In most ways, a loan backed by the Small Business Administration is just like any other loan, and the process for getting one is much the same.
The borrower applies to the bank, and the bank decides if he or she meets the criteria for credit. If the bank determines it cannot make the loan on its own, it may then look to an SBA program, most commonly the 7(a) guarantee program. If the SBA agrees, it will guarantee a portion of the credit, typically 75 percent or more.
There are pros and cons for the borrower. Working with the SBA typically allows banks to offer rates and terms they may not otherwise be comfortable with. But there are also fees that range from 2 percent to 3.75 percent of the guaranteed portion of the loan, depending on loan size. For example, a $250,000 7(a) loan with a 75 percent guarantee would carry a $5,625 fee.
Bernard Paprocki. director of the SBA’s Syracuse, New York, district, said it is important that entrepreneurs and business owners understand how this process works. A borrower should not go into a bank thinking they want an SBA loan.
“The goal is just to get a loan,” he said.
Going into the bank is actually one of the last steps in the process. First comes research and preparation. Whether you are starting a new business or expanding an existing one, you need a solid business plan, reasonable cash flow projections and a good sense of the competitive landscape.
“Your chances of getting a loan are greatly enhanced when you do your homework first,” Paprocki said.
Thomas Burke. vice president of SBA lending for San Francisco-based Wells Fargo. advised getting help from an outside expert, such as an accountant, a business consultant or one of the organizations affiliated with the SBA. These include Small Business Development Centers, which typically are tied to large universities; Women’s Business Centers and SCORE, a group of retired executives who mentor entrepreneurs. All three provide their services at little or no cost.
Burke, whose bank is the nation’s largest SBA lender the largest depositor in the Philadelphia area, also likes to see entrepreneurs with some experience — preferably managerial — in the industry they want to enter. It is also
important to have some of your own money to invest.
“We want you to have skin in the game,” he said. “For a startup the norm is 30 percent. For existing businesses it may be 10 or 20 percent.”
The next step is to find the right lender. Paprocki recommends starting with your own institution, if you have one.
“They have the most familiarity with you, your business and your plans,” he said.
Burke said people in the market for a new bank should research which institutions in their areas have expertise in their industries. Local SBA offices also can provide lists of certified and preferred lenders, those who have the most experience with the agency’s programs. Preferred lenders can put through an SBA loan without prior approval.
When you have a few banks in mind, go in and talk to them.
“This is just like any other service you would purchase,” Burke said. “Do you feel comfortable talking to them? Do they have an understanding of your business? You should interview them the way they will interview you.”
When you do sit down to apply for a loan, be prepared to show financial statements and have your past probed.
“We pull credit reports on people to make sure their personal finances are clean,” Burke said. “You also have to fill out a personal history form. The SBA will do an FBI background check.”
One of the keys to getting what you need from a bank is also knowing what you need. A line of credit? A term loan?
“A 7(a) loan is a term loan,” Burke said. “That is good if you are purchasing a business or a big piece of equipment you want to pay off over time. But if what you need is working capital, you may be better off with a line of credit. The SBA Express product is a line of credit.”
It is also wise, he said, to keep expectations reasonable. It is better, and easier, to borrow $20,000 now, and more later, than to get in over your head by asking for $200,000 now.
“It should be like building blocks,” Burke said.
Barbara Pinckney is a reporter for The Business Review of Albany, N.Y. a sister publication.