SBA loans can help your business in more ways than you might think
December 31, 2015
Small Business Administration (SBA) loans can be a great resource for businesses that are struggling to obtain funding from traditional lenders, but they should not be viewed as a loan of last resort, says Ken Mannina, senior vice president and regional sales manager at Bridge Bank.
“The participating lenders that provide SBA financing get a credit enhancement from the SBA,” Mannina says. “However, the credit enhancement does not mitigate all risks for an applicant with poor credit, an operating company that has a history of losing money or a property that provides weak collateral support for the loan.”
SBA loans are a great tool for small business owners where debt is typically not otherwise available from conventional institutional sources. However, looking beyond the loan request and evaluating the business and its specific needs, the following should be considered.
“Some capital requirements are best served with debt, others with equity,” Mannina says. “However, most will require a combination of both.”
Smart Business spoke with Mannina about SBA loans and how to best position your business to secure the funding it needs.
What are some common misconceptions about how the SBA can help a business?
One of the most common misconceptions out there in the business community is that SBA loans are actually small.
The definition of ‘small business’ is very broad. Most businesses are eligible based on size. SBA loans go up to $5 million and can accommodate an owner-occupied commercial real estate purchase of up to $15 million.
Another misconception is that you have to be in business for several years to get the SBA loan. SBA loans can be made to startup or recently started businesses, however, there will likely be collateral requirements. Many applicants have only one full fiscal year of tax return reporting at the time they seek SBA funding.
There is also a belief by some business owners that SBA loans take a long time both to approve and to fund. In reality, many SBA loans we work on are funded in 60 days or less.
Business owners should also know that SBA loans can be used for more than just working capital, which should dispel another myth about the program. SBA loans can be used for working capital, but also for the purchase of equipment, business acquisition, debt refinance, partner buyout, or purchase and construction of owner-occupied commercial real estate.
What’s the key to identifying your greatest need and using that knowledge to secure the necessary funding?
The key to identifying your greatest need starts before you apply for the loan, at the time you are initially formulating the reason you need capital and/or are starting your business. You need to determine the best financing option to manage that need. Is it debt or equity?
Business owners want capital so they apply for a loan, but thought and due diligence needs to be applied before this decision is made.
Consider the ratio of debt to equity. What is a good structure that fits your needs and comfort level in terms of the resources at your disposal, the feasibility of your business, how it will have the best possibility of succeeding and how much you expect the business to grow?
Capitalizing the business with adequate equity at the beginning will be a key factor in the early stages of the business. Equity is defined as non-borrowed funds that are injected by the business owners. This could be money that you have been setting aside in a personal account for the express purpose of growing and supporting your business or it could be a gift from a family member.
What do SBA lenders want to see that will encourage them to want to support your business?
First and foremost, SBA lenders want to see repayment ability. They want to see historical cash flow from operations that is adequate to repay the loan.
Beyond that, the SBA lender will want to see management with the technical ability and character to run the business successfully and repay the loan. Lastly, the SBA lender will want collateral to support the loan, i.e. the assets of the business and possibly the assets of the principals of the business.