The Small Business Administration’s (SBA) lending program is a major part of U.S. business growth, and these loans can often be substituted for traditional commercial loans with some benefits to the borrower.
“With SBA loans, a business owner can increase his or her cash flow and sometimes get approved for higher loan amounts than traditional commercial loans,” says Steven Valiquette, second vice president and commercial loan officer at First State Bank.
Smart Business spoke with Valiquette about how SBA lending works and what business owners need to know.
What are the advantages of SBA loans versus traditional commercial lending?
The SBA allows for longer amortizations than most typical bank financing, so business owners can utilize extended terms. For instance, real estate can be amortized over 25 years with SBA financing, but the bank may only offer 20 years with traditional bank financing. As another example, equipment can be amortized over seven to 10 years with SBA financing, while traditional bank financing may be limited to five years.
Another advantage to SBA loans is lower out-of-pocket expenses when compared to traditional commercial loans. The SBA also allows the borrower to roll fees into their loan balance, which isn’t normally the case.
Lower collateral requirements are another benefit. The SBA has higher loan-to-value ratios compared to traditional commercial loans.
What type of loans will the SBA finance?
The SBA can generally finance the same types of business loans that a bank can, with the major exception of non-owner occupied real estate. Term debt such as real estate or equipment purchases are typically financed with SBA 7(a) or 504 loans, and lines of credit can be financed with a SBA Express loan or SBA CapLines.
How can a borrower increase its chance of being approved for a SBA loan?
First, talk to several financial institutions. Find financial institutions in your market that make loans to businesses similar to yours and work with bankers who understand your industry. Other best practices are:
• Develop a good business plan. Be ready to explain why customers are going to want to do business with you and how your business is going to compete in your market.
• Take the time to understand the risks associated with your business and provide mitigating factors.
• Provide realistic projections with best case, worst case, most likely case and break-even scenarios. Having detailed projections can help mitigate some of the risk associated with the loan request.
• Develop alternative ways the loan can be repaid if business is slower than projected or, in worst-case scenario, fails.
• Maintain a good personal credit history. Many bankers feel if your personal credit isn’t handled properly, there’s a good chance your commercial loan payments will not be either.
What else do business owners need to consider?
Take your time and develop a well thought out business proposal. For many small businesses, the bank is not only looking at the financial statements or the business projections, but also the person or people behind the company.
Always provide the information your banker is asking for because any information he or she is requiring is a tool used to evaluate your request.
It’s also important to put focus on management’s experience. If management can demonstrate a strong knowledge of the industry and the ability to handle adversity, this may help ease some of the risk of the loan request.
Finally, try to anticipate your future financing needs. Commercial or SBA loans take some time to close, so you need to plan for it. Remember, it’s easier and less stressful to seek financing prior to the actual need.
Steven Valiquette is second vice president, commercial loan officer, at First State Bank. Reach him at (586) 445-1058 or firstname.lastname@example.org.
Website: For more about SBA loans, visit www.thefsb.com/sba.
Small Business Administration (SBA) loan programs can fill needs that traditional bank lending does not.
“The key is going to a bank that is a preferred lender and has dedicated resources or an SBA specialist who really understands the eligibility requirements and programs,” says Tom Doherty, managing director and head of Business Banking at The PrivateBank.
Smart Business spoke with Doherty about how SBA loans can give your business access to vital capital.
How does SBA lending benefit businesses?
What the SBA offers fits into three categories:
• Collateral shortfall — Banks have certain advance rates on the collateral they lend against. If there’s a collateral shortfall, the SBA can provide a guarantee to enhance the financing.
• Lack of equity — Banks have down payment requirements, but the SBA will guarantee loans to allow for a smaller equity injection by the business owner.
• Need for extended terms — If the borrower needs to extend the amortization term of a loan beyond traditional bank financing, the SBA will step in. If, for example, you need financing for a piece of equipment, the bank might offer five years on the loan term. The SBA has a program where you could go seven to 10 years on that deal.
What are some misunderstandings about SBA lending?
What the SBA considers a small business differs by industry, and although there is no minimum, it goes larger than most would think. Visit www.sba.gov/content/small-business-size-standards to find qualifying cutoffs. The standards are expressed in either millions of dollars or number of employees. In some instances, a company can still qualify with 1,500 employees.
