Often overlooked, SBA loans can bridge critical financing gaps

Businesses tend not to have a great understanding of the Small Business Administration loan programs available to them. Owners’ information is often secondhand, which leads to mischaracterizations such as that SBA loans are expensive, take months to obtain, have a burdensome application process and aren’t flexible. But an SBA loan can be a lifeline to a business that might otherwise be passed over for a traditional bank loan.

“Business borrowers typically have two options,” says Kurt Kappa, chief lending officer at First Federal Lakewood. “Some can meet conventional underwriting standards to get a loan. Other business owners may not qualify for a variety of reasons, and for those, an SBA loan program can be the answer. A lender can help business owners understand why this may be a good option and how to take advantage of an SBA loan program.”

Smart Business spoke with Kappa about SBA loans and how they can help companies unable to access conventional debt.

What are the benefits of an SBA loan?

SBA loans require a lower equity injection by the borrower; the repayment terms are longer than a conventional loan, which may mean lower monthly payments; and insufficient collateral isn’t usually a reason a loan application is declined.

It can be important to have a banker work with the business owner throughout the SBA process. An SBA specialist, found at many community banks, can personally facilitate the loan cycle. They have the specialized expertise and SBA relationships to anticipate and resolve issues. They will work with the business owner to find the best solution to their lending needs.

What businesses make for the best SBA loan candidates?

At least a third of the SBA loans are awarded to startups or for an acquisition. One of the biggest reasons a business chooses an SBA loan is because the borrowing company is at a very early stage in its lifecycle. Start-ups and early stage companies have little or no payment history, and their often-optimistic projections and other forecasts may not be reliable — criteria traditional lenders count on to approve loans. There has recently been an uptick in acquisitions as some business owners look to retire after a tough 2020, and SBA loans can be a good fit when sufficient collateral is not available to complete the transaction.

SBA loans can also help a business poised for rapid growth, usually more than 10 percent annually. SBA loans can ease the financial stress by providing funds for working capital, inventory, hiring or capital expenditures.

How might SBA programs help companies that are working to get their post-COVID footing?

There are several underutilized SBA programs that are related to export lending. It’s a specialty loan type for businesses that want to expand export activities and can cover loans for equipment, facilities, short-term working capital and support standby letters of credit. In addition to its use for exporting activity, a business adversely affected by competition from imports can qualify for this type of SBA loan. Also, a business could qualify if it is involved in indirect exporting and the borrower is selling to a customer that is in the U.S., but that customer will be exporting the items or services to a foreign buyer that qualifies.

The SBA was formed to assist entrepreneurs in obtaining financing that they otherwise would not qualify for. Lenders base their lending criteria on 2020 activity, and in some cases, because of 2020 business disruptions, won’t see the profitability or cash flow they need to approve traditional loans. The SBA program offers loans that can serve as bridge financing to help a business get back on its feet for a stronger 2021.

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