It seems like this has been the year of the SBA loan. For the last few months we have been working with several small business owners as they obtain their SBA funding. It has been interesting to me just how little the SBA’s programs are understood so I thought I would take a few posts to highlight the SBA’s 7(a) program and shed some light on the subject for business owners who might be interested in pursuing this type of financing.
Loans under the 7(a) program are primarily for business expansion, working capital and startups. Commercial real estate loans backed by the SBA are commonly referred to as 504 loans. We may save those for another post. My focus here is the 7(a) program since it is the one we have dealt with the most in recent months.
An SBA loan is a loan backed by the Small Business Administration, an agency of the federal government. It is important to note that the SBA does not make the loan. It only guarantees a portion of the loan so that the bank making the loan is not at risk of total loss. This guarantee can be up to 90% but tends to be around 75% of the loan value.
Guarantees are important because they encourage banks to loan money that they might not lend in a conventional scenario. Still, the banks are going to require collateral and guarantees of repayment. Borrowers in an SBA product can expect to have most of their assets tied up as collateral for the loan.
Banks also expect the business owner to have skin in the game. SBA loans typically require equity injections of 10-25% meaning that if a business needs $500,000 for expansion the business owner is going to need to put up $50,000 - $125,000 and will only borrow between $450,000 and $375,000. It is important to note that having too much cash can be a bad thing when it comes to SBA applications. If an individual can afford to fund the venture out of liquid personal or business funds the SBA guarantee may not be available.
Another thing to consider, probably the most important thing to consider, is the bank making the loan. Every bank is unique and the process of applying for an SBA loan at two separate banks can be vastly different. Just because one bank passes on the loan doesn’t mean another might not like the opportunity.
Too often I’ve heard stories where business owners were told “the SBA won’t make this type of loan.” That statement is wrong on several levels. First, SBA doesn’t make the loans. The bank does. Second, as we’ve already said, different banks have different loan criteria. Third, the landscape for SBA loans is constantly changing. What was once a sure thing for approval may be impossible today and what was once thought impossilbe might now be receiving special treatment. If someone tells you the SBA just won’t do the deal it’s a sure sign you need to seek different counsel.
Finally, when it comes to choosing a bank to work with you are probably better off using a bank in the SBA’s Preferred Lenders Program (PLP). These banks are able to close loans with SBA guarantees on their own without having to submit them to SBA for approval. SBA still reviews PLP lender loan portfolios and PLP lenders are subject to the same guidelines as other lenders. However, these banks have demonstrated an ability to process, close, service, and liquidate SBA loans.
Non-PLP lenders must get the SBA’s approval on loans before they can obtain the all important SBA guarantee. This can often slow down the process considerably and it may be evidence of the bank’s inexperience with SBA rules and procedures.
There is a lot more to the SBA 7(a) program but these are some of the basics most clients want and need to know before sitting down in front of a bank. Stay tuned in the upcoming days for more information on these interesting and useful products.