Expand your small business with an sba loan
The SBA does not make direct loans to small businesses. It simply sets the guidelines for the loan and then secures the loan or guarantees that the loan will be repaid, says Joseph Lizio, CEO of Capital LookUp LLC and a former commercial lender. It eliminates some risk for lenders.
A small business owner can apply for an SBA loan at any bank that offers SBA loans. "A business owner can also apply through a local Certified Development Company (CDC), a nonprofit organization certified and regulated by the SBA that works with participating lenders to provide small business financing", says Pili. There are 270 CDCs nationwide, each covering a specific geographic area.
"Many banks work with their local CDC to help borrowers who would not otherwise qualify for a traditional bank business loan", says Pili.
To be approved, an SBA loan application must first be approved and underwritten by a financial institution or small business lender. "Then it is sent to the SBA who will also sign and approve it or not according to their own guidelines", Says Lizio.
If both organizations approve the loan, the financial institution will finance and manage the loan from that moment on. "The SBA only guarantees the loan or a portion of it – usually around 85% – in the event of a borrower default,", Says Lizio.
If you're not sure if your local lender is an SBA-approved lender, visit the SBA website. While each lender has its own criteria to approve a loan, Lizio states that there are some general qualification criteria that all lenders use, including:
- Cash flow to service loan payment. If a monthly payment is estimated at $1,000 per month, applicants must show that the company can earn that amount in excess of its total operating profit.
- Personal credit history. Loan officers don't want to waste their time on an application they could never get approved by their loan or credit committee. Here's how they pull a personal credit history on applicants. If these items don't reach a minimum threshold, Lizio says, the lender will walk away immediately.
- Collateral. Although there may be some exceptions, the SBA generally requires that all SBA loans be accompanied by all available assets (inventory, building, cash, etc.) be collateralized – both business and personal. Banks and other commercial lenders will also want full collateral. Without collateral estimated at at least 100 percent of the loan amount, Lizio says the application will likely be denied.
For small business owners, the SBA route has some key advantages.
Loan term. Lizio says one of the biggest advantages of an SBA loan is the term of the loan. "Most lenders want borrowers to have the shortest term available. But SBA loans extend those terms", says Lizio.
For example, a bank might only agree to a 10-year term on real estate, but the SBA might approve a 20- or 25-year term.Or, say a private lender will only underwrite an equipment loan for 5 years – the SBA could approve 7 years.
Why this is important? Lizio says that a longer term makes the loan payment more affordable and also makes it easier to qualify for a loan. In addition, it increases the flexibility for a borrower. "No business has smooth revenue all the time. It could have a good month or period or a bad month or period. A smaller minimum loan payment is easier to cover during a bad month or period of time.
"I always tell borrowers to take the longest term they can, and then work to manage the loan to lower their overall costs by paying more when they can afford it", he adds.
Flexibility on collateral. Collateral requirements are also more flexible. Lizio says most business loans require collateral worth 100% or more of the loan amount for approval. But the SBA can approve a loan where the borrower meets all other criteria – and pledges all available business and personal collateral – even if that collateral doesn't add up to 100% of the loan amount. Those without much collateral may still be approved for an SBA loan where they would have been turned down by a traditional lender.
You are a borderline case. Sometimes the SBA is the only reason you get the loan. "If the bank or lender is on the fence for any reason, the SBA guarantee could push you to the right side. Says Lizio.
Higher costs. Fees associated with SBA loans can get costly. "You have to pay two sets of fees: an origination fee and closing costs for the lender, and fees up to 3.5% for some SBA approvals", says Lizio. You will also have to go through two underwriting processes that may require two different valuations of property or collateral. This can be expensive.
Slower processing. You also need to be patient. First, it involves two institutions – the lender and the SBA – not just the lender. "The application process for these loans takes forever because many bankers don't like doing them and the SBA is always secured", Lizio says.
For 7 (a) loans, investigate the SBAExpress loan program, which speeds up deadlines and promises a 36-hour response time to loan applications. The specifications of these express loans may or may not meet your requirements.