The ABCs of SBA Lending
Expert divulges key benefits and application preparation methods for businesses.
August 6, 2009
I had the opportunity to meet with Tommi Homuth, business banking manager with Wells Fargo in Dallas, Texas to discuss what‘s new in the Small Business Administration (SBA) loan programs. Homuth explained that recent changes in two Small Business Administration (SBA) loan programs mean many businesses may now have more opportunities to obtain financing. The new program enhancements could help business owners continue to manage and grow their companies by offering the financial wherewithal.
Homuth explained that the SBA loan program is a federal program dedicated to helping small businesses with loans made available through local lending institutions. She went on to note that recently, the SBA announced it is:
What do these changes mean?
These changes provide an economic incentive for small businesses to obtain a loan and they allow SBA lenders to offer an immediate cost savings to businesses. For example, a customer approved for a $238,000 loan could save up to $5,400 in fees under these new changes.
What additional benefits do the new provisions add to the already substantial benefits of an SBA loan?
Homuth pointed out that, as with any loan, the interest rate and monthly payment for an SBA loan will vary, depending on the transaction. Also, the amount of cash you’ll need at closing will vary, depending on the type of loan you choose. Expenses such as closing fees and appraisals often can be included in the SBA financing package — a feature that appeals to many business owners.
Why Apply for an SBA Loan?
What would a business seek an SBA loan for?
To buy owner-occupied commercial real estate. Many SBA loans are made to buy owner-occupied commercial real estate. Homuth explained that down payments for these loans may be as low as 10 percent — much lower than for other types of financing, so less cash is required for closing. These loans provide other benefits over conventional loans, including:
- Terms of up to 25 years for real estate with no balloon payments;
- Lower debt-service coverage requirements;
- Shorter time-in-business requirements; and
- No minimum net stabilized income requirement
Acquire a new business or franchise. Whether purchasing a new business/franchise or growing an existing one with additional inventory or new equipment, Homuth explained that they can be financed with an SBA loan.
Purchase equipment. Whether purchasing a new business/franchise or growing an existing one with additional inventory or new equipment, Homuth explained they can be financed with an SBA loan.
Increase your working capital. It is imperative that you choose the right financial service company. Homuth suggests you first find a service company that is a Preferred Lender. What is a Preferred Lender? A Preferred Lender is a designation given by the SBA that empowers the service company to handle all aspects of the loan process from making its own credit decisions to funding the loan. Since the Preferred Lender makes the decision on a loan application, your SBA loan is processed quickly and you get a decision within days. Your loan application isn’t sent to a government office for processing — instead, the SBA trusts the Preferred Lender to make its own decision.
Application Interview Preparation
Once you decide an SBA loan is right for your business, what should you bring to the application interview? With an existing business, it’s important to bring your financial history — the last three years of your business and personal tax returns, cash-flow projections, your current income statement and balance sheet and a personal financial statement. If you have a start-up business, you should bring your business plan along with your personal financial history. Most financial services companies also require a detailed breakdown of project costs and how the funds will be used. Real estate and construction loans usually require more documentation than equipment and working capital loans.
As an aside and on a more personal note, I can remember instances of helping clients make a presentation to a bank where the client thought it was fine to bring in notes on scraps of paper or as I referred to it as the “shoe box” presentation. (Receipts, payments, documents tossed into the shoe box for someone else to decipher.) As a banker, Homuth pointed out that the more explicit the reason for the loan, the more detailed the financial information and projection, the clearer the borrower’s goals and, how well-documented reasons on how the funds will be used makes it a lot easier for the lender to arrive at a decision. Having documentation reviewed and/or prepared by an independent third-party also adds more credence to the presentation. And it’s not just the financial information that should have a third party independence: engineer’s reports on the increased production by installing newer/more equipment, marketing studies that indicate more inventory will be needed to meet more demand, realtor’s comparisons, etc.
There are many SBA lending products, so you’ll want to work with a financial services adviser who is an SBA specialist and is familiar with the pros, cons and requirements of all SBA lending approaches. The specialist can help you determine the type and size of loan you need to meet your company’s unique circumstances, while ensuring your company has sufficient cash-flow to support the proposed debt.
On a final note, Homuth feels that given today’s incentives, this may be the right time to investigate the possibility of an SBA loan. She says, “You could find that an SBA loan is just the ticket to put your business plans into action and get your dreams back on track.”
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Allen M. Liebnick, CPA, is president of Overpaid Payables Recovery, Inc. A former associate professor, Liebnick has been providing accounts payable, sales tax and telecommunications post audit recovery services for over 15 years. He serves clients in the U.S., Canada and Mexico. He is a member of the New York Society of Certified Public Accountants as well as the Texas Society of Certified Public Accountants. Liebnick thanks Tommi Homuth for participating in this article. If you want to ask any questions, feel free to contact her and tell her Allen sent you.