Small Business Administration Resources and Services Program Recap

Thank you to Erika Pearson for a very informational presentation on the mission and resources of the Small Business Administration.   The SBA offers a variety of loan options to lenders while simultaneously connecting small businesses with those lenders.  Let’s dive in and see what the SBA is all about.

What is the SBA?

The SBA is a federal agency created to help foster the growth of small businesses.  As such, the SBA offers a wide range of services including financial assistance for funding procurement, management training programs, and specialized outreach for women, minorities and veterans.  Additionally, the SBA provides assistance on federal contract procurement, international trade, and loans to victims of natural disasters.  The SBA codifies all of these efforts into 3 core pillars, which we will explore below.

Counseling and Training

The SBA works with a variety of local resource partners to provide free/low cost online and soon to resume in-person trainings on a variety of business related topics, including creating business plans and financial planning.  Local partners affiliates include Small Business Development Centers, Counselors to America’s Small Business (SCORE), Women’s Business Centers, and Veterans Business Assistance.  Additionally, the SBA maintains an online Learning Center, https://www.sba.gov/learning-center, that offers 64 FREE training programs, including Buying a Business, Finding and Attracting Investors, and Savings Plans for Small Businesses.

Capital

The SBA is committed to helping small businesses find and procurement the capital necessary to start, expand, and grow their businesses.  The SBA does not provide any direct financial assistance to businesses, but rather serves as link between businesses and lenders.  To this end, the SBA created the Lender Match service, which allows businesses to connect with lenders from across the country with a simple online application.  Once your application is complete (5-10 minutes), you will be matched with lenders in 2 business days.  From there, you can connect with lenders to determine loan details and shop around.  Once you have a lender secured, you can apply for the loan.

Government Contracting

The federal government sets aside more than $500 billion for contracts ranging from armored vehicles to paperclips.  Roughly 23% of those funds are earmarked for small businesses, small disadvantaged businesses, women-owned businesses, service-disabled veteran owned businesses, and businesses located in underutilized business zones.  The SBA works with businesses in these categories to find the right government contract and assistance with apply for these contracts.  Please consult the Resource Guide for Small Business for more information.

The 5 Cs of Lending

Much of the SBA’s efforts are focused on connecting businesses with lenders and if needed, personally guaranteeing up to 85% of the loan should the business default on the loan.  Before we get into the types of SBA loans that lenders work with, let’s take a look at what lenders consider when a business applies for a loan.

1. Character

Character is essentially a summary of yourself and your business as well as the impression you make on the lender.  This includes your background, education, and experience, especially as it relates to the industry/purpose of your business.  The quality of your references can have an impact on how a lender evaluates your character as well as your personal and business credit history.  A great way to make a good impression is to have a strong Feasibility Business Plan, which should be done before trying to connect with any lenders.

2. Capacity

Capacity is a lender’s way of evaluating your ability to pay back the loan and your likelihood of defaulting on the loan.  Your cash flow is KEY and lenders will look to see how soon into the loan you can generate a positive cash flow.  Is your cash flow trending upward, downward, or remaining steady?  Do your financials indicate an ability to pay off the loan; when will you start making a profit; can the profit be sustained?  All of these questions should be addressed in your Feasibility Business Plan and Financial Projections and you should be be able to explain any areas of potential concern.

3. Collateral

While not all loans require collateral, many lenders like to see available collateral that can serve as a recourse if you default on the loan.  Collateral include tangible assets (cash), property, equipment, accounts receivable in the last 90 days, and inventory.  A lack of collateral may not disqualify you for a loan, but may prompt them to seek an SBA loan to ensure a majority of the loan is guaranteed.

4. Capital

How much skin do you have in the game?  Lenders are much more likely to consider your application if you are personally invested in the business.  As a result, they will want to know how much you have personally invested in the venture; be sure to keep separate and account accounting and statements to easily identify all of your investment and past business expenses.  Lenders will also look at your ability to save money and accumulate grow in your equity.  If you received gifts from family or friends or grants, these do count toward owner equity injection so make sure to keep track of all of these!