Then, there’s a perception that SBA is a lender of last resort. However, the SBA, like a bank, looks at cash flow. Recently, businesses have been returning to profit on their financial statements, so more are eligible for SBA programs.
Many borrowers also think SBA lending is a tedious process with a lot of paperwork. In part, this misconception may come when borrowers deal with an inexperienced lender. But the SBA has listened, too, and streamlined its processes, such as the small loan advantage program, which lends up to $350,000 on a very quick turnaround.
Are certain SBA loans not as well known?
The SBA’s 7(a) loan is the general flagship program with which most banks and borrowers are familiar. The SBA 504 loan program is a little lesser known. It applies when, for example, you want to buy a piece of real estate and put 10 percent down. The bank then takes 50 percent of the loan, and a local certified development company sells the remaining 40 percent as a debenture on the secondary market. Bottom line, it can give the borrower a 20-year fixed rate deal that’s not available conventionally.
What should a borrower know about the SBA loan process?
The SBA website, www.sba.gov, is a great place to find background on the different programs. But the best option is to go to a bank that is a preferred lender with a dedicated SBA specialist. As part of the application, there are SBA requirements to be met and documents to be completed. Many times, lenders don’t do enough of these on a regular basis to have expertise in putting the package together.
Once the application is complete, the loan goes through the normal course of underwriting because the SBA, in essence, has delegated the approval authority to that preferred lender.
What would allow more SBA lending?
Under 504, as part of the stimulus package, the government allowed banks to refinance existing real estate debt where businesses could improve their terms or lock in a longer fixed rate. However, this ended in September 2012 and the level of 504 lending has dropped significantly.
The new congressional budget proposal has suggested this refinancing provision be extended out to September 2014. This provision is something small business owners should push for and keep an eye on.
Tom Doherty is Managing Director and head of Business Banking at The PrivateBank. Reach him at (847) 920-3180 or email@example.com.
Website: Learn more about financing opportunities for small businesses through our small business banking page at http://www.theprivatebank.com.
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Banks typically exclude export accounts receivable (A/R) and work in progress (WIP) from a company’s borrowing base, which can be challenging for a company with global sales that are rapidly growing or when a single large export order is received.
As a result, Export Working Capital loans were created by the U.S. Small Business Administration (SBA) to allow U.S.-based businesses to have access to a low-cost source of funds that support their international sales and manufacturing cycles.
“Through programs like this, the SBA — a taxpayer-funded federal agency — is putting our tax dollars back into the U.S. economy to promote retaining current jobs or even creating new jobs associated with international sales that otherwise could be won by foreign competitors,” says Arthur G. Rice, vice president and manager, International Operations and Product Management, FirstMerit Bank.
Smart Business spoke with Rice, as well as Romona Davis, vice president and SBA specialist, FirstMerit Bank about how these transactions work to enable small businesses to obtain funds for international sales and operations.
What are some benefits and how do these loans differ from others?
These loans are different from what you might call ‘standard’ operating capital line facilities in that the benefits are focused on international business. Under standard operating line facilities, the borrower is not permitted to include any A/R, WIP or inventory tied to foreign sales into its borrowing base calculations.
This restriction can severely limit the borrower’s ability to have access to sufficient working capital to allow the small business the ability to react quickly to significant market opportunities. These foreign opportunities can be encountered through trade shows, Web sales and foreign distributors. The ability to include foreign A/R, WIP or inventory may allow the small business to jump from 75 to 90 percent advance funding rates.
Who can apply for these loans?
Any for-profit organization whether organized as a corporation, sole proprietor or partnership that meets size standards as a small business can be eligible for the SBA. This program supports both manufacturing and service-oriented organizations and has many applications.
SBA Export Working Capital loans are granted for up to $5 million to fund export transactions from purchase orders to collections. There’s a low guaranty fee and quick processing time. The SBA also has two additional export loan programs — Export Express Loan Program and the International Trade Loan Program.
In addition to supporting ongoing exports, what else can Export Working Capital loans be used for?
Export Working Capital loans not only support your ongoing export business, but also can be used for:
- Issuance of standby letters of credit to support bid bond requests, cash down payments and warranty periods.
- Purchase of raw materials, components, participation at foreign trade shows and general export marketing activities.
- Collection of foreign A/R.
Are there any exclusions or conditions business owners need to keep in mind?
