By Bruce Hurta
The SBA 7(a) government-guaranteed loan program is more popular than ever during these times of economic uncertainty. A constantly changing business environment has caused conventional bank lenders to exercise much more caution in granting loans to small businesses in America. Businesses can qualify for SBA loans with lower down payments, longer repayment terms, and easier qualifying criteria than are required for conventional bank loan applications. The SBA loan program, once considered the loan product of last resort, has become a much more popular vehicle for funding small business credit needs and for fueling the job growth so desperately needed in our economy at this time.
What You Should Know About the Approval Process
The SBA loan application process is probably one of the most consistent models for approving and declining small business applications, but SBA lenders are constantly challenged to make their credit approval processes most effective. Statistics produced by the U.S. Small Business Administration have proven that a primary reason for a business failure, and a loan default, is inadequate management experience. For that reason, it is of prime importance for the participating SBA lender to document the SBA loan file with evidence of business management expertise.
Industry Experience Matters
The ideal applicant is a business owner who has already produced consistent profits in the business applying for the loan, or in a previous related industry. The least qualified applicant is a person who has never owned or managed a business before. For all the applicants who demonstrate a range of experience between these two extremes, it is incumbent upon the lender to document their investigation of the applicant’s educational background and practical experience to successfully manage the business borrowing the SBA loan funds. The body of proof may include one or more of the following ingredients which sway the loan decision in a positive manner:
- If the primary owner/manager of the company does not have a track record of successful business management experience, a personal guarantor may be added to the loan, because his or her credentials display characteristics which are conducive to an effective advisory role in the business.
- The loan application should focus upon the strengths of the primary owner/manager for the borrowing entity which are relevant to the successful management of the borrowing entity
- The borrower should provide a business plan and financial projections which are so thoroughly researched and documented that the lender is swayed toward a positive assessment of their management abilities.
- A new business owner may structure a short term management contract with the seller to assure a smooth ownership transition.
- The borrower may affiliate with a franchise to strengthen the management model for the business. In some cases, a proven franchise system prefers less experienced franchisees, because they are more trainable for the franchise management model. SBA lenders research the successes of a franchisor, and they may accept less experienced borrowers for franchise businesses if the franchise has proven itself.
Communication is Key
Some industries require more specific industry experience to be successful than others. Once again, this is a judgment call for the lender, and not all lenders will reach the same conclusion. As you can see from the examples above, the SBA loan approval process provides the participating lenders with abundant flexibility to assess and approve SBA loan applications. The best small business borrower will communicate effectively with the SBA lender. They will keep providing additional information, until the lender has a well-documented file to justify the SBA loan approval. Borrowers who work with proven SBA lenders should be prepared to listen carefully for all possibilities in structuring a successful loan application.
SBA 7(a) loans may be used for any legitimate small business expenditure, including but not limited to the following activities:
- Business real estate purchase
- Business real estate new construction, remodeling, or expansion
- Business acquisition
- Partner buyout
- Business equipment acquisition
- Refinancing and debt consolidation
- Business expansion and working capital
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For more information about SBA real estate loans for small businesses, please contact:
Bruce Hurta is Business Lending Manager with Members Choice Credit Union. You can reach him at 281-754-1112 or by email [email protected] For other educational articles on SBA loans, see Bruce Hurta’s blog at http://brucehurta.wordpress.com/.
