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What is an SBA Loan?
An SBA Loan is a small business loan made by a local bank that is in turn guaranteed by the U.S. Small Business Administration. If the borrower defaults on the loan, the SBA will reimburse the bank for a percentage of the loan loss. The existence of the SBA’s guarantee is an inducement for the bank to make loans on terms it would otherwise not make available.
The SBA guarantee does not allow the bank to disregard standard commercial loan underwriting principals such as collateral and personal guarantees. It does allow the bank to loan more money, extend longer terms and approve loans to less mature businesses than it otherwise would. The SBA’s purpose under these financing programs is to help businesses gain more access to capital thereby creating jobs and expanding the tax base.
To be eligible for an SBA loan, a business simply needs to meet the size standards established by industry type as published by the SBA. Check with your local SBA Lender to determine your eligibility. Most businesses are eligible.
What types of loans are available?
SBA loans are not for everyone, but changes to the program in recent years have made it very user friendly and a financing mechanism that all businesses should at least consider. Most businesses find the bank’s vault door opens a little wider when requesting an SBA loan. Although the maximum SBA Guarantee to the bank is limited to $750,000, SBA loan sizes can vary widely from $5,000 to $2,000,000.
Currently, the most popular SBA loan programs include:
Commercial Mortgage loans for the purchase, new construction or refinance of commercial properties account for the largest volume of SBA loans. The property must be “owner occupied.” In other words, your business must occupy at least 51% of the space if it is an existing facility or two thirds if is new constriction. The balance of the space can be leased to third parties. This program is very popular for three reasons: (1) loan terms can be up to 25 years with no balloon provisions (as is customary with conventional loans); (2) the amount financed can be as much as 90% and occasionally higher (versus 70-75% on a conventional basis); and (3) the loan can be assumed by an SBA-eligible borrower.
Equipment Term Loans are available for the purchase or refinance of virtually any type of business equipment from printing presses to computers. The amount financed depends upon the resale market for the equipment. The repayment term is matched to the depreciable life of the equipment, which can be as long as 10 years. Most conventional bank loans are limited to 36 -60 months.
Permanent Capital Term Loans are most popular with start up business, which includes franchises. The proceeds can be used for general operating purposes or to carry accounts receivable and inventory during a high growth phase. The loans are generous with a 7 year repayment term that is only available because of the SBA guarantee.
The Greenline Program is a new product from the SBA that provides a short term working capital line of credit. A credit limit is established from which the company can borrow, pay down and re-borrow. It is an “asset based” line where availability is based upon a percentage of accounts receivable and/or inventory. This program is ideal for government contractors and professional service firms. The term for the line of credit can be up five years. Most conventional lines of credit are established on a demand basis or one year term, at the most
The Low Doc Program is the latest innovation from the SBA in an effort to become more user friendly. Under this program, the participating bank does not have to submit all of the financial data to the SBA for analysis and review. Rather the borrower completes a one page application and the bank completes a one page analysis of the request. The SBA relies heavily on the bank’s analysis and processes these loan quickly, usually within 48 hours. All of the traditional SBA loans can be processed under this program as long as the amount is less than $100,000. The Greenline is the only type of loan that cannot be done on a “Low Doc” basis.
HOW TO BE SUCCESSFUL IN OBTAINING AN SBA LOAN
The key is being prepared and finding the right lender. Know your needs and be able to explain how you arrived at the amount you are requesting. A successful loan application package will adequately provide a financial history of the business. It will also include a narrative background on the company, the principals, and what the future holds. Personal financial statements and tax returns for the owners will be required. Most important are projections that include monthly cash flow projections listing the critical assumptions.
WHERE TO GET AN SBA LOAN
Local banks and other select commercial financial firms (“approved lending source(s)” “ALS”) comprise the distribution system for SBA Loans. Not every ALS is the same and/or automatically fits yours needs. For example, the SBA Green Line is currently only available through certain local banks approved for that purpose.
Find an ALS that is familiar with your local or regional industry and/or is willing to take the time to learn. Choose an ALS that has an established track record in the SBA product which best matches your firm’s financial needs. Choosing the correct mix of capital and the best type for your business is an important factor to evaluate.
For example, an SBA term loan may look attractive on its face, but where the purpose is primarily cash flow based (predicated on accounts receivable/inventory levels), the debt commitment with attendant “principal and interest payments” may in fact provide more harm than good.
Timing is also important in the choice of an ALS. You do not want to be the first SBA loan from this ALS. Processing might take months. A preferable ALS should be able to move even the most complex transaction through the process in 3 to 4 weeks. Last, developing the SBA loan package offers a very good opportunity to develop a lasting banking relationship with the ALS – a key factor in your firm’s long term business success and growth.
There are basically three different types of SBA Lenders. A Preferred Lender is one that can make some loan decisions without the SBA’s approval. A Certified Lender is gets priority processing from the SBA. A General Lender is one that is licensed with commercial lending experience. A sample list of participating lenders follows (for other lending sources in your area, contact the nearest SBA District Office – see SBA section in this Guide):
Michael W Clarke, Senior Vice President, Patriot National Bank, Reston, Virginia 22090 (703-471-0900)
