What to consider when applying for a small business administration loan
A: SBA loans support small business operations and can be used for purchasing new equipment or inventory, refinancing debt, and funding business expansions or short-term working capital needs. They can also be used for starting a new business or purchasing an existing one, making commercial real estate purchases, and for small business export-development activity.
The number of SBA loans in Minnesota is on the rise. We asked local experts Andy Naughton, vice president and SBA lending manager at Platinum Bank, John Thwing, senior vice president at Old National Bank, and Chris Albrecht, SBA manager at Sunrise Banks, to share insights on SBA loans.
Why an SBA loan?
Thwing notes that there are two main reasons an SBA loan may be an appealing option for a business. First: An SBA loan often requires less cash equity, less collateral and less cash flow to support a shorter loan term. Second: Many business owners like the longer-term, fewer-strings-attached loan covenants, and the greater flexibility to repay early without penalty.
If you decide to get an SBA loan, however, recognize that not all lenders are equal. Partner with a bank that is an SBA preferred lender, a designation that allows the bank to underwrite and approve loans on behalf of the SBA. Lenders without this status must secure SBA approval before funding the loan.
“Experienced SBA lenders understand these requirements up front and will be able to get the right information and ask the right questions early in the process,” Naughton explains.
“This ensures that the underwriting and approval process go more smoothly, with fewer last-minute changes or delays. A preferred lender has more control over the timing of the underwriting and approval process. Non-preferred lenders need to send the loan to the SBA for approval, which inevitably means that the process will take longer.”
Albrecht notes that for a startup, a business plan is a must when applying for an SBA loan. Other documents that the lender will need are a formal loan request detailing the amount of funds and how they will be used, business financial statements for any existing businesses, three years of tax returns and financial statements (balance sheet and income statement), and personal financial statements.
“It’s important to understand the process and the commitment the borrower is making. There is no silly question when it comes to understanding financing. If a term the lender uses is new to the borrower, stop and ask them to explain. Take the time to get all of your questions cleared up before you enter the SBA process,” says Albrecht.
Thwing notes that to have a successful partnership with your lender, “You’ll need to be willing to share financial and business information and take the time to help your lender understand what you want to accomplish. Many of our clients want help understanding the financial fundamentals regarding the source of funding. Focusing on fundamentals (capital, cash flow, valuation, working capital, etc.) can give clarity on a much higher level, and help owners focus on the best form of capital for their situation and work their way down to a specific loan program and structure.”
Misconceptions about SBA loans
There are many misconceptions about SBA loans, including that the process is burdensome and time-consuming. “The SBA has made considerable efforts to streamline its processes and required documentation over the last few years,” says Naughton. “If you work with a bank experienced in SBA lending, especially if they are an SBA preferred lender, the process from application to funding is not much longer, if at all, than a conventional commercial loan.”
Another misconception he hears is that an SBA loan is borrowing from the government. “This is not true. While the SBA loan program is a government program, you are borrowing from the bank. You work directly with the bank during the underwriting and approval process. It is the bank’s funds that ultimately fund the loan. You make your payments to the bank from which you borrowed. The SBA simply provides the bank with a guarantee on a certain portion of the debt (50%–90% depending on the program). This guarantee only comes into play if there is a default on the loan, and the bank incurs a loss,” says Naughton.
This story appears in print in our July/August issue. For a complimentary subscription, click here.