By Paul Long– Written and Published in the Business Examiner December 2016
Starting and growing a small business in is not an easy task. As a lender dedicated to helping small businesses it is absolutely humbling to hear stories about how people have sacrificed in order to achieve their dream of owning a small business. Whether it is a retail store, new service business or manufacturing a product, each business has its unique challenges. As most business owners know, the #1 issue small businesses face is getting access to capital.
In the United States, we have an amazing government program called The SBA (U.S. Small Business Administration) The SBA works with banks in order to provide a loan guarantee to assist banks in making certain loans to small businesses when businesses do not qualify conventionally. The SBA does not directly lend money to business owners, the SBA partners with the bank to do so.
There are two main SBA lending programs.
SBA 7(a) – This program allows small businesses to finance inventory, working capital, vehicle and equipment purchases, business acquisitions and more. An average SBA 7(a) loan term (that doesn’t rely on real estate) are up to a 10 year term with market rates typically in the 4-8% range. SBA 7(a) can also be used for real estate with terms up to 25 years.
For borrowers who are seeking loans under $350,000, the SBA has the SBA Small Loan and SBA Express program that has increased overall efficiency with less paperwork the borrower needs to fill out and quicker turnaround times. With an average 7(a) loan amount around $350,000 this small loan program can really assist businesses get capital that they need quickly.
SBA 504- This program is great for business owners looking to purchase large equipment or owner-occupied commercial real estate. An average SBA 504 Loan allows the borrower to have as low as a 10% down payment which keeps more capital in the business. The SBA lender then provides the funding for 50% of the loan and a Certified Development Company (aka the SBA portion) finances 40%. The best part of this program is that the SBA/CDC portion of the loan typically has a 10 or 20 year fixed interest rate.
When applying for SBA loans, banks still look for the 5 c’s of credit:
- Character-Having good credit personally and for the business will always be a big deciding factor in getting a loan. It is important to check your personal credit free each year at annualcreditreport.com.
- Capacity– Be able to show you have a financial plan or historical proof on how you plan to pay back the loan. Having multiple sources of repayment is always a plus.
- Capital– Lenders will always look to see how much cash or equity you put into the project. There are very few 100% lending programs for businesses available.
- Collateral– Even though the SBA can be flexible with collateral, having some collateral is still required.
- Conditions– How you are going to use the loan funds is also important. Make sure you have a solid budget and business plan.
When you are ready to take the next step in seeking capital for your business, make sure to reach out to a local SBA lender like Timberland Bank. The SBA has also made it easier to connect borrowers with local SBA lenders with a service called SBA LINC. (www.sba.gov/tools/linc) Borrowers answer a few questions about your business and in as little as 2 business days, hear from local SBA lenders interested in your request.