Small business owners may be surprised to learn that SBA loans are not just ideal finance options for startup companies. The Small Business Administration wants startup and seasoned entrepreneurs alike to know that financing is available for a multitude of needs and that it can be obtained quickly compared to other sources of financing. Mr. Matt Millett, Vice President SBA Business Development at Community Bank in Southern California, discusses the different types of SBA loan programs that are available to business owners. He’ll also discuss the advantages of SBA loans over other types of financing.
The SBA does not loan the money. The money is lent by your banks or lenders out there. The SBA provides the guarantee.
- Mathew Millett
Jeff: There seems to be the idea that SBA loans are for start-ups, for small businesses, folks just starting out. But is this just kind of a myth or is there some truth to that?
Matt: It is kind of a myth. The SBA has a very broad definition of what they consider to be a small business. If you look at how they define it, a company with 500 employees can still qualify. The side standards that the SBA really puts on that is dealt with and say, as long as you have a net income of at least five million or less in the last two years on average you should qualify for an SBA loan and a tangible net worth of less than $15 million. Obviously from that definition it's going to encapsulate most of the businesses out there. You got to be a pretty large business to not qualify for an SBA loan. I really think it is a little bit of a myth out there that "I have to only be a small company to qualify. Maybe I only need to be a company in distress to get an SBA loan." That's really not the case. We do them for all types of businesses, anywhere from half a million in revenue to 20, 25 million in revenue. It's quite a broad definition of what the SBA constitutes as a small business.
Jeff: Why would I consider an SBA loan as opposed to some other source of financing that I could obtain in my local area, or from across the country for that matter?
Matt: The main point of SBA is really to provide credit to businesses that may not be able to get access to that type of loan. Number one SBA loan is really a great vehicle for those businesses that might not be able to go for conventional financing. A lot of the benefits of SBA loans come down to the terms of the loan. Ten year terms are pretty common on non real estate transactions, whereas on the conventional side you're typically going to see a term of three to five years. From a cash flow standpoint the company has a great advantage of going SBA and from a real estate standpoint is the advantage really there is capital retention. If I could get into a property with putting 10 percent down on my loan versus a conventional loan might be 25 percent to 30 percent down maybe. I'm going to go the rout of retaining my capital and keeping it for my business. Those are a lot of the advantages that SBA loan is bringing to the table as opposed to other financing scenarios. They’re really trying to look at three different types of lending solutions I guess if you will out there. There's the conventional route, there's the SBA route, and then there's the third route which I would call the alternative blending route, and that could be your hard money financing, high interest rate, low returns type of thing. SBA kind of sits right there in the middle. It's not the lender of last resort, and that is another common myth that SBA typically gets plugged with. SBA, those are only for the weaker businesses, well, that’s not necessarily the case at all. There are a little bit stricter guidelines with conventional loans that may push a business' qualifications out of the conventional realm and into the SBA realm. But really, the program is there to be a benefit to the businesses and to provide access where they otherwise may not have access to that lending opportunity.
Number one SBA loan is really a great vehicle for those businesses that might not be able to go for conventional financing.
Jeff: And to clarify, the SBA itself does not lend the money, is that correct?
Matt: No. That's correct. The SBA does not loan the money. The money is lent by your banks or lenders out there. The SBA provides the guarantee. So for example on an SBA 7(a) loan the SBA will guarantee 75 percent of that loan. There are some cases where they may guarantee 90 percent if the business is involved in exporting. But mainly 75 percent of that loan is going to be guaranteed by the SBA and really it's there to reduce the risk for the banks. Whenever a bank has less risk on a deal, they're able to get ... Maybe it's more creative on the underwriting, maybe they're able to mitigate certain issues that they wouldn't otherwise be able to mitigate had it been a conventional loan. That 75 percent guarantee that's put in place by the SBA for the banks really allows them to get more aggressive, reduce their risk, and again, lend to businesses that maybe are in the start-up phase. Maybe they’ve have some rocky sales trends over the last few years but still profitable. The banks are still going to want to see cash flow and the SBA puts regulations on the banks to make sure that they're still underwriting these loans properly. We don't want another 2008 here where the banks are underwriting bad loans or anything like that. So we're still held to a standard of underwriting that we've got to adhere to, and collateral that we've got to take. Generally that SBA guarantee is in place for a reason and allows us to mitigate risks where we might otherwise not be able to.
