Small Business Week is April 30 – May 6, 2023 which is a great time to reflect on the critical role SBA loans play in supporting small business. Providing funding where it otherwise might not be available is the central mission of the agency. SBA lenders across the country utilize this program allowing small businesses to achieve their dreams. Today’s economy includes businesses from online retailers to manufacturing, professional services to food preparation, and many in between. These various industries look quite different when it comes to providing financing. So, how can SBA really make a difference in supporting small business? We’ll share a few ways below.
Many businesses, especially those in the service industry, lack the collateral necessary to fully secure a loan. Lenders often then either cannot provide the financing needed or will provide it on a shorter term in order to burn off unsecured debt quickly. The problem arises when the small business does not have the necessary cash flow to service the debt in the shorter term. An SBA loan allows for a collateral shortfall to exist and gives the lender a guaranty on a percentage of the debt. This could be anywhere from 50% to 90% depending upon the program.
As noted above, lenders will have certain maximum terms allowed in their credit policy based upon the loan type. SBA loans can be up to 25 years when the majority purpose is for real estate. They can be up to 10 years for all other needs, including working capital. Where a conventional loan term might be 5 years and the business cannot cash flow the debt, the business may be able to cash flow it at 10 years with an SBA loan. Again, the lender is getting a guaranty on a percentage of the loan, allowing them to have more comfort in making a positive credit decision.
Start-up businesses and changes of ownership are two other scenarios where a lender can use an SBA loan to reduce risk. Both of these do require a minimum equity injection of 10% (per current SOP). Additionally, financial projections can be used to qualify the opportunity.
Lenders also have the opportunity to consider other reasons for utilizing an SBA guaranty. Some of these will include the historical debt service of the company, higher balance sheet leverage, etc. A lender will need to carefully document these reasons with supporting data.
In summary, an SBA loan can work well for both the borrower and the lender. A borrower gains access to credit that might not be otherwise available under reasonable terms. The lender gains a mechanism to make a loan that it might otherwise decline.
At Community First Bank of Indiana, we’ve been a Preferred Lender with the SBA since our founding in 2003. You can feel confident working with our team as we share our 30+ years of industry experience supporting small business. If you’d like to inquire about our services, please call us at (765) 236-0600.
