As we discussed in our previous article on growing your business, growth usually requires capital to support an increase in inventory and receivables. Businesses that are planning to grow often turn to outside growth financing for this necessary capital, including small business loans from their bank.
Commercial banks offer a wide range of different types of small business loans. One of the most beneficial is Small Business Administration or SBA loans. Through this program, the SBA guarantees a majority of the loan proceeds, which helps reduce the bank’s loan risk. This enables the bank to make larger loans to businesses with longer loan terms than it can through its normal credit underwriting process.
Benefits of SBA Loans
SBA loans can be particularly attractive to growing businesses. SBA loans offer lower down payments and longer repayment terms than conventional bank loans. Spending less on debt repayment frees up business cash flow for other operational expenses.
Key benefits of SBA loans for small businesses include the following:
- Higher loan advance rates - This enables growing businesses to preserve their liquidity in order to fund more growth.
- Longer loan terms - SBA loans typically feature longer amortization periods - between seven and 25 years, compared to up to five to 10 years on most conventional loans.
- Lower equity injection requirements - Less owner equity is required for asset purchases like equipment and real estate. Owner-occupied real estate loans are available with as little as 10 percent down.
- More flexibility - With some SBA loan products, additional working capital can be advanced on a line of credit, including working capital advances based on inventory. This could otherwise be limited due to accounts receivable concentrations, the presence of government receivables or other factors.
Preparing to Apply for an SBA Loan
Keep in mind that an SBA guarantee doesn’t mean that a bank is going to give a business loan a rubber-stamp approval. SBA loans are underwritten just like conventional loans - the biggest difference is that the SBA assumes some of the loan’s risk. This makes thorough preparation just as important when applying for an SBA loan as it is when applying for a conventional loan.
Consider these three suggestions for boosting your chances of obtaining an SBA loan:
1. Determine whether your business qualifies for an SBA loan. SBA loans are only available to companies that meet the SBA’s definition of a small business. To qualify, your business must have less than $15 million in tangible net worth, and your annual after-tax net income for each of the past two years must be less than $5 million. Also, some types of businesses are not eligible for SBA loans, including nonprofits, passive organizations (like developers and landlords) and real estate investment firms.
2. Become familiar with the different types of SBA loans. There are several different types of SBA loans programs, each designed to help borrowers accomplish specific objectives. Learning about them in advance will help as you prepare to meet with your banker to discuss an SBA loan. Three of the most popular SBA loan programs are:
- SBA CDC/504 program - These loans provide long-term, fixed- and variable-rate financing mostly for business expansions and upgrades. Loan proceeds can be used to acquire or build owner-occupied commercial real estate or buy business equipment.
- SBA 7(a) program - These loans can be used for a wide range of general business purposes, including boosting working capital, buying inventory and equipment, and acquiring another business. Loan maturities range from seven years for working capital and inventory to 25 years for commercial real estate.
- SBA CAPLine program - This is a special type of SBA 7(a) loan that’s designed to help meet short-term and cyclical working capital needs. CAPLine loans are available as a revolving line of credit up to $5 million.
3. Find a bank that specializes in SBA lending. Not all banks are the same when it comes to SBA lending — far from it. So do some research to determine which banks in your area specialize in SBA loans. You will benefit from a higher level of expertise and a more streamlined loan application and approval process when you work with a bank that is experienced in SBA lending.
In particular, you should work with a bank that is designated as an SBA Preferred Lender. Such banks follow a streamlined method for processing SBA loans, which usually results in faster turnaround of SBA loan applications and a smoother loan review and approval process.
City National Bank is an SBA Preferred Lender. As a result, our experienced SBA lending professionals can streamline the SBA lending process and expertly handle all the SBA loan details so everything runs smoothly.