Embedded in today’s complex web of financing sources, including venture funds, banks, credit unions, fintech lenders and equity investors, is a simple time-tested source of capital for entrepreneurs that tends to become invisible: the Small Business Administration loan.
Smaller firms, whatever their specific lines of business, are eligible for SBA-guaranteed loans for working capital, business acquisition or expansion, retiring more expensive debt, and – often in partnership with community development corporations (CDCs) – acquiring fixed assets, including real estate for the firm’s own use. SBA loans are designed to support small business growth by enabling lenders to originate loans to borrowers unable to meet the down-payment and/or collateral requirements of conventional loans.
Last year, loans guaranteed by the SBA provided approximately $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.
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. The truth is, SBA-guaranteed loans generally are available to any small enterprise whose owner can demonstrate a sound business plan, repayment capacity and management expertise.
Equally important, securing an SBA loan is not a complicated, bureaucratic process and even less so if the SBA-approved lender is also a PLP, or Preferred Loan Provider, as Savoy Bank is. A PLP is authorized by the SBA to close SBA loans without prior SBA approval, thereby expediting the closing process.
The SBA administers two widely used guaranteed loan programs: the 7(a) Loan Program, which covers a wide range of small-business needs; and the 504 Loan Program, designed to provide relatively low-cost fixed-rate financing for acquiring fixed assets, such as real estate and machinery.
Under 7(a), the lender closes loans with a partial guaranty from the SBA. 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 additional equity may be required.
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 personal and small business tax returns and interim financial statements for 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, don’t overlook this basic financing tool for growing your business!