In 2009, Lesme Romero started his pasta-making business with former business partner Reinaldo Gonzalez inside a one-car garage, churning out a pound of noodles an hour with a KitchenAid mixer, a pasta cutting machine and a rolling pin.
Five years later, when the time came to expand his pasta-making venture, he had a growing wholesale business serving local restaurants and groceries, a budding local reputation as the “Pasta Guy” and a lot of ambition—but no real collateral for a business loan, he said. His business, essentially, was built on flour, water and eggs.
Bill Straus
Lesme Romero
“We got to the point where the one-car garage just wasn’t cutting it for us,” said Romero. “But staying in business for five years—to a bank, that’s like nothing. … People thought we were making a lot of money because we were in Kroger and Whole Foods, but Lexington Pasta was just a wholesale business operating on very low margins. We had to grow.”
Landing a conventional business loan seemed unlikely, but with guidance from the Lexington Small Business Development Center, Romero assessed his needs and assembled a solid business plan, which he shopped around to more than a dozen banks in the hope of securing a loan. It worked, he said. He was approved for a $100,000 loan backed by the Small Business Administration to refit a 10,000-square-foot former warehouse building on Delaware Avenue, which he has since filled with a new production facility, his Pasta Garage Italian Café, a 70-seat event space and an incubator kitchen where aspiring business owners with a culinary-minded idea, as Romero once was, can develop and test their concept in a supportive space.
Bill Straus
Romero, Kentucky Small Business Association’s 2018 Small-Business Person of the Year, used an SBA-backed loan to repurpose a warehouse on Delaware Avenue into a production facility and Pasta Garage Italian Café restaurant.
As the economy has strengthened and interest rates have remained low in recent years, many small business owners like Romero throughout Kentucky and the United States have been turning to the SBA to gain access to the capital they need. The SBA loan program helps small and medium-sized businesses primarily by guaranteeing a portion of their loan to reduce the risk involved for lending partners.
SBA by the numbers
The program guaranteed more than $30 billion nationally for small businesses in fiscal year 2018. That included 60,353 loans totaling $25.37 billion through its flagship 7(a) loan program, which can be used by businesses for things like equipment purchases, expansions, acquisitions and working capital.
In Kentucky, the SBA loan program surged to an all-time record volume of $225 million in 2016, as the country’s economy regained momentum, said Michael Ashcraft, senior area manager and public information officer for the SBA’s Kentucky district. Since then, the state’s total SBA volume has edged back a bit to $170 million in 2018, but that still indicates a trend of solid and steady growth for the program over the long term for Kentucky.
Well-suited for small business
SBA loans are tailored to overcome the challenges that small business owners commonly face in applying for loans, said Terry Spears, vice president and small banking officer at Community Trust Bank, which has been Kentucky’s top-volume SBA 7(a) lender among community banks for 10 years running. The Pikeville, Kentucky-based bank had 59 SBA loans authorized in fiscal year 2018, totaling almost $7 million. The SBA’s guarantee can offset the weaknesses in a small business’ loan application, Spears said, and enables banks generally to be more flexible in their requirements or repayment terms. The loans can be used to finance a wide range of business types, ranging from small trucking companies and hair salons to restaurants and hotels.
“The vast majority of our customers, well above 90 percent, are small businesses, and the SBA loans fit their needs extremely well,” Spears said. “The SBA’s programs are well suited to help us make those loans we couldn’t otherwise make without SBA’s participation.”
In addition to the 7(a) program, the SBA also guarantees 504 loans of up to $5 million (or $5.5 million for manufacturing), in partnership with banks and community development companies (CDCs), to help companies fund the acquisition of fixed assets such as real estate.
As Kentucky’s top SBA 504 lender, Community Ventures Corporation handled more than $7.6 million worth of 504 loans within the state in fiscal year 2017 alone. The loans are structured to provide a maximum of 40 percent permanent financing from the SBA program, which takes a second lien on the project, with an additional 50 percent secured from an applicant-selected bank partner, which takes a first lien. In most cases, the loan applicants contribute only 10 percent, said Brenda Weaver, CVC’s president of lending.
