For over a decade, I have been teaching growth financing to business owners across the country. Yet I am still shocked at how little is known about the Small Business Administration. Whether it's the SBA's tried-and-true loan programs or one-time changes implemented in Covid relief measures, any small- to medium-size business needs to be aware of these government programs that actually work.
First of all, don't give up if one lender says you can't get an SBA loan. There are more than 2,200 SBA lenders nationwide who all have different loan appetites. Second, make sure you work with an SBA-preferred lender. The process will be far less painful and take about half the time. And finally, don't automatically discount SBA loans as being too small. You'd be surprised at how much you can actually get.
The most popular of these programs is the 7(a), which provides working capital to grow and expand your business. In addition to increasing inventory and hiring more staff, this working capital can also be used to acquire a business, buy out a partner, or even refinance your debt. These loans can go up to $5 million with 10-year repayment periods and interest rates around 6 percent.
Among other SBA programs is the 504, which businesses can use to buy a building, acquire land, renovate space, or purchase equipment. The 504 loans are structured so that the SBA provides 40 percent of a project's total costs. The borrower kicks in 10 percent and the lender accounts for the remainder. These loans are usually for 20 to 25 years at variable rates.
These programs are outstanding in "normal" times and are even better now because of the pandemic-related sweeteners.
For example, thanks to the Cares Act, there are no guarantee fees on new loans through September 30. Those fees normally run at 2.5 percent of the guaranteed loan amount. Plus, there are three months of payment forgiveness of up to $9,000 per month. All payments the SBA makes on your behalf are non-taxable. The catch is, you can't wait until September 28 to make a decision. Starting the process within the next few weeks is imperative if you want to secure those benefits.
The SBA has also increased its guarantee to lenders to 90 percent. Why does this matter to you? Higher guarantees encourage banks to make riskier loans than they otherwise would. In other words, your odds of getting approved have gone up.
These sweeteners are no small thing. Consider these examples:
Refinance Your Debt
A client had accumulated $350,000 in debt between her business credit cards, term debt, and credit line. Her monthly debt service was around $9,000.
By refinancing her debt into a 10-year SBA 7(a) loan at 6 percent interest, she took advantage of there being no government guarantee fees and three months of forgiven payments. Aside from the immediate cash flow relief, her payments starting in month four are just $3,886.
Buy Your Dream Business
Or maybe you're looking to buy a business. For our purposes, let's say the purchase price is $1 million.
Via the SBA, you are required to contribute a minimum of $100,000 (10 percent). Thanks to the relief act, the borrower would pay no upfront guarantee fees. The first three months of payments would be $991.85, followed by $9,991.85 for the balance of the 10-year loan, assuming 6 percent interest.
Compare that with a monthly payment of $16,984, which is what you'd pay with a conventional five-year bank loan at a seemingly attractive 5 percent interest rate.
As always, you need to prepare your balance sheets in advance to take advantage of these fleeting opportunities. If you don't have a handle on your fiscal condition, any lender will be leery of working with you.
The age-old adage that "you snooze, you lose" is never more appropriate than today. No matter how much the pandemic hurt you, opportunities are now presenting themselves and they need to be taken advantage of. The reality is, we need to get out of survival mode and start working to make our businesses more resilient in the future.