the origin of a down payment.
- Tax returns. Owners must supply three years’ tax returns instead of two to qualify for an SBA loan.
- Criminal records and green cards. If a borrower has an arrest or conviction record the loan must be submitted to the SBA for approval. And an applicant’s green card must be validated by the INS before his or her loan is approved.
- Processing time. Most SBA loans are underwritten and approved in 30 to 45 days. But if the owner plans to purchase property, which requires an appraisal or an environmental impact report, the underwriting process may take 60 to 90 days.
Does the SBA offer other support to small business owners?
The SBA provides Small Business Development Centers (SBDCs) which offer owners free and confidential assistance with financial, marketing, production, organization, engineering and technical problems and feasibility studies. Many centers partner with local universities and engage local CPAs, retired executives and consultants to advise small business owners. In fact, the staff can even recommend a banker and help an owner develop a business plan or create a sales forecast to qualify for an SBA loan. The SBA also provides mentorships and free counseling services through a nonprofit organization called SCORE. SCORE has more than 389 chapters and 11,000 volunteers serving urban, suburban and rural areas. Keep in mind that the SBA also offers specialized assistance to women and veterans, so why not unleash the power of your small business advocate by visiting a local office.
Anna Chung is the senior vice president and SBA manager at Wilshire State Bank. Reach her at email@example.com or (213) 637-9742.