Small business loans are not only for small start-ups or businesses in trouble, the loans are available to any business that meets the loan’s qualifications. Photo furnished
Starting a small business can be a daunting task, even before it comes to financing it.
But using Small Business Administration (SBA) loans are a way for smaller companies, newer companies and companies without a proven lending track record to get the financing they need, said Fausto Sarmiento, center director for the Kentucky SBDC (Small Business Development Center) in Lexington. An SBA loan makes the most sense when a business owner needs a viable solution to a “feasible problem,” he said.
“When a transaction may not quite fit inside the box of conventional commercial lending,” Sarmiento said, “an SBA loan helps the lender say, ‘Yes, we may fund the loan, if we can get an SBA guarantee.’ The business must prove it may repay the loan.
“What the SBA guaranty may do is help a lender become comfortable with a transaction that might otherwise present too much risk because of insufficient collateral, the age of the business, the size of the project, or some other factor.”
The best thing a small business can do when they want an SBA loan, Bob Watson, senior vice president of commercial lending with Community Trust Bank, said, is to go to the SBDC for help with some of their basic paperwork.
Community Trust is one of the SBA’s preferred loan providers and makes the most SBA loans in the state, Watson said. While no two SBA loans are alike and there are no guarantees when helping people get credit, he said, with the right cash flow and the right information, he said he can generally help businesses get SBA loans in 30 to 45 days.
SBA loans make sense for a variety of different businesses, Sarmiento said. Small businesses run the gamut from small mom and pop shops on Main Street to manufacturing companies with less than $5 million in annual revenue.
SBA loans are evaluated just like any other loan, he said. While one of the biggest misconceptions about the loans is that they are only for small start-ups or businesses in trouble, the loans are available to any business that meets the loan’s qualifications.
Lenders evaluate all loan requests through the ‘5 Cs of Credit,’ ” Sarmiento said. “The more work a business owner does to shore up five focus areas before approaching a lender, the more compelling the loan request becomes. The 5 Cs of credit are Character, Capacity, Capital, Collateral and Conditions.”
Character refers to whether the lender believes the borrower will do what they say they will do, he said. Capacity is the business’s ability to generate enough money to service the debt. Capital is the owner’s personal investment into the business, as well as the business’s financial reserves. Collateral refers to any secondary source of repayment. And conditions include the loan’s purpose, the strength of the industry and economy, and the specific circumstances surrounding the request.
“Business owners may improve their chances of approval by addressing all five before the lender has to ask,” Sarmiento advises. “Be prepared to explain your credit history, demonstrate repayment ability with solid financial statements and realistic projections, show meaningful owner investment, understand what assets are available to serve as collateral, and clearly articulate why the financing makes sense in the current business environment. A weakness in one area does not always kill a deal, but it does need to be understood and, where possible, offset by strengths elsewhere.”
It’s all about cash flow and collateral, just like any other loan, Watson said.
“When I bring them in, I’m going to make sure that they have at least three years of financials,” he said. “If not, I’m going to have them go to the SBDC.”
The center helps businesses put together a business plan. It will do three years’ worth of projections, broken down the way the SBA wants to see it. It will calculate debt service coverage ratios.
“They’ll do all the stuff that meets the SBA lending requirements,” Watson said, “and the great thing about it is that it’s a free service. It won’t cost the business a dime.”
One of the biggest misconceptions he sees about loans is that they are expensive, which he blames on brokers.
“Where I’ve seen people get disappointed with SBA lending is when they go through a broker and they rip them off with their fees and what the loan costs to put together,” he said. ”It’s going take them three times longer and cost them three times as much to get the loan on the table. If I was advising anybody that wanted to get a business loan, I’d say to go to the bank first and let the bank determine whether they’re a candidate for the SBA.”
Even if they don’t qualify for an SBA loan through a regular bank, there are other options, said Shirie Hawkins, president of lending with Community Ventures.
Community Ventures can help businesses who have been turned down by their banks, either because the business is too new, or because the business or the owner has a credit issue, with microloans. Community Ventures also handles SBA 504 loans that are strictly for asset purchases, Hawkins said.
“For our SBA micro loans, it has to be a for-profit business. And the money can be used for equipment, business vehicles, inventory, supplies, leasehold improvements, marketing, working capital, those type of things,” she said. “But for the microloans, it’s for a maximum of $50,000.”
With those loans, Community Ventures likes to work with the borrower to make sure it is something that will set them up for success.
“A business may come in for $50,000 and have a 400 credit score, but then we at Community Ventures are going to work with you with our technical assistance advisors one-on-one,” Hawkins said. “We try not to tell you ‘No.’ It’s generally ‘Not right now.’
“You may not be able to qualify for a $50,000 loan at this time, but we may need to work with you in baby steps to get you a smaller loan so that you can work on your credit and get your business going so eventually you can go for a higher dollar amount.”
And whether it’s a microloan with Community Ventures or a large SBA loan with Community Trust, it’s important to talk to your banker as soon as you can to get the loan process started.
“Any time you’re interested in getting a business loan, I would suggest you look at that as soon as possible,” Hawkins said. “I wouldn’t wait until you’ve used all of your savings, or retirement, or anything like that.
“As soon as you’re interested in starting a business, you may want to have a conversation with your banker or with us here at Community Ventures about what it is that you need to have in order to get a business loan.”