Jeff: Matt Millett is Vice President, SBA Business Development at Community Bank with 16 offices in the greater Los Angeles area. And everything that we're talking about Matt today on this segment of Deal Talk really applies to businesses all over the country and those markets that are serviced by the Small Business Administration which is pretty much throughout all 50 states. So if you're listening in Florida today or New York City, or you're listening in Vermont, or Kansas, it doesn't matter where you're at. You can probably consult a bank in your local area, in your neighborhood, or certainly somewhere in your county there that would be able to help you with Small Business Administration loan financing, and answer your questions there. So I just want to go ahead and make that absolutely clear. Matt, let me ask you a question. Those people who visit you, those business owners who come into your office and talk to you about SBA loans, typically what are they using their money for? What are those loans being used for in growing their business? Is it to finance equipment, leases or purchases of real estate? Talk to us about that.
Matt: Yeah Jeff, I really look at the delineator between two types of uses. You either have your real estate uses or non real estate type of transactions. The real estate portion is pretty straight forward. If you're buying a building or if you've been leasing for a while and now you have the opportunity to purchase from the landlord. You come in and do an SBA loan, and like I said before 10 percent down is the minimum requirement. That loan product is pretty straight forward. It was a purchase owner occupied real estate. The caveat there is it needs to be owner occupied and SBA defines that as at least 51 percent of the building you need to occupy. You can't go out and you can’t buy an investment property or you're not going to occupy it, that really is not the purpose for SBA but as long as you occupy at least a majority of the building you can have a tenant in there to have some rental income, the SBA is okay with that.
You can't go out and you can’t buy an investment property or you're not going to occupy it, that really is not the purpose for SBA but as long as you occupy at least a majority of the building you can have a tenant in there to have some rental income
Jeff: Other uses for the money that people are coming in to expand their businesses and so forth, just the typical types of things that people are looking to finance.
Matt: Oh yeah, the SBA 7(a) loan is one of the most broad loan types out there. It could be anything from purchasing inventory, it could be purchasing equipment, financing a business acquisition obviously, working capital, partner buy-outs, we've done them all. So really, you have a wide range of uses for that product which is why it's such a popular program. And as I said before that the non real estate users of that 7(a) loan, typically you're going to have a turn of 10 years on it. And like I said, anywhere from purchasing a business, to working capital, to inventory financing, it's a pretty dynamic loan product.
Jeff: What other types of loans are available, other types of loan programs that are offered by the SBA that you can tell us about?
Matt: The SBA has some line of credit programs called an express line of credit. Not every SBA lender do them, a lot of them do. The way they function is they act as a traditional line of credit or the first two years, and then after that they're amortized over the remaining five, and that basically just amortizes out principal and interest. The 7(a) loan and the 504, the main products for SBA, they're the most widely used, the SBA 7(a) loan being the most widely used. But they do have some other products out there if you're an exporter and you're doing some specific export financing, they have some programs out there for you. My recommendation would be to check with your local SBA lender, your bank first and see if they do SBA loans, and see what kind of programs they offer, because not all of lot of them are created equal. Some of them like to do certain products and others not. So I would check with your local bank first and see what kind of products they carry and see if that fits your requirement.
My recommendation would be to check with your local SBA lender, your bank first and see if they do SBA loans, and see what kind of programs they offer, because not all of lot of them are created equal.
Jeff: Matt Millett, are there any restrictions as to what SBA funds, or when I say SBA funds what the SBA loan program will finance. Is there something that they absolutely will not provide money for?
Matt: Sure. There are qualification restrictions. The SBA puts out a pretty thick packet each year on how to determine eligibility. They call it their standard operation procedures each year. It could be a specific industry that the SBA is not favorable with. If the business is tied to speculation for example, if it’s the type of business where they make their money on speculative investments or things like that then the SBA doesn't want to get involved in that sort of thing. Because it really just doesn't want to put the risk out there on speculative markets. It could be an eligibility issue as far as the borrower. There's a litany of things that could cause a business to not qualify. But again, that would be one of those things I would check with your SBA lender, go through the scenario of your business, what industry you're in. SBA lenders, the reason that the banks have their own departments generally is because it's such a specific niche that you want to be with an expert that knows the product. The last thing you want to do is go down the road with a lender that maybe doesn't do a whole lot of SBA loans and then find out later that you didn't qualify for some reason you probably should've been told upfront that caused it to not work. My best advice on that is check with your lendor, go through the scenarios on what industry you're in, because there's a litany of things that could cause that business to not be eligible for SBA financing.
Jeff: Good advice Matt, and we're going to take a short break. When we come back we're going to talk about some of the benefits associated with SBA loans, and also a little bit about the application process itself. And I know that Matt has got a lot of experience to kind of pass along with regard to those items and more. I'm Jeff Allen and I'll be back with Matt Millett, Vice President of SBA Business Development at Community Bank when Deal Talk gets back in 60 seconds.
