SBA Loans - A Real Option
By Sergei Galeano, CPA
The Small Business Administration ("SBA") is an organization that was founded in 1953 and whose function was to "aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns." Within a year the SBA was providing loans to small businesses. The SBA provides assistance with procuring government contracts, management assistance and training and support for minority-, female- and veteran-owned businesses. But I want to concentrate on the lending aspect of the organization.
For years small and mid-sized businesses turned to the SBA when lending wasn't available through conventional banking. But there was often reluctance to use the SBA's resources because SBA loan application process could be burdensome, requiring considerably more information and application documents than a conventional bank loan. Much of that has now changed, making SBA loans a very viable option for many business needs. Also, the SBA generally requires less owner's equity or collateral than conventional loans.
It is important to understand that the SBA is basically setting up rules, qualifying lenders and then guaranteeing a portion of the loan. The qualified lender, often a bank, is actually underwriting and negotiating the loan with the borrower.
First of all, who is eligible for these loans? It is often a matter of who is not. Companies in the insurance, financial or religious activities industries and foreign companies generally don't qualify. Some attributes you must have are:
- Operate for profit
- Be small, as defined by SBA
- Be engaged in, or propose to do business in, the United States or its possessions
- Have reasonable invested equity
- Use alternative financial resources, including personal assets, before seeking financial assistance
- Be able to demonstrate a need for the loan proceeds
- Use the funds for a sound business purpose
- Not be delinquent on any existing debt obligations to the U.S. Government
What qualifies as "Small" varies by your industry, but often revenues can be in the tens of millions, profits at several million and employee headcount into the hundreds.
The two most popular loan types of SBA loans are:
General Small Business Loans: 7(a)
- USE OF FUNDS: You can use these funds for almost any purpose, including long or short-term working capital needs, property or equipment purchases, or use in an acquisition. Generally funds cannot be used for investment property or to reimburse owners for their investments.
- Loan Amount: Up to $5 million with no set minimum.
- Term/Maturity: Up to 25 years for real estate, 10 years for equipment and 7 years for working capital.
- Fees: Can range from 0% to 3.5%, depending on the guaranteed portion and term of loan.
- Rate: Negotiated between borrower and lender. The SBA sets a maximum and there is no minimum. Generally based on borrower and risk, just like a regular bank loan.
- Guarantee: Remember the lender is making the loan and the SBA is guaranteeing a percentage. In this case the SBA can guarantee up to 85% of the loan, depending on the size.
- Personal Guarantee: Yes, if you own 20% or more of the company, the SBA wants your personal guarantee. Their position is "If you are not willing to guarantee your loan, why would we?" This applies to all owners whose ownership equals or exceeds 20%, not just the majority owner.
- Collateral: The SBA likes to have all loans fully secured, but they will work with you if you don't have sufficient assets to fully secure. The lender will concentrate on cash flow.
Real Estate and Equipment Loans: CDC/504
- USE OF FUNDS: Financing of fixed assets like real estate or equipment. Not for working capital, consolidating or refinancing debt or speculative real estate investments.
- Qualifications: One difference with the 7(a) requirements is that the company cannot have a tangible net worth over $15 million or net income over $5 million for the preceding two years.
- Loan Amount: Up to $5 million, depending on circumstances such as job creation or public policy goals.
- Maturity Term: 10 and 20 years.
- Fees: Approximately 3%
- Rate: Pegged to the 5- and 10-year US Treasury bonds. Should be competitive.
- Guarantee/Financing: Typical is 50% by the bank, 40% by the Certified Development Companies ("CDC") - required for this type of loan - and 10% by the owner.
- Personal Guarantee: Of course, just as above.
- Collateral: In this case you do have something to use - the assets you are planning to buy or improve.
There are other loan programs such as Disaster, Microloans, Quick Loans, and Caplines, but the majority of the loans are one of the two noted above. The point is that the SBA offers a viable option for many of the small and mid-size business needs and there are plenty of bankers out there specializing in these lending vehicles.
The key to successfully obtaining one of these loans is to be prepared with the proper financial history, financial forecast and an understanding of your business. You are going to need to show that you are invested in your business with some equity, conversant in the financial aspects of its performance and that there will be sufficient cash generated in the future to pay your debt obligations to the SBA and your lender on a timely basis.
Nperspective can help you evaluate your financial position to determine if an SBA loan is right for you and help you identify lenders who may be a resource and prepare the financial and business plan data necessary to start the process. Our CFOs have decades of experience helping companies budget, plan, forecast and report results as well as manage working capital and cash resources, enabling our clients to properly finance their operations.
If your company or one of your clients may benefit by our experience and knowledge, contact Russell Slappey at 407.448.1781 or rslappey@npcfo.com for a complimentary consultation.
