The recent economic collapse has made things more difficult than ever for new, start-up businesses to secure financing. Even through the SBA (Small Business Administration), “Loans are harder to get than they have been at any time in my career, because of these turbulent economic times,” states Annette Jorgensen, Vice President and Business Development Officer for Community West Bank here in Santa Barbara (805.963.5749). For those businesses looking for financing, there are loans available through the SBA, but potential borrowers need to know what to expect and how the process of securing an SBA loans works, if they want to see their dreams become reality.
Contrary to popular opinion, the SBA is not a direct lender. Instead, they guarantee loans made by banks that offer SBA loans, providing a higher level of safety for the lender. The normal guarantee amount is 75 percent, but currently, through a provision in the stimulus package, the loan guarantee amount can be up to 90 percent of the loan amount.
The rate on SBA 7(a) loans are usually variable, and are typically based on the Prime rate, which is currently 3.25 percent. SBA loans are typically priced between Prime plus 1% and Prime plus 2.75 percent.
Also, SBA loans are typically offered for a longer term than traditional business loans. A typical business loan would have a three to five-year term, while SBA loans are seven years for working capital loans, ten years for loans relating to equipment, etc, and up to 25 years for business real estate loans.
There are various types of SBA loan programs, each intended to address a specific type of business purpose. The 7(a) loan program offers loans with terms and conditions as outlined above, while a 504 loan is for business real estate/equipment only. The 7(a) loan typically requires a 10 percent to 30 percent down-payment, depending on the situation, while a 504 loan requires a 10 to 20 percent down-payment. The 504 loan is again for real estate/equipment only, and is not for investment purposes. The borrower must house the business in/on the real estate, and must occupy at least 51 percent of the building/property to qualify.
Given the current economic situation, it is not surprising that, especially for start-up businesses, it is extremely difficult to get a loan, even with SBA support. Lenders are not just concerned about having the SBA guarantee, they are concerned that the business plan is complete, makes sense, and can be achieved during this difficult economic period, so repayment will occur.
As a result, some banks are not lending to start-ups at all, while most others are requiring much more money down, more personal assets or outside sources of income, and very good credit, even on SBA loans.
According to Jorgensen, a potential borrower looking for an SBA loan for a new business needs to have or provide the following:
- Good credit – Individuals with bad credit are probably wasting their time, given the economy. Lenders want to see good credit.
- Low expenses – Lenders want to see controlled expenses in relation to the available income.
- Money down – Plan on putting at least 20 percent down. Lenders may consider loans with less than 20 percent down, but only if all other things look exceptionally good (credit, personal expenses, etc.)
- Background check – A credit check and background check will be conducted, and bad credit or trouble with the law will not help borrowers’ prospects for getting an SBA loan. In fact, according to Jorgensen, it will be very difficult to get a loan in the current economic environment with credit or legal skeletons in your closet.
- Industry experience – borrowers should have at least three years of direct industry experience, either as an owner or in a management position within the same industry that the proposed business will operate within. Lenders want to see that the borrower can successfully operate a business. Some business experience, even if not within the same industry, is preferable over none.
- Collateral – for new businesses, personal assets will be required as collateral, along with any assets placed in service for the business. Business assets are only valued at liquidation value, because the lender assumes that the only time they would be selling the assets would be in the event that the business failed. This means that collateral values will be discounted, which in turn means that more collateral will be needed to satisfy the lender.
- Three years of personal financial statements and tax returns will also be required. If the borrower is looking to buy an existing business, three to five years of business statements and tax returns will be required.
A little of everything is best, says Jorgensen. “If the borrower is weak on some or all of these points, they should look for a partner, guarantor, or a secondary source of income to qualify,” she advises.
Things are not all bad out there for potential borrowers. For those who are qualified, there are loans available, and the SBA is providing the added loan guarantee amount, from the normal 75 percent to 90 percent (at the moment) to incentivize lenders to make SBA loans.
SBA loans are available for amounts up to $2 million. For more information on the details and requirements of the various types of SBA Loans, potential borrowers can visit the SBA website, at www.SBA.org.
The steps necessary to apply for an SBA loan are similar to applying for a loan with a bank. Jorgensen states that borrowers should look for an SBA preferred lender, because the preferred lender can handle the entire loan process rather than the borrower having to also submit information directly to the SBA. The borrower will fill-out an application, present three years of personal financials and tax returns, a management resume that details the borrower’s business experience, sign forms for a background and credit check, and present a business plan that outlines the business, in detail, including at least two years of monthly financial projections.
For those wishing to secure funding for a business venture, and who prefer to borrow the funds rather than sell equity to an outside investor, an SBA loan can make a lot of sense. A conversation with a preferred lender like Jorgensen, before starting the application process, can be very valuable, as lenders can help borrowers prepare their application materials and understand the process. If you plan to apply, the best advice is to be prepared, have all of your documentation in order, and have a well-written business plan that accurately represents the business. Forecasts should be reasonable, but should also show that the business will eventually make money; and not five years out, but within a year or so.
Although in these difficult economic time it is harder than ever to secure a loan, the SBA offers, through lenders, some hope for aspiring business owners. For some, an SBA loan may be the only possible way to finance their dream, so this option is certainly worth exploring.