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Jeff: Welcome back to Deal Talk, I'm Jeff Allen joined by Matt Millett, an expert in SBA loan programs as VP of SBA Business Development for Community Bank with locations throughout Southern California. If you're just joining us we're talking all about SBA loan programs, the types of companies that really need to look into that and really it's wide open to small businesses. The majority probably in fact are small business that could really look into and be helped by the SBA loan program. Matt, what I'd like to go back into now to further our discussion, talking about some of the benefits that are specific to SBA loans, and really maybe some reasons that some business owners should consider in fact in applying for an SBA loan right to help them expand their business.
Matt: Sure. That's a great question, because so often I get questions from borrowers about, "Why should I go this route over the conventional route?" And when it boils down to it is really the terms of that SBA loan are going to be more in the advantage of the borrower. When you're talking cash flow the SBA program offers longer amortization terms which lead to lower payments. Generally, pre-payment penalties can be less stringent on the SBA's 7(a) loan program side. Capital retention is a big factor when you're purchasing commercial real estate and the SBA program offers a 10 percent down as opposed to a 25 percent or 30 percent down that may be common on a conventional loan. Really for these small businesses where cash is king, they need to hold on to their cash and they kind of live and die by the cash flow of the business. And so the longer amortization terms on the loans are a great benefit for these businesses that might be cash-strapped if they're having to finance their projects on their own. And maybe they don't have a ton of access to other outside finance facilities from other banks as far as a line of credit or something like that.
So like I said before, they kind of live and die by the cash flow of the business and the SBA loans offer a great program to extend those terms, boost the cash flow of the business. And like I said, the flexibility of the program really allows for a laundry list of programs of things that you can use that loan for. I kind of touched on it before, business acquisitions, partner buy-outs, debt refinance. So often business owners see on their balance sheet shorter term loans, or high interest rate loans that they've got on their balance sheets that they weren't even aware that they could refinance. In some cases I've gone in and reduced their payments by half on some of this outstanding debt that they had.
If you’ve got a cash flow concern and you've got some outstanding debt out there, it may not be a bad idea to just talk with an SBA banker, open your books and say, "What can you do for me?" Because the application process, and I'm sure you'll touch on that later, but it's really not as onerous as rumors out there that I've heard. There are a few additional applications that the SBA requires but by and large again, it comes down to your SBA banker and how organized they are in doing SBA loans, but it shouldn't be a headache process.
So like I said before, they kind of live and die by the cash flow of the business and the SBA loans offer a great program to extend those terms, boost the cash flow of the business.
Jeff: Great segue. This is a perfect segue Matt Millett because this is where we will in fact now talk about that application process. I know a lot of folks, they feel, "It's agonizing to go in and have to sit down, or sit there at your office and fill out this paperwork and all of these forms and do this. But when you sit down and you do that, you got to get started at some point. Tell us a little bit about it, the process, how it's different from applying for other financing, and how closely you work with your clients in preparing that application?
Matt: In applying for an SBA loan on the face is really not that much different than applying for a conventional loan at the bank. Because the loan still comes from the bank the bank is still going to require your typical financial items from the borrower. For example, last three years business tax returns, last three years personal tax returns, most recent interim financial statements, a business debt schedule. There's those common, typical financial items that the borrower is still going to need to have available to their banker so that they can assess the strengths of the business financially. As I mentioned before there are some specific SBA forms that they do require that are unique to SBA. I wouldn't say that they're very onerous forms. The borrower sat down, I'm sure they could complete them in the span of 20-30 minutes. Really, they don't go into too much detail but you do have to sit down and provide some additional information that you probably normally wouldn't on a conventional loan.
One of the things that we kind of pride ourselves on is we stay very closely to the borrower and from soup to nuts, begin to end, we’re there to guide them through the process. Because there are going questions especially for those folks that haven't done an SBA loan before. Maybe they've heard some horror stories out there about I heard that it takes nine months to get an SBA loan. That's not the case. And again, I'm sure we'll get into the timing of the loans later on. But as far as the application process it's pretty streamlined. And especially if you're with an SBA lender that does a large majority of these loans they should be organized enough that they have these forms top of hand.
Jeff: So Matt, I've applied for my SBA loan, everything looks good, and it looks like I've got a pretty shot here at being approved. How soon will I receive my funds if everything goes smoothly?
