In considering a loan application, the SBA will scrutinize your experience, cash flow, capital, and collateral.
Last February, when Scott and Lori Herbert sought $150,000 to develop and market a new line of recycled paints, they didn't waste time pitching their plan to a long list of bankers. Instead, they went right back to the bank that had helped them launch their start-up, H2O Coatings, the previous spring. Within weeks the new deal was done: the Manchaug, Mass., company (which also does business as the Green Paint Co.) got the money it wanted through a seven-year loan that's 90% guaranteed by the Small Business Administration.
Many capital-hungry business owners complain that the bureaucracy that greets applications for SBA-guaranteed loans -- technically known as 7(a) loans -- is mind-boggling. But as the Herberts have found, experienced SBA lenders can eliminate many of the worst headaches. As of this past spring, there were 695 SBA-certified lenders nationwide, each of which can get decisions from the agency in three business days; 167 of them have preferred-lender status, meaning they can approve their own applications for guaranteed loans, without SBA involvement. "Lenders all over the place are jumping into this market,' says Tony Wilkinson, executive director of the National Association of Government Guaranteed Lenders, in Stillwater, Okla.
Meanwhile, the volume of SBA-guaranteed loans has shot way up, too. (See "Who Gets SBA Loans?," [Article link].) Yet just because the federal government takes most of the bank's risk, borrowers can't assume that the loans -- which can be structured for up to 7 years for working capital and up to 25 years for real estate -- are any easier to get. "As with any debt, you need to demonstrate that your deal makes sense,' says Donald McGowan, president of Flagship Bank, in Worcester, Mass., which made the loan to H2O Coatings. Aspiring borrowers should expect scrutiny in the following areas:
Experience. Few lenders will consider a manager who has a scant track record in running a business or who lacks at least some related experience. H2O's Herberts, for example, had been successful with another paint company, as had a new manager they brought in as a partner. "It gave us a lot of comfort,' says Flagship vice-president Mike Hanewich.
Cash flow. Lenders will evaluate how the debt will be serviced. In addition to their business plan and projections, the Herberts impressed their bankers with letters of intent from several big customers who said they'd buy H2O's products.
Capital. SBA lenders typically require owners to put up equity of at least 30% of the proposed loan amount. "We need it for the same reason that banks don't finance 100% of a house," explains Hanewich. "Owners have to share the risk.'
Collateral. When cash flow can't cover the loan payments, lenders need a backup source. For SBA loans, borrowers are required to provide personal guarantees, second mortgages on real estate, and rights to any other assets.
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To find the most active SBA lenders in your area, ask your local SBA district office for the latest list of certified and preferred lenders. Or call the SBA's special toll-free information number, 800-827-5722.