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By Gabe Makhlouf
The Small Business Administration’s (SBA) lending program is a major part of U.S. business growth, and these loans can often be substituted for traditional commercial loans with some benefits to the borrower. With SBA loans, a business owner can increase his or her cash flow and sometimes get approved for higher loan amounts than traditional commercial loans.
Here is a synopsis of how SBA lending works and what business owners need to know.
The SBA allows for longer amortizations than most typical bank financing, so business owners can utilize extended terms. For instance, real estate can be amortized over 25 years with SBA financing, but the bank may only offer 20 years with traditional bank financing. As another example, equipment can be amortized over seven to 10 years with SBA financing, while traditional bank financing may be limited to five years. Another advantage to SBA loans is lower out-of-pocket expenses when compared to traditional commercial loans. The SBA also allows the borrower to roll fees into their loan balance, which isn’t normally the case. Lower collateral requirements are another benefit. The SBA has higher loan-to-value ratios compared to traditional commercial loans.
The SBA can generally finance the same types of business loans that a bank can, with the major exception of non-owner occupied real estate. Term debt such as real estate or equipment purchases are typically financed with SBA 7(a) or 504 loans, and lines of credit can be financed with a SBA Express loan or SBA CapLines.
First, talk to several financial institutions. Find financial institutions in your market that make loans to businesses similar to yours and work with bankers who understand your industry. Other best practices are:
Develop a good business plan. Be ready to explain why customers are going to want to do business with you and how your business is going to compete in your market.
Take the time to understand the risks associated with your business and provide mitigating factors.
Provide realistic projections with best case, worst case, most likely case and break-even scenarios. Having detailed projections can help mitigate some of the risk associated with the loan request.
Develop alternative ways the loan can be repaid if business is slower than projected or, in worst-case scenario, fails.
Maintain a good personal credit history. Many bankers feel if your personal credit isn’t handled properly, there’s a good chance your commercial loan payments will not be either.
Take your time and develop a well thought out business proposal. For many small businesses, the bank is not only looking at the financial statements or the business projections, but also the person or people behind the company.
Always provide the information your banker is asking for because any information he or she is requiring is a tool used to evaluate your request.
It’s also important to put focus on management’s experience. If management can demonstrate a strong knowledge of the industry and the ability to handle adversity, this may help ease some of the risk of the loan request.
Finally, try to anticipate your future financing needs. Commercial or SBA loans take some time to close, so you need to plan for it. Remember, it’s easier and less stressful to seek financing prior to the actual need.
Gabe Makhlouf is a First Vice President and Commercial Loan Sales Manager at First State Bank. Reach Gabe at 586-445-4856 or firstname.lastname@example.org.