When Marcella Williams wanted to expand her fledgling commercial truck rental company in Las Vegas, her bank connected her with the U.S. Small Business Administration.
Williams, owner of CDL Focus, got an SBA loan from her bank for $60,000 in May 2015 to cover business expansion costs. By July 2016, she had paid it back.
Williams used the loan funds to purchase a trailer, pay for vehicle storage and make a deposit on a commercial vehicle, among other things.
“SBA loans are essential engines for growing small businesses," said Sal Mendoza, senior vice president at City National Bank, which plans to fund a growing number of SBA loans this year. “They are one of the most touted benefits the government offers for small businesses."
To understand how SBA loans might provide small business financing for your company, you need to know these five things.
1. The SBA Doesn't Fund Loans Directly
People often interpret the term “SBA loans" to mean that the government is directly lending to business owners. But that is not the case: Rather than making the loan, the SBA works with financial institutions to provide additional credit support. Certain SBA loans include a guarantee of up to 90 percent of the borrowed amount. While both the financial institution's and the SBA's underwriting standards still apply, this guarantee from the SBA reduces the bank's risk as a lender.
2. You May Qualify for an SBA Loan Even If You Don't Qualify for a Conventional Loan
Guidelines for SBA loans can be a little more flexible than for conventional business loans, Mendoza said. The eligibility and underwriting standards are established by the SBA on top of the financial institution's own underwriting standards.
Interest rates on SBA loans are competitive to conventional loans, he added.
3. There Are Various Types of SBA Loans, Each Tailored for Different Needs
Before applying for an SBA loan, determine your financial need. Is it for working capital? Managing cyclicality or seasonal needs? Expansion? Lenders will need to understand your purpose in seeking funds—and your purpose will help you both determine which SBA loan to seek.
The SBA's general small business loan guaranty program is known as the 7(a) Loan Program. Loans extended under this program are distinguished from a financial institution's conventional loans by the SBA guarantee. The maximum loan size is $5 million, with terms from seven to 25 years, and loan proceeds may be used for working capital, inventory, acquisitions, equipment and debt refinancing.
The SBA 504 Loan Program is specifically for commercial real estate purposes; the small business owner can use it to purchase an owner-occupied industrial or commercial building or fixed assets at below-market interest rates with as little as 10 percent down.
And the SBA Microloan Program is geared toward helping small businesses start up and expand. It provides loans up to $50,000; the average loan is about $13,000.
4. SBA Loan Documentation Requirements Are Similar to Those of Conventional Loans
When you apply for an SBA loan, you'll be required to provide the same types of documents needed for conventional loan applications. Those usually include three years of financial statements and business tax returns, as well as personal tax returns.
Remember, you'll need to provide a track record of business operations and a documented financial history.
In addition to meeting underwriting standards for an SBA loan, a small business must also meet size standards. Those limits restrict how large a business can be to be eligible for assistance from the SBA, and they vary by industry. You can find the size standards for your industry on the SBA website.
5. The Application and Approval Process Can be Lengthy— But Worth the Wait
For Williams, the most important attributes for securing an SBA loan were patience and organization. During the application process, she had a chance to review her expenses closely and make sure she was spending her company's money wisely.
"Going through the SBA loan process showed me that I had a lot to learn about business," Williams said. "The SBA process basically forced me to mature faster by documenting and providing the purpose for my expenses. Additionally, the loan gave me breathing room so I could keep going [and] helped me turn my small business into a revenue-generating business."
|All loans, lines of credit and other credit facilities offered by City National Bank are subject to credit approval and additional terms, conditions and eligibility requirements.|