Expanding Your Small Business With An Small Business Administration Loan
Expanding Your Small Business
If you are wondering how to fund the expansion of your small business, you might want to consider a Small Business Administration (SBA) loan. Although not for every business owner, this loan is a viable option for those who cannot obtain other financing to grow their business.
Basically, when a business that meets the conditions applies to an Small Business Administration loan, it is actually applying for a commercial loan, structured according to Small Business Administration requirements with Small Business Administration guarantees. Small business owners and borrowers who have access to other financing with reasonable conditions do not qualify for loans guaranteed by Small Business Administration. "Small Business Administration loans are a good idea if small business owners don't qualify for traditional bank business loans and they have special use for funds that will help businesses grow," said Anthony Pili, vice president and director of strategic planning, Greater Hudson Bank in Bardonia , NY
Examples of good and specific uses are if, for example, orders exceed inventory and some new machines, additional employees, other locations or other trucks will help fulfill the demand after paying new debt payments, said Pili.
Other good uses for Small Business Administration loans include: buying a competitor's business to obtain economies of scale, refinancing a higher level of debt, or buying a building where the business operates if new mortgage payments are equal to or lower than lease payments.
SBA Option
The Small Business Administration offers a variety of financial programs aimed at helping small businesses succeed. Programs range from offering assistance facilitating loans with third party lenders to guarantee bonds or helping small business owners find venture capital.
Guaranteed loan programs - also called SBA loans - are one of these offers. Several types of loans are available, including:
1. Loan Program.
This is the most common Small Business Administration loan program and includes financial assistance for businesses with special requirements, such as franchising, agriculture and agricultural businesses, and fishing vessels.
2. Microloan Program.
It provides small, short-term loans for small businesses and certain types of non-profit childcare centers.
3. Real Estate Loans & Equipment
CDC / 504. This loan provides financing for major fixed assets, such as equipment or real estate.
Small Business Administration does not provide loans directly to small businesses. This only sets guidelines for loans and then supports loans or guarantees loans will be repaid, said Joseph Lizio, CEO, Capital LookUp LLC, and former commercial lender. That eliminates some risks for lenders.
Obtaining approval
Small business owners can apply for Small Business Administration loans through banks offering SBA loans. "Business owners can also register through a local Certified Development Company (CDC), which is a non-profit company certified and regulated by Small Business Administration that works with participating lenders to provide financing for small businesses," said Pili. There are 252 national CDCs, each covering a specific geographical area.
"Many banks partner with their local CDC to help borrowers who will not qualify for traditional business loans offered by banks," said Pili.
To be approved, a Small Business Administration loan application must be approved in advance and borne by a financial institution or small business lender. "Then it is sent to the SBA which, under its own guidance, will also guarantee and approve or not," said Lizio.
If both organizations approve loans, financial institutions will fund and service loans since then. "The Small Business Administration will only guarantee a loan or part of it - usually around 85% - if there is a failure by the borrower," Lizio said.
If you are not sure whether your local lender is an SBA-approved lender, visit the SBA website. While each lender has his own criteria for approving loans, Lizio said there are several general qualification criteria used by all creditors, including:
1. Cash Flow for Operating Loan Payments.
If the monthly payment is estimated at $ 1,000 per month, the applicant needs to show the business can produce that amount, above and beyond the total operating profit.
2. Personal Credit History.
Credit officers don't want to waste their time on applications that they could never agree to through their underwriting or credit committees. So, they draw personal credit history to applicants. If the score does not meet the minimum threshold, Lizio says, the creditor will leave soon.
3. Guarantee.
Although there are some exceptions, Small Business Administration generally require all Small Business Administration loans to be guaranteed with all available assets (inventory, buildings, cash, etc.) - both business and personal. Banks and other commercial lenders will also want full guarantees. Without a guarantee worth at least 100% of the loan amount, Lizio said that the request would likely be rejected.
Small Business Administration Specific Advantages
For owners of small businesses, going the Small Business Administration route has some key advantages.
Term of Loan.
Lizio says one of the biggest benefits of an Small Business Administration 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 instance, a bank might only agree to a 10-year term on real estate, but the Small Business Administration might approve a 20- or 25-year term. Or, let's say a private lender will only underwrite an equipment loan for 5 years the Small Business Administration might approve 7 years.
Why does this matter? Lizio says a longer term makes the loan payment more affordable and also makes it easier to qualify for a loan. In addition, it adds flexibility for a borrower. No business has constantly smooth revenue. It could have a good month or a good period, or a bad month or period. A smaller minimum loan payment is easier to cover during a bad month or period.
I always tell borrowers to take the longest term they can, then work to manage the loan to reduce its overall cost by paying more when they can afford to do so, he adds.
Flexibility on Collateral.
The 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 Small Business Administration may approve a loan where the borrower meets all the 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 Small Business Administration loan where they might have been declined by a traditional lender.
You're a Borderline Case.
Sometimes, the Small Business Administration might be the only reason you get the loan. "If the bank or lender is on the fence for some reason, the Small Business Administration guarantee could be what pushes you over to the right side, getting you approved," says Lizio.
Some Disadvantages
Higher Costs. Fees associated with Small Business Administration loans can become costly. You have to pay two sets of fees: an origination fee and closing costs to the lender, as well as fees up to 3.5% for some SBA approvals, says Lizio. You also have to go through two underwriting processes, which may require two different valuations of property or collateral. That can be expensive.
Slower Processing.
You also have to be patient. For one thing, you're dealing with two institutions the lender and the SBA not just the lender. The application process for these loans takes forever, as many bank officers don't like doing them and the SBA is always backed up, says Lizio.
For 7(a) loans, you may want to investigate the Small Business Administration Express loan program, which has expedited deadlines and promises a 36-hour response time to loan applications.The specifications of these express loans may or may not meet your needs.
The Bottom Line
Before applying for any type of business loan, it's wise to assess your business financial health and needs. The SBA suggests you consider the strength of your industry, how you'll use and repay the loan, and the strength of your management team.
Develop a business plan that answers these questions. All lenders will want to review a substantial, comprehensive and well-thought-through business plan before approving a loan to expand or launch a business.
A traditional business loan will generally be faster to get and have lower fees. But SBA loans can offer important advantages, including being able to get a loan at all at certain stages of your company's development.