SBA loans offer important benefits for today’s economic environment | Viewpoint

National Small Business Month, held each May, celebrates the contributions that small businesses make to the local and national economy. Those contributions include creating jobs, offering products and services that often are purchased by local customers, buying goods and services from other local companies, supporting nonprofit organizations, sponsoring events and otherwise enhancing a community’s quality of life.

The essential role that small businesses play is reflected in people’s steady interest in starting or acquiring a small business, as well as in trends we’re seeing across the region. For example, there have been more loan applications for acquisitions of existing small businesses as owners activate succession or retirement plans. This also creates opportunities for a new generation of ownership. At the same time, there’s growing interest among people who recently retired in becoming small business owners as a second career.

There has also been an uptick in the number of loans sought for purposes of social entrepreneurship — projects such as refurbishing and repurposing existing buildings to help revitalize a neighborhood or starting a business to bring products and services that otherwise wouldn’t be available in a community.

The hospitality field represents another growing area of interest as people look to start or buy a restaurant, hotel, or similar business based on the resurgence of travel, dining out, and recreation.

Further, loans to finance current small businesses are on the rise as owners pursue growth by adding new products or services, buying new equipment, opening new locations or keeping up with increased customer demand.

Numerous types of loans exist for people interested in starting, purchasing, or expanding a small business in partnership with a financial institution. Small-business owners can typically get access to capital plus many other financial products including small-business credit cards, merchant processing products to accept credit card payments, and cash management by working with a financial institution,

In 2023, a particularly valuable financing alternative for business owners to consider is a loan guaranteed by the Small Business Administration (SBA). Loans through the SBA program include a business line of credit, term loans, or loans for a specific purpose such as funding start-up costs, purchasing or renovating equipment or vehicles, or buying commercial real estate. SBA loans can be approved for up to $5 million.

SBA loans offer a variety of features and benefits that are particularly helpful to small-business owners in this uncertain economic environment. Concerns about the labor market, inflation, interest rates, and other factors that could present challenges to small businesses continue to persist. So, it follows that business owners would seek to minimize risk and maximize flexibility in every aspect of their operations, especially when looking at options for a new loan.

Tailored to a customer’s unique situation and needs, an SBA loan through a qualified preferred lender provides longer terms and lower down payments than conventional financing. The SBA program allows for maximum terms of ten years compared to five to seven years with conventional loans. If the loan covers a commercial real estate purchase, the maximum term goes up to 25 years versus 15 to 20 years with traditional financing.

Based on the transaction type, most SBA loans would require as little as a 10% down payment, and in some cases even less. Conventional financing often requires between 20-35% down payments. The SBA program encourages borrowers to hold onto their additional liquidity as support to aid their business going forward.

SBA loans also include more flexible structures than other loans. Conventional loans often include loan covenants and may require a borrower to meet certain performance requirements or restrict owners from taking money out of the business. SBA loans forbid covenants, enabling small-business owners to manage their business as they see fit. If a small business owner chooses to distribute money out of the business at any time, they have the flexibility to do that with an SBA loan.

The SBA program’s flexibility also extends to collateral requirements by reducing the impact to a borrower of not having collateral coverage. While conventional loans require 100% collateral coverage, SBA loans can be acceptable with effectively 0% collateral coverage. To further mitigate the lack of collateral coverage, the SBA program allows the ability to finance intangible assets such as goodwill that often aren’t accepted as collateral.

SBA loans also mitigate risks for businesses operating in industries that may be considered too risky for conventional financing. In addition, a single SBA loan can cover an unlimited number of transaction types that would otherwise require separate loans for each.

The steps a business should take to help the financing process go smoothly when seeking an SBA loan are similar to those of obtaining a conventional loan. These include:

• Building your personal credit score to demonstrate your level of commitment to your business
• Providing financial statements, tax returns, and projections with your loan application to give a full picture of your business
• Checking with your bank about what they require as part of the loan process, which may include a personal guarantee, collateral, insurance documents, and accounts payable information
• Proving ownership through financial and legal documents
• Developing a business plan to show your bank how you plan to use the money and give them an idea of how your repayment terms might look.

For relatively new companies, your loan request may also require an SBA enhancement. SBA loans also require borrowers to provide all available collateral. However, if there isn’t enough to cover the loan — which is often the case — the SBA program can help offset the required collateral.

Keep in mind that all SBA lenders have different terms and conditions, just like with other types of loans. Each bank offers unique interest rates, minimum credit score and cash flow requirements, and other qualifying factors.

If you’re ready to start or expand a small business, the SBA loan program could be the right choice. For resources and information, visit the Loans page at sba.gov.

Dina Kempski is Regional Senior Vice President of Business Banking at Northwest Bank.