The SBA Export Working Capital Program is quite flexible and able to be utilized for most international sales opportunities. However, products to be exported must be more than 50 percent U.S. content and shipped from the U. S. There also are some specific restrictions based on federal regulations that your lender can make you aware of to help you stay in compliance.
What do you need to get started?
Along with the application and fee, you’ll need at least one year’s worth of financial statements and a brief history of your company, including senior management biographies and pro forma business plans. You also need a clear description of your proposed use of the working capital proceeds.
All opinions expressed herein are those of the authors/sources and do not necessarily reflect the views of FirstMerit Corporation.
Arthur G. Rice is a vice president, manager, International Operations and Product Management, at FirstMerit Bank. Reach him at (330) 384-7178 or firstname.lastname@example.org.
Romona Davis is a vice president, SBA specialist, at FirstMerit Bank. Reach her at (330) 996-6242 or email@example.com.
Learn more about FirstMerit’s International Banking export programs.
Insights Banking & Finance is brought to you by FirstMerit Bank
California small business owners rely on banks for traditional financial services, of course, but also for valuable knowledge and advice on navigating today’s challenging economy.
That’s why California Bank & Trust periodically conducts surveys of small business owners as part of the bank’s commitment to understanding small business owners’ challenges and needs.
“Knowledgeable banking professionals who take the time to understand your business objectives and your industry will often provide valuable suggestions on how to significantly improve your finances,” says Tory Nixon, Executive vice president at California Bank & Trust.
In support of Small Business Month, Smart Business spoke with Nixon about the most recent survey the bank conducted and what it revealed about the challenges small business owners face as the state’s economy continues to recover.
What challenges do California small business owners face?
Laws and regulations seem to be the biggest hurdle for business owners, with nearly 38 percent of survey responders citing that as a major issue. There’s also concern over cash flow and money management, access to capital and finding top quality employees.
Nearly half of those who responded describe California’s economic climate as worsening. While that might appear bleak, about half of all respondents also cited a need for additional capital in 2013 to expand or increase staffing.
What tools can owners use to overcome these challenges and succeed?
As noted, access to capital continues to be a challenge for smaller businesses, but small businesses can and do get financing — especially when maintaining a good working relationship with their business banker, who can help in arranging loans and lines of credit.
One key advantage that small business owners have over their larger counterparts is access to Small Business Administration financing. Look for a bank that’s a preferred SBA lender. That’s a sign that there are knowledgeable bankers who can help you navigate the complexities of both SBA 504 and SBA 7(a) loans, or provide you with traditional small business financing options.
Small business owners also should stay focused on their cash flow. Your business banker can provide expertise in cash management and access to accounts and technologies that can keep idle cash working as hard as possible.
How do business owners feel about their banking relationship?
Again, small business owners seem to be extremely concerned with cash flow management and access to capital, but a significant number are also looking for more expert knowledge and advice from bankers.
The bank’s survey found that about 80 percent of business owners feel their bank doesn’t do enough to inform them of state, federal or local programs that could help their business. That’s why many local and community banks are extending services to provide access to highly informative resource centers, digital magazines and newsletters, which provide exactly that kind of information and are easily accessible online. Banks also are providing valuable information through social media channels and via email marketing programs.
How can you improve your banking relationship and increase business growth?
In most cases, all you have to do is ask for help — and your business banker will follow up as often as necessary. Knowledgeable banking professionals who take the time to understand your business objectives and industry will often provide valuable suggestions for improving your finances.
Getting the most from your banking relationship means keeping the lines of communication open and scheduling regular meetings. Don’t be shy about sharing your business vision; it will inspire your banker to suggest the best solutions, technologies and financing to help your business grow in the months and years ahead.
Tory Nixon is executive vice president at California Bank & Trust.
Website: May is Small Business Month in California. Learn more.
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Commercial banking today isn’t just about loans, it involves a partnership with a bank that helps build a business.
“Probably the most overused word in banking right now is relationship; everyone talks about it,” says Paul Duren, senior vice president at Bridge Bank. “Several data collection agencies even changed their terminology from ‘standard commercial loans’ to ‘relationship loans.’ But what exactly does that mean?”
Smart Business spoke with Duren about what relationship banking means and how it can translate into improved customer service as well as increased profits for your company.
What makes for a good banking relationship?
