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SBA Loans to Finance Your Business


This article originally appeared on the website of Thomas H. Gray.Tom Gray is a member of the Chicago/Midwest chapter of the Turnaround Management Association (TMA), the only international non-profit association dedicated to corporate renewal and turnaround management.  To learn more about the TMA visit the Chicago/Midwest chapter blog

An SBA loan is not an alternative to a bank loan! The Small Business Administration (SBA) helps businesses get started and grow not by lending taxpayer funds directly, but by guaranteeing bank loans against loss. This is intended to make the bank more willing to lend to a small business with few assets and little history.

The SBA offers to guarantee up to 85% of the loaned amount in return for upfront charges (similar to a banks “points”) and a competitive interest rate, both paid by the borrower. The guarantee fees normally cover all the cost of SBA administration and loan losses, so that taxpayer money is not involved.

Banks like the guarantee because it reduces their risk, and because the bank’s requirement to hold funds in reserve does not apply to the guaranteed amount. This means the bank has more funds available to make other loans, which is how it makes money. However, offsetting these benefits are two negatives: the bank cannot charge points for an SBA loan, and the process of executing the SBA loan guarantee is considered a burden by some banks.

As a result, not all banks will process a loan to obtain the SBA guarantee. Active SBA lenders solve that complexity issue by having an expert on staff who manages the process. Small business owners seeking an SBA-guaranteed loan should apply to a bank familiar with SBA loans for two reasons: the bank itself does not need to be persuaded that the SBA loan process is manageable, and the bank’s familiarity with the process means that it will be executed more quickly than by other banks. Note: the bank will want all of the borrower’s banking business, not just the loan.

The top SBA lenders nationwide can be found on the SBA’s website at www.sba.gov. The top eleven in Illinois for 2011 are:

JP Morgan Chase
Ridgestone Bank
Associated Bank
US Bank
Charter One
Superior Financial
First American Bank
Wells Fargo Bank
Fifth Third Bank
Rockford Bank
First Colorado National
Other Illinois banks who are highly active in SBA loans include the Wintrust banks and Resource Bank.

While the SBA has its own types of loan guarantees and its own underwriting standards, the first step in getting an SBA-guaranteed loan is that the bank itself must be interested in lending to a particular borrower for a particular purpose. Remember that the bank itself is responsible for at least part of the loan risk, because the SBA will not guarantee the entire loan. This means that all the advice in Lending in a Community Bank Environment about getting a bank loan still applies, even if you are seeking an SBA loan.

Assuming the bank is interested in financing you and your business, and the bank agrees to your request to seek an SBA guarantee, the next step is to understand the SBA eligibility rules and types of SBA loans to see which fits you best. Note that the limits given here are subject to changing government rules.

Eligibility — Definition of Small Business:

–        Retail or Service: max $7M revenue

–        Manufacturing: up to 500 employees

–        Wholesale: up to 100 employees

–        Annual Profit: max of $5M

Eligibility — Use of Funds (Purpose):

–        Assets: lands and/or buildings; expand/convert existing facilities;     machinery/equipment

–        Working capital: supplies, materials, inventory, “long term working capital”

–        Short term asset-based line of credit

–        Debt refinancing under limited circumstances

For those who are eligible, the SBA’s main loan guarantee types and terms are presently:

7 (a)
SBA Express
Patriot Express*
Export Express
“Express loans” are the most popular these days. The attraction is that no SBA documentation is required and there is no waiting for SBA approval. Only the lending bank’s application is required.

The Prime Rate in late September is 3.25%. The spread (amount above the prime rate) varies by length of loan, type of collateral, and adjustable rate terms of the loan.

In addition, the SBA offers a 504 type loan guarantee of up to 40% of the project for Certified Development Companies. See the SBA’s website for details.

So what is the winning strategy for a speedy loan? Select an SBA-experienced bank, place all your banking business with them, fill out their application, convince them of the attractiveness of you and your business, and ask for an SBA Express loan. Compare its terms with the bank’s own terms if there were no SBA guarantee. Use SCORE for advice in the process. Good luck in your business! (To learn more about the SBA, visit www.sba.gov or call 312-353-4528.)

Tom Gray, a member of the Turnaround Management Association, helps owners save and grow their companies. He is a management consultant focused on small business and telecom, a Certified Turnaround Professional (CTP), a Certified Business Development Advisor, and a Certified SCORE Mentor. He can be reached at 630-512-0406 or tgray@tom-gray.com. Visit www.tom-gray.com to learn more about his services.