Chasing a Small Business Administration loan these days is a little like going to a carnival and expecting to win one of those giant stuffed animals. It might happen, but the odds are probably against you. As Christine Reilly, the president of small business lending for CIT, points out, about a year ago, the federal government tinkered with the formula for getting an SBA loan, and for a brief shining time, even during the Great Recession, SBA loans were semi-easy to come by.
In what was called "the 90 percent guarantee," the SBA guaranteed 90 cents on the dollar for each loan, instead of 75 cents, and waived the borrower's fee, "which could be as much as 3 percent," Reilly says. Meaning banks and business owners both had added incentive. And so SBA lending jumped -- until the the 90 percent guarantee ended in May. And now? In June, according to Reilly, lending dropped 74 percent.
Of course, it's still possible to get an SBA loan -- Reilly is the first to admit it -- and it can be a great way to infuse your company with cash. But how can you navigate the red tape and make sure all the effort pays off? Here are five things you need to know.
1. Know the lingo.If you want to sound like you know what you're talking about when you start the SBA loan dialogue, here's a crash course. The SBA's flagship loan -- the one that has the most flexibility and has been the most popular -- is the 7(a) Loan Program. It's aimed at startups and existing small businesses, and within the 7(a) program are four types of loans: the express program, the export loan program, the rural lender advantage program and the special purpose loan program. Each is pretty self-explanatory:
- The express program is aimed at getting you a loan as quickly as possible.
- The export loan program is for businesses that export their products.
- The rural lender advantage program is for businesses located in small communities far from metropolitan areas
- The special purpose loan programs are even more targeted -- designed to help a business that's been negatively affected by NAFTA, for example.
There are also microloan programs and disaster assistance loan programs and the 8(a) program, which is aimed at "socially disadvantaged individuals," according to one of the SBA's FAQ guides. Odds are, you'll be applying for the 7(a) program or perhaps an SBA 504 loan, which you'll want if you're using the loan for real estate or infrastructure, such as buying land or expanding your building.
2. Document everything.You can't get a loan simply by asking nicely or scrawling something down on a napkin. So what should your paperwork look like? Consider following the advice of John Martinka, vice president of "Partner" On-Call Network, a Kirkland, Wash.-based company that helps entrepreneurs sell their businesses. His specialty is getting SBA loans so he can acquire companies, and he has some smart advice for winning the hearts and minds of any lender: "Prepare a book on the company and yourself," he suggests. "My clients use a 10-tab divider set with business and personal financial statements, tax returns, accounts receivable and accounts payable aging, a short business plan, reference letters and whatever else is appropriate. Bankers see a lot of potential loans. A complete package gives them everything they need to make an intelligent decision. It also allows others who are part of the decision process, and who didn't meet the borrower, to get a complete understanding and see some professionalism. Don't just throw a couple years of tax returns on the desk and expect a loan."
Reilly seconds that, noting that she sees a lot of "shoebox accounting," and business owners like that don't get very far in the process before being told to go to the end of the line.
And in that documentation, "tell a good story," suggests John Reddish, president of Advent Management International, a strategy and growth consulting company based in Drexel Hill, Pa. (Reddish is also a longtime member of a loan committee for a local development agency that is a large producer of SBA loans.). That story, Reddish says, should give your lender a good feel about both your company and what you plan on using your loan for.
3. Got collateral?"Three or four years ago, when credit was flowing and there was lots of money, some lenders were making loans with not a lot of the borrower's skin in the game," Reilly says. That isn't the case any longer. "In fact, the SBA requires that the lender put up all available collateral, which may include the equity in your home, against the loan, and when some people realize that, they don't want to do it." Of course, your business may have plenty of assets to offer up as a replacement for not paying back the loan, but realize that you're going to have to put down something, and that could be your mortgage or even your spouse's assets. "That's the norm," Reddish says.
4. Do your homework. Seriously.Obviously, you want to get a sense of what your lender wants to see in a business that they plan on giving money to. So if you really want to be clever and proactive, Reddish offers this tip: "If you can get a copy of your industry's Annual Statement Studies Report from the Risk Management Association or from a bank member of the association and compare your projections, you increase your chances of getting the loan because you'll know what the industry norm is -- the norm that your bank or your local development agency might be comparing your performance against. Statement studies typically present hundreds of companies' aggregated financial information, categorized by NAICS [North American Industry Classification System] codes, that show balance sheet, income statement, key financial ratio and other information. If you fit the norms, your chances are enhanced. If not, your chances are reduced or eliminated."
5. You are not a risk taker.Yes, risk is in your blood. You've always felt that your ability to turn improbable ideas into profits is one of your most admirable qualities. You liken yourself to a sword swallower, a tightrope walker, Evil Knievel of the business world -- OK, you get the point. Fine, brag about your penchant for risk to your friends or family. You have every right to be proud of your improbable accomplishments. But resist that when talking to a lender. If you've got a solid business and can make a good case for an SBA loan, the last thing you need right now is to give your lender the idea that giving you money is any riskier than it already is. Lenders want to see that they're lending money to a solid pillar of society, not some fly-by-the-seat-of-his-pants entrepreneur. So if you have a family-owned car wash that's been around since 1938, and you'd like to expand so you can service more cars -- you're probably in luck. If you want to expand your car wash business to add an ice skating rink, then, well, good luck with that. Not that we want to discourage risk-taking, but just know that traditional lenders hate risk. "Stick to what you know," Reilly advises. "This isn't the best environment to go way outside your core business."
The original version of this article appeared on AOL Small Business on 7/28/10.