“We love our relationships with our bank partners,” said Lynn Littrell, CVC senior vice president, commercial lending. “We see them not as competition but as partners, for this program and for everything we do.”
Littrell said 504 loans are often used by leasing businesses that are looking to buy their own building space, allowing them to avoid potential future rent increases while building equity at the same time. Buildings must be primarily owner-occupied, Littrell said, and borrowers often end up with loan payments that are lower than their previous monthly leasing expenses.
For smaller-scale entrepreneurs, the SBA also provides capital for microloans for as little as $500 or as much as $50,000, and CVC has also been Kentucky’s leading SBA microloan lender for 12 years running, Weaver said. Fledgling businesses often need smaller amounts to cover expenses such as licensing fees, but for most banks, such loans are not profitable enough to justify the paperwork. For the CVC, much of its mission of helping people achieve their dreams has been fulfilled through its SBA microloan services, with the goal being to help those business owners succeed, Weaver said.
“We work a lot more one-on-one with our microloan borrowers,” Weaver said. “A huge component of the microloan program is the technical assistance we provide with it.”
Understanding what’s required
Despite the advantages that SBA-backed loans offer, many small business owners either don’t understand the process or they are not fully aware of their options, said Perry Dunn, an SBA loan specialist for Huntington Bank, the overall top SBA 7(a) lender in Kentucky, and the leading lender in the nation in the number of loans approved.
“Locally, the demand is there, especially in the restaurant space and the craft brewery space. … It’s just a matter of knowing how to gain that access, and that’s not always readily apparent.” — Perry Dunn, an SBA loan specialist with Huntington Bank
“There is so much access to capital out there that people just don’t understand,” Dunn said. “Locally, the demand is there, especially in the restaurant space and the craft brewery space. … It’s just a matter of knowing how to gain that access, and that’s not always readily apparent.”
One major advantage of SBA 7(a) loans is that they don’t require collateral, Dunn said, which can be a major hurdle for business owners like Romero looking to fund their enterprises through conventional bank loans. Dunn also noted that the SBA loan application process is commonly assumed to be prohibitively difficult and time consuming, but thanks to new technologies and an effort by the SBA to streamline in recent years, that’s no longer the case. While the time required can vary among lenders, Dunn said he has secured approval on SBA loans in as little as two days, and he typically closes deals within 30 days.
For business owners interested in learning more about their SBA loan options, Ashcraft suggested they begin with the resources that may already be available to them close to home. Almost all lenders in Kentucky are authorized to do SBA loans, Ashcraft said, and the SBA has resource partners across the state, including small business development centers, that are available to guide small business owners through more than just the loan process.
“These folks really know their markets,” Ashcraft said. “It helps [business owners] to figure out strategically what’s best for their business.”
And although all lending partners follow the same basic guidelines to secure approval for SBA loans, all banks do not take the exact same approach to the process, Dunn said. If one bank denies an SBA loan for a borrower, that doesn’t mean another bank can’t make it work.
“[Some borrowers] get told ‘no’ by one bank, and then they quit,” Dunn said. “But it all comes down to the individual bank’s risk tolerance.”
Finding the right resources to both inform a small business’s growth strategy and make necessary capital available is key, according to Romero, who was named as the Kentucky SBA’s 2018 Small Business Person of the Year.
Romero’s company now produces roughly 2,000 pounds of pasta per week and employs 25 full-time employees. His incubator kitchen is helping new local food start-ups gain a foothold in the market, and his next goal is to open an additional Pasta Garage location in Louisville in 2020.
“We wouldn’t be where we are today if it weren’t for the SBDC and the SBA,” Romero said. “They put us on the right path. … And even better, they have continued to help us stay on track in our growth. That has given us the confidence to accomplish what we really had in mind all along and allowed us to really exceed our expectations.”