Acquainting Veterans With SBA’s Lending Options
Understanding the options is the first step in obtaining the funding needed for business growth.
Flexible financing options are important for new and existing franchisees. Given the challenges of financing a start-up or a rapidly growing business, many times a conventional commercial loan isn’t a viable solution for business owners. That’s when owners can consider a U.S. Small Business Administration program. SBA loan programs offer lenders alternative loan solutions to fit franchise owners’ unique financing needs.
In 1953, the SBA was created as an independent agency of the federal government. Its mission is to aid, counsel, assist and protect the interests of small-business concerns, preserve competitive enterprise and strengthen the nation’s economy.
SBA has two main loan programs: Section 7(a) Loan Guaranty and Section 504 Certified Development. Understanding the options available is the first step in moving toward obtaining the funding needed to focus on business growth.
Section 7(a) Loan Guaranty Program
The 7(a) Loan Guaranty Program provides the broad financing needs of franchisees including start-ups and existing small businesses. Within appropriate guidelines, proceeds for 7(a) loans can be used for real estate purchase, refinance and construction, business expansion, equipment purchase, business acquisition and partner buyout.
The program offers businesses up to 100 percent financing (SBA lenders look mostly for between 10 percent to 25 percent equity), longer amortizations and no balloon payments. Because the 7(a) loan is based on the aspects of the business, not the owner, there are clearly defined aspects of eligibility. For example, the business must operate for profit, fit within SBA size eligibility standards and have reasonable equity invested. The loan must also have a sound business purpose as defined by SBA guidelines.
This program allows for loans up to $5 million; terms can be set for commercial real estate (up to 25 years), equipment (up to 10 years) and working capital (from seven to 10 years). The rates are negotiable, but are subject to SBA maximums.
There is also the 7(a) Express product, which has a maximum loan amount of $350,000.
Section 504 Loan Program
The 504 Loan Program provides fixed-asset financing to franchisees for the purchase, construction and renovations of owner-occupied real estate, and for the purchase of machinery and equipment. This program structurally distributes the loan among three parties: the business owner, a conventional lender and the Certified Development Company, or Privately Held Agencies. These loans can provide financing for up to 90 percent of project cost with only 10 percent equity from the borrower.
To be eligible for a 504 Loan, the borrower must meet specific criteria, including being organized for profit, having tangible net worth of less than $15 million and having average net income of less than $5 million (after taxes preceding two years and meeting job creation criteria). While the program cannot be used for working capital or inventory, it enables lower down payments and the additional injections are cumulative.
The maximum loan amount (second mortgage) is $5 million and the maximum term is 20 years. Interest rates are pegged to an increment above the current market rate for five- and 10-year Treasury issues and the fees are normally approximately 3 percent of the debenture.
Finding a Lender That is Right for You
One point that cannot be over-emphasized when looking for an SBA loan: borrowers should look for a lender with experience and knowledge in both SBA lending and franchise lending to help them through the process.
The agency has delegated lending authority to SBA Preferred Lenders (commonly referred to as PLP banks). An experienced lending officer, especially one from a PLP Bank, will fully understand the SBA lending process and explain the nuances from application to closing.
It’s also important that first-time SBA borrowers understand the added value of going with an SBA loan versus a conventional loan, while also having a general understanding of the complex nature of the agency’s loan programs.
SBA loans are intrinsically more complex than home mortgage or standard commercial loans, and the lending process is dynamic. It is not uncommon for a borrower to be surprised by the longer turnaround time and the strong commitment required to pull together all of the documentation for the application process. Choosing an SBA Preferred Lender with lending experience will streamline the process and help guide your journey.
How Do You Get Started?
Each SBA loan program has eligibility criteria. The documentation involved will be outlined for you at the onset of the process by your lending officer, but there are a few items you can develop to get ahead of the process.
- Prepare a business plan. The plan should include a project outline with proposed costs and details of costs already paid, with documentation.
- Provide projections. These should be included by month for year one, including ramp-up and the breakeven point.
- Establish collateral identification. Identify all available collateral for secondary loan repayment sources.
- Create a demographic analysis. Identify the characteristics within the population for which the business is designed. This should include basic information about your industry and market research with an overview of how you expect the general economy to affect your business.
- Establish management structure detail. Provide an organizational chart outlining specifics of the job functions of everyone expected to operate within your company. Include the percentage structure of each owner with profile and qualifications.
Remember that these loans were developed for businesses with special requirements. To make SBA’s lending programs work for your business, it’s crucial to become knowledgeable about every aspect of the process.
Jonathan Smith is head of SBA National Franchise Lending at TD Bank, N.A. Find him at fransocial.franchise.org.