(This column originally appeared in The Daily Herald)
With interest rates and the cost of borrowing so high, many small businesses are finding it harder to get financing as banks pay greater scrutiny toward their ability to service their loans.
Because of that many of these companies — including many of my own clients — have been turning to the Small Business Administration, or SBA for help.
“We’ve seen a significant growth in SBA financing this past year,” said Robert Einstein, a Midwest regional manager for SBA loans at U.S. Bank in Cook County. “These loans offer more flexibility and because of that we’re able to provide different types of options to our small business clients that they normally couldn’t get in a traditional loan.”
If you’re interested in an SBA loan, here’s what you need to know.
The SBA does not lend money.
Other than disaster loans, the SBA doesn’t loan funds to small businesses.
Instead, the agency offers its loans through a network of lenders that include independent and community banks, Community Development Financial Institutions (CDFIs) and other non-bank financial services firms. Because its loans mostly are guaranteed by the federal government these lenders are incentivized (and monitored by the SBA) to make this capital available.
“The cost of capital to the bank is less because of the guarantee,” said Einstein. “That’s what makes this such an attractive option both for the bank and the small business owner.”
There are multiple financing options available for small businesses with the most popular being Section 7(a) and 504 programs.
Small businesses can borrow up to $5 million under the 7(a) program and use the funds for things like acquiring, refinancing, or improving real estate and buildings, short- and long-term working capital, refinancing current business debt, purchasing and installation of machinery and equipment as well as furniture, fixtures and supplies and even for buying another business. Terms vary and interest charged is generally at competitive market rates.
The 504 loan program can offer as much as $5.5 million and be used for long-term investments including buying new buildings and equipment or improving property such as parking lots, streets and landscaping. As opposed to the 7(a) program funds cannot be used for working capital, inventory or consolidating debt. Repayment terms are between 10 and 25 years. Interest rates are pegged to an increment above the current market rate for 10-year U.S. Treasury issues.
The SBA also offers a microloan and a newly announced working capital credit line program.
There are specific criteria to be eligible for these loans.
Not all businesses can apply for an SBA loan. To be eligible you must be located in the U.S. and generally have less than 500 employees. You also can’t be able to obtain loans at “reasonable” terms elsewhere and you must be creditworthy and demonstrate the ability to repay the loan back. There are a bunch of businesses that are ineligible just by the nature of their business. These include nonprofits, businesses deriving more than one-third of gross annual revenue from legal gambling activities and private clubs and businesses which limit the number of memberships for reasons other than capacity, among other organizations.
You will be required to provide the same documentation as any other loan.
Although these loans mostly are guaranteed by the federal government, no one wants a default. So the government is relying on their lenders to ensure that applicants are doing the due diligence that is necessary and consistent with other loans they make. This includes providing historical financial statements, tax returns, projections and other documentation that is normally required. Personal guarantees and collateral also are usually required.
Kasia Leiter, a senior vice president and small business banker at Bank of America in Elmhurst, says that underwriting for loans at Bank of America is done in-house and goes through the same approval process as many other loans.
“We do want to feel comfortable with an applicant’s cash flow and ability to afford the debt,” she said. “It’s important for us to have a good understanding of the company’s financial liquidity.”
The turnaround time is similar.
One of the biggest historical complaints about getting an SBA loan that I’ve heard from my clients is that the turnaround time between application and actually receiving the funds is significantly longer than with a traditional loan. However, both the SBA and its participating lenders have worked hard to significantly minimize this time. Einstein says that SBA financing has been “easier than it’s ever been” in the 15 years he’s been in the business.
Leiter says that what impacts approval time the most is “waiting for confirmation from the IRS” which can take up to two to five business days.
“For most of our loans we’re able to get them approved between 30 and 90 days,” she said. “Real estate financing usually takes the longest.”
The most important thing to remember is that just because rates are higher doesn’t meant that financing is out of reach for your small business. It’s important to talk to bankers and strongly consider SBA financing.
“We are in the lending market to lend,” says Leiter. “The ability to retain your capital is one of the biggest factors why clients choose SBA lending.”