Matt: Generally, if I was to put an average time frame on the SBA loans, it could be anywhere from ... I might say 45 days give or take. It certainly can be shorter if there's an escrow time frame that needs to be met on a purchase. It could take longer if there's a multiple appraisal that need to be conducted. Maybe there's some follow-up issues with an environmental report that caused concern. I'd say on average if everything goes smoothly I don't see why it should take longer than 60 days from the start of that loan process. But like I said, there are extenuating circumstances. Sometimes there's just those loans where Murphy's Law kicks in and anything that can go wrong happens to go wrong.
And especially if you're with an SBA lender that does a large majority of these loans they should be organized enough that they have these forms top of hand.
Jeff: That would be me. Murphy's Law, I live by it and I follow that law to the letter. Anyway, but I appreciate that. So 45 to 60 days which really is not unreasonable when you think about that. Now, what I'd like to do is kind of turn it around and we're going to just highlight some of the negative here. What are some reasons that a business might not qualify for an SBA loan that you could share that you've kind of witnessed yourself?
Matt: Sure. It could be anywhere from a cash flow issue, maybe the revenues of the business haven't lent themselves to sufficient profitability over the last year. I do get questions, "How long do you need to see cash flow? Do you need to see it in all of the three year period?" And not necessarily that the case where we need to see cash flow in all three periods. But we do want to see it in the last tax year. We do want to see at least a strong trend for the business. It could be a cash flow issue. It could be a revenue trend issue. It could be an industry issue. On the personal side, it could be credit issues from the borrower themselves. I get asked a lot about I've got a foreclosure, I've got a short sale, how does the bank look at that? I was involved in a bankruptcy. My best answer on those is it's kind of a case by case type of thing. Yes, it does make it a little bit tougher. It's perceived as a negative type of thing. But just in and that of itself does not necessarily preclude it from SBA financing. The lenders are providing their own funds. They do underwrite to their standards and different banks may have different standards. And they may have a different appetite that another bank doesn’t have.
But by and large, generally the banks want to get a sense of what happened if there was a short sale or a foreclosure. Be prepared to have an explanation on that, what were the circumstance around it, what was the amount of the loss that the lender took. These are typical follow-up questions that I would have if a borrower came to me and said, "Hey, I've had this issue." I would always recommend borrowers provide that information upfront and to the banker. I had a case where I talked to a borrower for probably about an hour. And at the tail end of the conversation it came up and he said, "By the way I've had this, this, and this." And it kind of changed the dynamic of the call. I probably should have asked about it earlier on but honestly tends to always be the best policy when it comes to credit issues from the borrower side personally. I would advise them to have an explanation on that. Be prepared to talk about it. There's collateral issues that could arise on the transaction.
One of the things that the SBA puts on the banks is they basically come to the bank and say look, “If we're going to give you a 75 percent guarantee on this loan we need you to be as diligent as you can in collateralizing this loan.” The SBA basically says to us as the bank, you need to go out and you need to get as much as collateral as you can to secure this loan. And if we don't reach full collateral that's okay. It doesn't mean the deal will be declined. But we need to assess what our collateral position is going to be and how to secure the loan. And if we're not fully collateralized then ... We look at the deal as a whole. We don't look anything in a vacuum. And so I think the point being when banks tend to underwrite loans they'll acknowledge the strengths, they'll acknowledge the weaknesses, and they'll try to use the strengths to mitigate the weaknesses where they can.
And so I think as long as you're not having to explain away too many negative issues you should be in a good position. But like I said with that SBA guarantee, the point of the SBA program is there to loosen up the credit standards a little bit, to provide access to funding where it normally would not be available to some of these businesses that may be just starting out, or they may have lost a large customer and now their revenue trends may be suffering a little bit. So the SBA loan is a great program to come in and there are going to be issues to mitigate on any transaction. I've never seen a loan that was completely 100 percent pristine that didn't have something here or there to go against it. But by and large we try to look at those negatives and mitigate them with strengths of the deal.
Jeff: And we'll take that message as a positive. And on that note, Matt, we're going to have to wrap up, but not before giving you the opportunity to tell us how we can reach you if our listeners have any questions for you, maybe they live in Southern California or maybe they don't. How can they get in touch with you over there at Community Bank?
Matt: My cellphone number is probably the best number to reach me. That number is 310-560-9661. We are headquartered at Pasadena, California. We are a business bank and we do conventional financing as well as deposits and all sorts of things. So SBA is not just our only knack. We're prolific in all banking.
But by and large, generally the banks want to get a sense of what happened if there was a short sale or a foreclosure. Be prepared to have an explanation on that, what were the circumstance around it, what was the amount of the loss that the lender took.