A good relationship involves a banker bringing value beyond providing access to capital. Businesses need a banker who understands their business — one who takes the time to learn about your vision so he or she can fully understand your goals. A proactive banker can anticipate your needs and bring information and services to help you grow or run your business.
In a good banking relationship, the banker acts as your advocate within the bank. However, much of the banking industry utilizes centralized credit processing and call centers, so there isn’t always the personal touch that a good banker will provide.
Can you provide an example of how this relationship works?
There was a drink manufacturer that saw a need to take its product from powder form to liquid for store shelves, and needed additional capital to do so. The banker saw the vision and understood the potential market for the product. That extra capital turned the company from a small manufacturer to a major player in the sports nutrition industry, and it started with an injection of capital from a loan made possible because a banker understood the vision.
Has banking changed since the recent recession?
It definitely has. There’s been growth in lending, but there’s also been a shift to more small and medium business sector loans coming from small and medium-sized banks. According to the Small Business Administration, big banks controlled 31 percent of the small business loan market in 2005, and that grew to 39 percent in 2009. That trend has reversed and small banks are gaining more share of that market. A Federal Reserve Bank of Boston study showed that smaller institutions continued to lend to small businesses at a stable rate during the recession, whereas big banks cut back.
Small to medium-sized banks are more invested in the community and more invested in the small business owner. For that reason, they are more likely to provide financing. Bigger banks focus on large companies in order to move their numbers. A smaller bank can get the same percentage growth through smaller loans. In one of its papers, the Federal Reserve Bank of Boston talks about how community banks are better at the soft skills — understanding the vision of the business owner, how he or she operates. Small banks take the time to listen.
What are the benefits of a good banking relationship beyond access to capital?
When people talk about relationships, they focus on the loan. What gets neglected is the deposit, or treasury management, side of the relationship.
During the downturn, businesses were looking for ways to get more out of their existing systems. Banks can help them do that with data feeds and other ways that save significant time and money. A good relationship banker also reviews the customer’s systems.
An experienced relationship banker has a toolbox filled with solutions to help his or her clients. This business is still about people, and banks need to be in touch with their customers and the community.
Paul Duren is senior vice president at Bridge Bank. Reach him at (408) 556-8688 or firstname.lastname@example.org.
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International expansion is a great way to grow as the U.S. economy slowly recovers, and the population and per capita gross domestic product of countries such as India and China continue to rise. But finding funding for exports can be difficult, unless you leverage a government-backed program.
“Why turn away sales when you can get working capital assistance through government programs to penetrate red hot foreign markets?” says Alfred Ho, vice president and enhanced credit specialist at California Bank & Trust.
Smart Business spoke with Ho about the benefits of leveraging guaranteed export financing.
What is the working capital guarantee program?
U.S. manufacturers were struggling to compete overseas, as foreign sales and receivables are generally excluded from traditional lending programs. So, to spur exports and domestic hiring, the federal government offers guaranteed financing programs administered by the Small Business Administration (SBA) and the Export-Import Bank of the United States (Ex-Im Bank).
The loan proceeds under these programs can be used to purchase supplies and equipment, hire staff or, in the case of the SBA’s Export Express program, even attend an overseas trade show. And because the terms are flexible, owners can use the loan proceeds to fulfill a large contract or several small deals.
How do the programs help small businesses?
The programs encourage banks to lend to small businesses by guaranteeing 90 percent of the loan amount and allow loan officers to consider foreign receivables and work-in-progress during the underwriting process.
Plus, if a standby letter of credit is required to support a bid bond, advance payment guarantee or performance bond, the collateral requirement to have one issued is only 25 percent, instead of the 100 percent in traditional cases. This provides an edge for a U.S. company in its quest for overseas contracts.
How much can companies borrow and what does it cost?
The SBA export working capital program permits loans below $5 million. It charges an upfront fee of 0.25 percent of the loan amount and an annual utilization fee of 0.55 percent, which is assessed monthly.
There’s no limit to how much you can borrow from Ex-Im Bank, and its upfront fees range from 1 to 1.5 percent of the loan amount. The loan interest rate is based on the prime lending rate plus a spread. Interest rates for larger loans are based on the London Interbank Offered Rate,
which is currently hovering around a 52-week low.
What are the eligibility requirements?
Requirements differ among the programs but they all require a firm purchase order prior to advance and, minimally, shipment from a U.S. port to a country acceptable to Ex-Im Bank. Goods and services shipped must have at least 51 percent U.S. contents. Certain products are excluded from the programs. A company must also have a positive net worth and be profitable for the last three years to qualify.