5. Conditions

These are the terms and conditions of the loan that you negotiate with the lender.  These will include the intended purpose of the loan (start-up, inventory, property expansion), amount of the loan, and length of the loan.  A standard working capital loan is 3-5, but SBA loans can extend to 10 years.  Loans for furniture, fixtures, equipment, and equipment are generally for the useful life of the item or items.  Real estate loans, which tend to have the highest loan amounts, run up to 25 years.

Why an SBA Loan?

Perhaps the most important aspect of the SBA are their loans.  SBA loans are not direct loans to the recipient, but rather a guarantee for a traditional lender, such as a bank, where the SBA provides the funding to the lender, which is then extended to the borrower. For example, you apply to the lender, the SBA guarantees the lender of repaying up to 85%the loan, then the lender approves the loan and gives you the money.

SBA loans help reduce the lender’s risk if the borrower has an aspect that is considered too risky, such as:

• unstable cash flow or fear of repayment issues
• insufficient collateral
• seeking non-standard repayment terms
• startups

In order to qualify for an SBA loan,  the borrower must be:

• for profit
• independently owned
• citizen or legal resident
• meet SBA size requirement

Disqualifiers include:

• ineligible for financing
• non-profit
• money used to buy and sell real estate (landlord)
• pyramid sales
• defaulted on federal government debt and without a structured repayment plan
• probation, parole, or pending criminal charges

SBA Loans Programs

• 7(a)
  • Maximum of $5 million
  • Fixed interest rate, but rate is negotiable
    • Less than 7 years = Prime + 2.25%
    • Greater than or equal to 7 years = Prime + 2.75%
  • Uses include working capital, inventory, line of credit, expansion/renovation, land, equipment/fixtures, or refinance debt for compelling reasons
  • Fees
    • Only on guaranteed portion of loan
    • Less than 1 year = 0.25%
    • Greater than or equal to 1 year
      • up to $150k = 2%
      • $150k – $700k = 3%
      • $700k – $5m = 3.5% + 3.75% per million
    • If in a HUB Zone, less than or equal to $150k = 0.06667%
    • Fees can be rolled into total loan and no prepayment penalty if less than 15 years
  • Prepayment
    • Maturity < 15 years, no prepayment penalty
    • Maturity = or < 15 years, prepayment penalty if:
      • loan prepays 25% or more during first 3 years
      • Fees:
        • Year 1 = 5%
        • Year 2 = 3%
        • Year 3 = 1%
• SBA Express
  • line of credit up to 10 years
  • designated lenders can offer flexible smaller loans and approve quickly
  • Up to $350k = 75% guaranty by SBA
  • Greater than $350k – $1m = 50% guaranty
  • Rates
    • $50k or less = Prime + 6.5%
    • Greater than $50k = Prime + 4.5%
  • Eligibility requirements are the same as for 7(a) loan
• MICRO Loan
  • Maximum of $50k
  • No fees
  • Maximum of 6 year repayment
  • Maximum interest rate as negotiated with lender
  • No real estate
  • Mandatory FREE pre and post loan counseling
•  504 Loan
  • Primarily for real estate
  • Maximum of $5 million generally in 25 year terms
  • Contribution breakdown
    • 50% of loan from the lender
      • Max rate is Prime + 6%
    • 40% sold in secondary market
    • 10% put forward by borrower
  • Long Term Fixed rate financing (10, 20, or 25 years)
  • Refinancing available and prepayment penalty for first half of life of the loan
• Special Purpose Export Loans
  • 3 types:
    • Export Working Capital
    • International Trade Loan
    • Export Express – up to $500k
  • Loan amounts up to $5 million
  • Term loan or line of credit
  • Quick processing time and low guaranty fee

If you have any questions about the SBA or any of the available loans, please reach out to Erika Pearson at 973-645-6160 or erika.pearson@sba.gov.  For a copy of the presentation, please visit https://www.njstatelib.org/wp-content/uploads/2019/04/SBA-Resources-Presentation.pdf.  To view a recording of the webinar, please visit https://youtu.be/UypyZJX6v10.