Expanding Your Small Business – 2019
If you are wondering how you can finance the expansion of your small business, consider taking out a loan for a Small Business Administration (SBA). Although they are not for every business owner, these loans are a viable option for those who cannot obtain other financing to grow their business.
In short: if a qualified company applies for an SBA loan, it actually applies for a commercial loan structured according to SBA requirements with an SBA guarantee. Small business owners and borrowers who have access to other financing on reasonable terms are not eligible for SBA-guaranteed loans. “SBA loans are a good idea if a small business owner is not eligible for a traditional banking business loan and they have specific use for the funds that help the business grow,” said Anthony Pili, vice president and director of strategic planning, Groot Hudson Bank in Bardonia, NY Read more in The Fundamentals of Financing a Company .
An example of good, specific use is if, for example, orders are faster than the delivery and a number of new machines, an additional employee, another location or another truck would help to meet that demand profitably after covering the new debt payment. , says Pili.
Other good practices for an SBA loan include: buying a company from a competitor to achieve economies of scale, refinancing debt with a higher interest rate, or buying the building in which the company operates if the new mortgage charges are equal are to or lower than the lease payments.
A bad example works on a premonition. Many marketing activities fall into this category, says Pili. “Many think that if they take out a loan for a billboard or a newspaper, customers will come.” That’s rarely the case.
The Small Business Administration offers a variety of financial programs to help small businesses succeed. The programs range from offering assistance in facilitating a loan with a third-party lender to guarantee a bond or to help a small business to find venture capital.
Guaranteed loan programs – also known as SBA loans – are one of these offers. Different types of loans are available, including:
- 7 (a) Loan program . This is the most common loan program of the SBA and includes financial assistance for companies with special requirements such as franchises, farms and farms and fishing vessels.
- Microloan program . This offers small, short-term loans to small businesses and certain types of non-profit childcare centers.
- Loans for real estate and equipment: CDC / 504 . This loan provides financing for important fixed assets, such as equipment or real estate.
The SBA does not provide direct loans to small businesses. It only sets the loan guidelines and then supports the loan or guarantees that the loan will be repaid, says Joseph Lizio, CEO, Capital LookUp LLC and a former commercial lender. That eliminates any risk for lenders.
A small business owner can apply for an SBA loan through any bank that offers SBA loans. “A business owner can also apply through a local Certified Development Company (CDC), a non-profit organization that is certified and regulated by the SBA that provides financing to small businesses together with lenders,” says Pili. There are 270 CDCs nationwide, each covering a specific geographical area.
“Many banks work with their local CDC to help borrowers who would otherwise not be eligible for a traditional business loan that the bank offers,” says Pili.
To be approved, an SBA loan application must first be approved and endorsed by a financial institution or a small business lender. “It is then sent to the SBA, which will also endorse and approve it based on its own guidelines,” says Lizio.
If both organizations approve the loan, the financial institution finances and maintains the loan from that moment. “The SBA only guarantees the loan or part of it – usually around 85% – in the event of default by the borrower,” says Lizio.
If you are unsure whether your local lender is an SBA approved lender, visit the SBA site. Although every lender has its own criteria for approving a loan, Lizio says there are a number of common qualification criteria that all lenders use, including:
- Cash flow for paying the loan payment. If a monthly payment is estimated at $ 1, 000 per month, applicants must demonstrate that the company can earn that amount on top and above the total operating profit.
- PersooBobbsey Twinsijke credit history. Loan officials do not want to waste their time on an application that they could never approve through their acceptance or credit committees. So, they draw a persooBobbsey Twinsijke credit history on applicants. If those scores don’t meet a minimum threshold, Lizio says, the lender will run away immediately.
- Collateral. While there may be some exceptions, the SBA generally requires that all SBA loans be covered by collateral with all available assets (inventory, buildings, cash, etc.) – both business and personal Twinsijk. Banks and other commercial lenders also want full collateral. Without collateral that is valued with a minimum of 100% of the loan amount, Lizio says that the application Bobsey Twinsijk will probably be rejected.
For small business owners, offering the SBA route has some important benefits.
Duration of the loan. Lizio says that one of the biggest benefits of an SBA loan is the term of the loan. “Most lenders want borrowers to have the shortest term available. But SBA loans extend those conditions,” says Lizio.
For example, a bank can only agree to a 10 year term on real estate, but the SBA can approve a 20 or 25 year term. Or, say, a private lender will only guarantee a loan with equipment for five years – the SBA can approve seven years.
Why is this important? Lizio says that a longer term makes the payment of the loan more affordable and also makes it easier to qualify for a loan. Moreover, it adds flexibility for a borrower. “No company has constant flexible income. It can have a good month or a good period, or a bad month or period. A smaller minimum loan payment is easier to cover during a bad month or period.
“I always tell borrowers to take the longest term to borrow in order to control total costs by paying more if they can afford it,” he adds.
Flexibility on collateral. The required collateral is also more flexible. Lizio says that most business loans require collateral worth 100% or more of the loan amount for approval. But the SBA can approve a loan if the borrower meets all other criteria – and promises all available business and personal security – even if that collateral does not amount to 100% of the loan amount. Those without much collateral can still be approved for an SBA loan, where they may have been refused by a traditional lender.
You are a borderline case. Sometimes the SBA is perhaps the only reason to get the loan. “If the bank or lender is on the fence for some reason, the SBA guarantee may be what pushes you to the right, allowing you to be approved,” says Lizio.
Higher costs. Costs related to SBA loans can become expensive. “You have to pay two sets of costs: a start-up fee and closing costs for the lender, as well as fees up to 3.5% for some SBA approvals,” says Lizio. You must also go through two acceptance procedures, which may require two different appraisals of ownership or collateral. That can be expensive.
Slower processing. You must also be patient. To begin with, you have to deal with two institutions – the lender and the SBA – and not just the lender. “Applying for these loans takes forever, because many bank officers don’t like doing them and the SBA is always backed up,” says Lizio.
For 7 (a) loans you may want to examine the SBAExpress loan program, whereby deadlines are extended and a 36-hour response time to loan applications is promised. The specifications of these express loans may or may not meet your needs.
The bottom line
Before you apply for a business loan, it is wise to assess the financial health and needs of your company. The SBA suggests that you look at the strength of your industry, how you use and repay the loan, and the strength of your management team.
Develop a business plan that answers these questions. All lenders will want to review a substantial, comprehensive and well-considered business plan before approving a loan to expand or launch a business.
A traditional business loan will generally be faster and have lower costs. But SBA loans can offer important benefits, including being able to borrow a loan at certain stages of your company’s development.