For many businesses, the first line of
financing is a loan backed by the SBA
(U.S. Small Business Administration).
Small business is a big contributor to the
nation’s economy, generating 50 percent of
the private, nonfarm gross domestic product. Many budding businesses turn to the
SBA for help.
“An SBA loan — provided to a business
by a bank — is guaranteed in part by the
SBA,” says Michael Benson, senior vice
president and Small Business Segment
manager for FirstMerit Bank. “SBA provides a guaranty to the bank up to a certain
percentage of the loan balance that the
bank will be made whole if the loan
defaults.
Smart Business asked Benson for help
getting familiar with the SBA process.
Does the SBA actually provide money?
No, the SBA does not provide grants or
do any actual lending. All of the money is
provided by the participating bank in the
form of a commercial loan to the business.
SBA provides a guaranty (up to a certain
percentage of the loan amount) that the
bank will be repaid if the loan is not paid as
agreed. When the SBA provides direct
funding, it is generally related to disaster
situations, like Hurricane Katrina.
To get an SBA loan, do I start with the SBA or
my bank?
You always start with a participating
bank, primarily one with a preferred SBA
lender status. This indicates that the bank
is deemed to have the expertise to work
with the client directly.
Is there an SBA pre-qualification program?
Not necessarily. Experienced small business bankers generally do a good job of
pre-qualifying a business, but it is by no
means a credit decision.
The bank makes the initial decision on
the loan. If the loan is otherwise creditworthy, but perhaps lacks collateral or is a
start-up enterprise, the bank may approve
the loan, subject to an SBA guaranty. Then the application is submitted to the SBA for
its approval. Generally, if an SBA preferred
lender makes an initial approval, then the
SBA will approve the deal as well.
Is a written business plan required?
A written business plan is very helpful to
the credit decision process, both for the
SBA and the bank. While it is not required
in every instance, any loan request that will
significantly impact the future income
statement of the business should have a
business plan that tells the story of the
company and includes pro forma financials
that are realistically predictive of the company’s future financial performance.
Situations where business plans and projected financial performance are definitely
needed include: loans to any start-up business, loans that represent relatively large
capital injections for buildings or equipment, and loans that help finance a firm’s
expansion into a new line of business.
Customers can receive assistance in
preparing their business plans from local
Small Business Development Councils or
the Service Corps of Retired Executives
(SCORE), an organization that helps people start new businesses. Some universities
also sponsor business incubators.
Will they demand my personal property as
collateral?
The personal guaranty of the business
owner is a given.
Banks and the SBA are generally unwilling to lend to an entity that does not have
the guaranty support of its owners. The
SBA requires that all useful collateral is
pledged. If the owners are not willing to
carry the weight of risk personally, the
bank and the SBA will not be willing to
take on all of the risk.
Business owners often are asked to
pledge their personal residence as collateral. This is especially important when
lending for intangible items or items that
are difficult to secure. These things include: franchise fees, goodwill on a transfer of business ownership, inventory and
receivables.
Who sets the interest rates and terms on SBA
loans?
The bank sets the interest rates and
terms. Loan limits generally are $2 million
under 7(a), $350,000 under Express,
$250,000 under Community Express and as
high as $4 million under 504.
How do I know when I’m ready to graduate to
a non-SBA situation?
Once the bank is comfortable enough
with a loan request to approve it conventionally, it does so. Some of the conditions
include: being an established business,
having a history of making positive cash
flow, having collateral, and having experience in the industry.
It should be noted, however, that an SBA
loan should not be regarded as a substandard path for financing. It is a conduit for
quality businesses or individuals with realistic business plans to obtain needed funds
to grow or expand their business.
MICHAEL BENSON is senior vice president and Small Business
Segment manager for FirstMerit Bank. He specializes in small
business banking and merchant services. Reach him at
[email protected].