For most small business owners, finding financing and working capital can be an overwhelming task. The process can be confusing, frustrating and time consuming. Worst of all, it can take you away from running your business. However, it can also be one of the most important decisions a business owner will face with implications that benefit, or burden, the company far into the future. The Small Business Administration Loan Programs can offer substantial benefits to small business owners but the process can also be daunting. To get the full benefits of SBA Loan Programs we need to understand what they offer and understand the process.
If I receive an SBA loan, do I make payments to the government?
No. SBA loans are made by individual banking institutions. The Small Business Administration offers a guarantee of a certain percentage of the loan amount. By offering a guarantee on a portion of the loan, the SBA seeks to reduce the bank’s risk. This is an important component in a bank’s decision to make a loan to a small business, which may not have the resources, capital and established history that a larger corporation usually has.
I have a great relationship with my banker. Why would I consider an SBA loan?
There are several reasons that a business owner should explore the SBA loan option. For example, even if you have a great relationship with your bank, the fact that a portion of the loan amount is guaranteed could convince them to increase your credit limit. The primary benefit of an SBA loan is the length of the repayment period. The term of most SBA loans can be longer than what a bank is willing to extend. A longer repayment period means a smaller monthly payment. This opens up a whole new world of expansion opportunities for a small business.
Whom should I contact at my bank about an SBA loan?
Start with your banking officer. More than likely they will refer you to the bank’s SBA loan department. A word of warning: Although most banks have a Small Business Administration loan department don’t be surprised if the level of attention you receive is less than you expect. The administrative burden that the government places on SBA funding combined with the fact that most SBA loans are significantly smaller than the bank’s regular business loans, makes the process more costly for the big banks. But don’t despair! There are banks, and bankers, that specialize primarily in SBA loans. You can receive a list of SBA-approved lenders from your local SBA office, or simply ask your B2B CFO partner about which institutions in your area they would recommend.
What types of businesses are eligible for SBA loans?
As you would expect, with a government program, the SBA has many different types of loan programs with varying eligibility requirements. In general, the business must be operated for profit and meet SBA size standards. The business owner must show good character, management expertise, commitment and the ability to repay the loan.
It sounds good so far. What’s the downside?
There are several factors that need to be considered before pursuing an SBA loan. There are fees involved and the interest rates can be higher than what you might obtain for a conventional bank loan. These financial considerations are not extreme and are often offset by the longer repayment period.
The primary consideration is the application process. It’s fairly lengthy and can be challenging to navigate without the help of an experienced professional. A failure to dot all the “I’s” and cross all the “T’s” will result in the application being kicked back – a frustrating and potentially costly delay.
Will I need an audit?
No, you will not need an audit to apply for an SBA loan (although an audit is always looked upon as a plus). You will however need accurate historical financial statements, budgets, and projections, which include cash flows that show what the proceeds of the loan will be used for and the company’s ability to service the debt. You will also need to be able to convince the lending officer that you understand the financial implications adding the debt obligation and explaining to them the financial benefits it will provide your company.
How can B2B CFO help me through this process?
As the nation’s largest part-time CFO firm (with close to 200 partners and over 5000 years of combined CFO experience) we can absolutely help a business owner as he/she seeks financing – conventional or SBA. From a strategic standpoint we can help the company analyze available financing options. If an SBA loan makes sense, we will work with the business owner to prepare the projections and cash flows, review the application document and ensure that the proposal is as banker friendly as possible. If you would like to explore the option of an SBA loan for your business please feel free to contact me.