Embedded in today’s complex web of mortgage conduits, mezzanine loans, limited partnerships, opportunity zones and sovereign wealth funds is a simple time-tested source of capital for small business entrepreneurs that tends to become invisible: the Small Business Administration loan.
Smaller business firms, whatever their specific lines of business, are eligible for SBA-guaranteed loans for working capital, expansion, business reorganization, retiring more expensive debt, and – in partnership with community development corporations (CDCs) – even for help in acquiring fixed assets, including real estate for the firm’s own use. Because repayment of most of the loan is guaranteed by the SBA, in many cases a lower interest rate is available to the borrower.
Last year, loans guaranteed by the SBA provided over $30 billion of financing for smaller companies, and indications are that number will be even larger this year. Women- and minority-owned businesses are accounting for a growing portion of the loans. Small business owners should especially take note.
As a community bank president, I find that misunderstandings about SBA loans are fairly common. For one thing, neither a perfect credit score nor a lengthy credit history is required for loan eligibility, as some would-be borrowers believe. Leaning in the opposite direction, however, are those who perceive the SBA as a lender of last resort, willing to make loans no financial institutions want to consider. The truth is, SBA-guaranteed loans generally are available to any small enterprise whose owner can demonstrate a sound business plan and a responsible approach to finance.
Equally important, the SBA loan process is not—as some contend—a drawn out affair bogged down with red tape. When approvals are delayed, it’s generally because the borrower has not given adequate care and attention to accuracy on the application. The process is straightforward, designed to progress efficiently. It tends to be even more efficient if the SBA-approved lender is also a PLP, or Preferred Loan Provider, as Savoy Bank is. A PLP is authorized by the SBA not only to originate loans but also to approve them, which can shorten the time to closing.
The SBA administers two widely used guaranteed loan programs. The prevalent one is known as the 7(a) program, which can serve to cover a wide range of small-business needs. The other is the 504 program, designed to provide relatively low-cost fixed-rate financing for acquiring fixed assets, such as real estate and machinery.
Under 7(a), when the SBA approves a loan, it guarantees that it will repay most of the loan balance to the lender if the borrower defaults. The 504 program is a little more complex, however. As noted above, for 504 financing, a small business must apply in partnership with a CDC, a non-profit organization set up to promote economic development within a community. If the application is approved, the SBA and CDC typically loan a total of 40 percent of the project cost, and an SBA-approved lender will make a loan to cover 50 percent. The borrowing business is responsible for the remaining 10 percent, although under certain circumstances a borrower may be asked to cover a somewhat higher percentage.
A full list of CDCs, published by the National Association of Development Companies, can be found at https://www.nadco.org/page/cdclistaz There are more than 270 CDCs throughout the nation.
To smooth the process of applying for an SBA loan, make sure to have a clearly delineated business plan ready to show prospective lenders, together with all the relevant asset and profit-and-loss numbers of your business. Avoid the common mistake, especially among start-ups, of conflating personal finance data with the finances of your business. That is a primary reason why decisions on loan applications may get delayed.
Above all, do not overlook this basic financing tool for growing your business.
Mac Wilcox is the President and Chief Executive Officer of Savoy Bank. With more than 20 years of experience as a banking leader and entrepreneur, Mac is a strong believer in small businesses and the power of local entrepreneurs to drive economic development and growth.