I used a Small Business Administration loan to start Jordan CPA Services from the ground up, so I was surprised recently when someone told me that they couldn’t get an SBA loan because “they are only for businesses with three years of financials showing a profit each year.” So, I went to the bank that helped me get my SBA loan and learned some interesting things about these loans. Archie McDonald at Guaranty Bank has spent eight years helping businesses with SBA loans.
Let’s jump in with a little bit of background. The Small Business Administration has a loan program designed to help businesses get the funding they need. The SBA loan program works by partnering with local banks to guarantee part of the loan to make the loan more attractive to a bank as most SBA loans have collateral shortfalls.
Most banks offer SBA loans, but banks that do a lot of them, like Guaranty Bank, can get a special designation called the “Preferred Lending Partner,” or PLP. PLP lenders have delegated authority to process most SBA guaranteed loans without prior SBA review.
Myth #1: You have to have an existing business to get an SBA loan. In fact, it’s often easier to get funding before you start the business, so talk to your banker before starting your business. If you haven’t started business yet, the bank will rely on your projections, but if you’ve already started and are struggling (maybe because your business didn’t have enough cash to begin with) then you might find it’s harder to get a loan.
Myth #2: SBA loans are only good if you can’t get a conventional loan. Interest rates are higher with SBA loans. SBA charges a Guarantee Fee for loan, this fee is based on the loan amount, if your loan is under $150,000, there is no Guarantee Fee. But, the interest rate and fees are not the only things to consider with a loan. SBA loans allow a longer repayment length than conventional loans, meaning that while you will pay more in interest, your monthly payment will be lower with an SBA loan than a conventional loan and, in most cases, the additional cash flow can be critical.
The SBA is aware that addressing adequate working capital needs is critical in starting up a business. In most cases these requests are not eligible on a conventional basis, putting the business in a cash flow crunch from the beginning. The down payment on an SBA loan is also often less than a conventional loan, which can help you stretch your cash.
Myth #3: SBA loans are strictly about the business’s financial numbers. Actually, your experience within the industry and personal credit score can be significant factors, too. Since the SBA is a federal program, if you have delinquent debts to the government such as overdue student loans or back taxes, you will need to address those before getting an SBA loan. Your banker can be a great person to help you develop a plan to get SBA ready.
Myth #4: I need to be really profitable to justify buying new equipment. If you are getting an SBA loan to buy new equipment, your banker can look at projections of what this new equipment will do for you and consider those in its lending decision. A good explanation of how the new equipment will help your business can go a long way.
Myth #5: The application process for an SBA loan is really slow and a lot of work. This can be true if you work with someone who isn’t very familiar with SBA loans, but if you are using a PLP, it really isn’t true. I can tell you firsthand that my loan went through a lot faster and with less effort than I expected. Working with an experienced SBA lender allows for a faster turnaround time and reduces the amount of paperwork frustration for you as a borrower.
Pro tip: You will need a Data Universal Numbering System (DUNS) number to get an SBA loan, so apply for this early so it doesn’t hold things up. Go here to apply for free.