GETTING AN SBA LOAN: THINGS YOU NEED TO KNOW
Getting a business loan is tough -- especially these days. But the Small Business Administration can still be
a great lending partner. 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 easier 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, 2010.
And now? In June, according to Reilly, lending dropped 74 percent. Of course, it's still possible to get an SBA loan
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's three things you need to know to have a chance at getting an SBA loan for your Laundromat.
First, make sure you learn and understand the terms used in lending. Second, make sure you can
document everything on your application. Third, make sure you know how to present yourself to a
1. KNOW THE LENDING 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 and the special purpose loan program are applicable to Laundromats. The express program is aimed at getting you a loan as quickly as possible. The special purpose loan programs are even more targeted -- designed to help a business that's been negatively affected by NAFTA, for example.
There is also 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. His specialty is getting SBA loans 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 set with business and personal financial statements, tax 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. That story, Reddish says, should give your lender a good feel about both your company and what your plan for your loan.
"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
3. PRESENT YOURSELF AS A SERIOUS BUSINESSMAN
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 might be comparing your performance against. If you fit the norms, your chances are enhanced. If not, your chances are reduced or eliminated."
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 Laundromat that's been around
since 1958, and you'd like to expand so you can service more customers -- you're probably in
luck. If you want to expand your business to add a tanning salon, 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