The Small Business Administration has a ton of programs available for
someone starting a business as well as for owners of established
companies.
But if you don't know how to qualify for this money then you are not going
be able to use this valuable resource.
Before we get started lets cover some basics...
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);
** (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
sources" "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
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.
If you want to learn everything you can about using the SBA to fund your
ideas then get your hands on my course The Definitive Guide To Raising
CapitalŪ -- How To Fund Your Business In 30 Days Or Less! immediately.