For other qualifications and restrictions, talk to your lender or visit the SBA or Ex-Im Bank websites.
How can business owners find a participating lender?
Your local SBA or Ex-Im representative can provide referrals, but you can look for a Delegated Authority Lender who has the ability to expedite your loan.
Your banker can walk you through the lending process and share helpful ideas. The banker should be able to suggest ways to lower the risk of international commerce.
The important thing is: Don’t venture into the international marketplace alone. Find a competent banker to serve as your guide.
Alfred Ho is vice president, enhanced credit specialist at California Bank & Trust. Reach him at (213) 593-2118 or email@example.com.
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Finding the necessary financing to thrive — or just survive — can be difficult for small businesses. But there are resources available to help startups and entrepreneurs compete in this market.
“SBA loans are designed for borrowers that might not qualify for conventional financing due to a number of different reasons,” says Romona J. Davis, Vice President of SBA lending with FirstMerit Bank.
Smart Business spoke with Davis about how to determine whether an SBA loan could help your business, and how to get started with the process.
What are the differences between SBA loans and conventional loans?
The main difference is that SBA loans are backed by the United States government, which provides a guarantee to the bank. SBA loans are for borrowers that might not qualify for conventional financing due to a variety of reasons, such as:
- Insufficient collateral
- A startup business or one that’s only been in existence for a short period of time
- The company is looking for a longer term on its owner-occupied commercial real estate purchase
- The borrower is in a ‘high-risk’ industry
- The borrower only wants to inject a minimum down payment
- Impending or current ownership changes with the business
- Inconsistent financial performance over the past few years
How does a lender determine if an industry is high risk?
It varies by bank. Most banks consider the restaurant industry as one that has a lot of risk associated with it. Also, when the economy changed and building contractors were negatively impacted, they became high risk.
However, being part of a high-risk industry doesn’t mean a conventional loan is impossible.
What can SBA loans be used for?
SBA loans can be used to:
- Purchase owner-occupied commercial real estate
- Buy out a business partner
- Buy a business
- Purchase machinery and equipment
- Buy a franchise
- Construct a building (the business must occupy 60 percent of the space)
- Cover working capital needs
- Refinance existing business debt
What types of businesses are eligible for SBA loans?
To qualify for SBA financing, the entity must be designated ‘for-profit.’ In addition, the business must meet certain SBA size standards, demonstrate good character, have a positive payment history on previous federal debt (no prior defaults on federal debt), possess U.S. or Legal Permanent Resident status, and show reasonable expectation of repayment.
What are the required size standards?
The SBA has developed size standards for different types of industries. Companies must meet either a maximum number of employees, maximum revenue amount or an alternative size standard to qualify as a small business.
How is ‘good character’ determined?
First, the SBA looks at the company’s credit, tax liens and any prior delinquencies with the government.
Also, the SBA always wants to know if a borrower has any criminal background, has been under indictment, is currently on probation, has ever been on probation, or has ever been charged with or arrested for any criminal offense, other than a minor motor vehicle violation.
The two ways to assess character, from the SBA’s perspective, are through personal credit and personal background.
Why might a business opt for an SBA loan instead of a conventional loan?
Businesses might opt for an SBA loan versus a conventional loan if they:
- Want a longer term on their owner-occupied commercial real estate or equipment loan
- Want a straight term and amortization versus a balloon note
- Prefer a lower down payment on their transaction
- Have a collateral shortfall
- Want to consolidate business debt into one loan that could offer a longer repayment period
- Want to buy out their business partner with a minimum equity injection
- Want to purchase a business but there’s insufficient collateral
- Desire cash flow savings due to a longer term and amortization
How can businesses get started with the loan process?
If a business is interested in an SBA loan, the first step is to contact a bank that participates in the SBA program. The banker will need to make certain that the company is eligible as indicated above. Assuming the business is eligible, the borrower would need to provide a financing package to the bank for SBA consideration.
Disclosure: All opinions expressed in this article are that of the authors or sources and do not necessarily reflect the views of FirstMerit Bank or FirstMerit Corp.
Romona J. Davis is Vice President of SBA lending for FirstMerit Bank. Reach her at (330) 996-6242 or firstname.lastname@example.org.
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