SBA Loans: What They Are and How to Qualify

The following post is by guest blogger Emily Haleck, from Bank of American Fork

There comes a time in most small business owners’ lives when they need to borrow money to grow the business. At these times, one option that should be considered is a U.S. Small Business Administration (SBA) loan. Here’s what small business owners need to know about SBA loans to determine if they are the right fit.

What is an SBA loan?

An SBA loan is a loan specially geared towards small business owners who may not qualify for a traditional commercial loan. SBA loans are partially guaranteed by the U.S. Small Business Administration, which partners with banks across the country to provide these types of loans that help Americans start, build and grow businesses.

What are the types of SBA loans?

There are two main types of SBA loans:

• 7(a) Term Loan: This is a bank or credit union loan that is partially guaranteed by the SBA. It can provide up to $5 million to fund equipment, real estate, inventory and working capital, and up to $350,000 in revolving lines of credit to fund ongoing operations.
• 504 Loan: This is a participation loan with a bank or credit union and the SBA that  is used to fund fixed assets, including large equipment and new facilities, with a cost of up to $12.5 million. Down payments range from 10 percent to 20 percent. Terms extend 20 years and interest rates are typically below market rates.

What are the benefits of an SBA loan?

• Less upfront cash – SBA loans require 10-20 percent down versus 25-35 percent for traditional loans.
• Competitive interest rates that are comparable to or lower than conventional commercial loans.
• Flexible repayment terms customized to your needs.
• Borrowers can sometimes avoid balloon payments that conventional loans may require.
• Higher-risk borrowers may be able to obtain financing.

Do I qualify for an SBA loan?

Businesses may qualify for SBA loans by meeting at least one of the four criteria: size, revenue, net worth or net income. Size and revenue guidelines vary based on industry type, as determined by North American Industry Classification System (NAICS) codes. If a company does not qualify under NAICS size and revenue guidelines, it may qualify with  a net worth less than $15 million or a 3-year average net income of $5 million or less.

While many banks are willing to take a little extra risk on government-backed SBA loans, borrowers must still meet the following qualifications, known as the 4 C’s of lending:

Cash flow

The debt coverage ratio (DCR) is used to measure cash flow and evaluate whether a business can afford its debt payments. DCR is determined by dividing net cash flow from operating income by debt. Typically, lenders require a DCR of 1.25 or higher.

Other ways lenders evaluate cash flow is by examining your company’s profit and loss statement or its statement of cash flows. In the P&L, earnings before interest, taxes, depreciation and amortization (EBITDA) is the key figure. In the statement of cash flows, the key figure is cash flow from operating activities. These evaluations consider all of your debt obligations and help a lender determine your ability to repay the debt.

Credit

As a small business owner, you are the business, so both your business and personal credit reports will be used to determine your ability to fulfill financial obligations. While SBA loans can overcome certain shortfalls in loan credit applications, good personal and business credit is a necessity. On your business credit report, lenders will look at information regarding classification (based on size and creditor payment history), outstanding liens and pending lawsuits.

In addition to checking your credit history, lenders will review your company’s financial statements for the past few years and compare your company’s various financial ratios with industry averages.

Collateral

Cash or other tangible assets, such as property, inventory or equipment, will be used as collateral for your SBA loan. An SBA loan can be as high as 90 percent of the collateral value.

Character

The first three C’s revolve around hard-and-fast numbers, but lenders also consider a non-financial factor when qualifying potential borrowers: character. This includes your business philosophy, past experience, business savvy, education and work ethic. If you are lacking in the other C’s, this is your opportunity to shine.

How do I apply for an SBA loan?

Look for a bank that is an SBA Preferred Lender, which may be able to approve your loan faster than  non-preferred lenders (days versus weeks). Request an SBA loan application, which includes sections for the company’s present and historical financial info, details on the business model, background on principals, IRS request for tax transcripts and a personal history form to verify legal residence and check for criminal background.

Emily Haleck is the public relations manager for Bank of American Fork, Utah’s largest community bank, where she is responsible for media relations, employee communications, copywriting and campaign measurement. Haleck received a bachelor’s degree in public relations from Brigham Young University and a master’s of business administration degree from the University of Utah. She is a member of the Public Relations Society of America.

Charitable Holiday Traditions & Project Teddy Bear

Michelle McCullough, Business Development Director/Fairy Godmother writes:

I don’t remember specifics of many Christmas mornings, but there’s one as a teenager that I remember vividly.  My brothers and I ran upstairs in anticipation of all the loot awaiting us in the living room and there were no new presents under the tree.  My mom said, “Get dressed.  We’re going out.”  We drove to the local “Soup Kitchen” and were immediately put to work serving breakfast to the homeless and less fortunate in our community.  After spending the morning seeing family after family who had so little, it was very easy to list all of my blessings.  When we arrived home and had our actual Christmas (Santa hid the presents in my mom’s room until we returned) I remember the feeling being very different.  Each present seemed like a luxury – WAY more than I needed.  Though I don’t remember a single Christmas gift I got that year, this memory was the best gift my mother could have given me.

That wasn’t the first time my mother taught us about the spirit of giving during the holidays.  As a kid, at the beginning of December, my mother got us together as a family and we talked about what we were going to GIVE this Christmas and not what we were going to GET.  We’d pick a family to do a service for or we’d do a “Sub for Santa” for a less fortunate family in our neighborhood.

This is a tradition that I treasure and have tried to instill in my young family.  Though our contributions may be meager, it’s a nice tradition to brighten someone else’s holiday.

Last year I heard about Project Teddy Bear from one of Startup Princess’ partners: Bank of American Fork.  I thought that would be fun thing to do with my then not-quite-2 year old.  We had three stuffed animals that he had received as gifts that were sitting in a box (with the tags still on) and had never been played with. And that was a start of our annual tradition with Project Teddy Bear.  I told him about little boys and girls who didn’t have very much and that they would love a new toy.  He helped me carry them in and set them down in the impressive pile and then looked at the pile and picked up a new one to take home.  I tried to explain that this wasn’t a trade and, luckily, it went over pretty well.  We said, “Bye, bye bears.” And went home.  It took all of about 20 minutes including driving time.

Project Teddy Bear is a community service project sponsored by Bank of American Fork. Customers, employees and community members donate teddy bears and other stuffed animals that are given to the Utah Valley Family Support & Treatment Center in Orem, the Salt Lake County Family Support Center (locations in Midvale, Taylorsville, West Valley City and Sugarhouse) and the House of Hope in Salt Lake City, Provo and Ogden. Last year, Bank of American Fork collected an all-time high of 7,463 stuffed animals and their goal for 2010 is 8,000.

Check out this cool time lapse video of last year’s donations Bank of American Fork Project Teddy Bear

I know I’m not alone in having chartible holiday traditions.  There are many families who at the beginning of every December help their children inventory toys and select 2 or 3 items to donate to Salvation Army, Goodwill or Deseret Industries.  This is also a great tradition of making way for new presents and also giving to those whose budgets may be tight.

I also know of other businesses that host fun projects during the holidays for employees, customers or community members like Sub for Santa.  Utah based, woman owned company, Stampin Up! decided to do away with sending holiday cards to their demonstrators and took the money and donated it to the Ronald McDonald House.

However you do it in your business or in your family, we’d love to hear about your ideas for charitable holiday traditions or hear about other company’s projects, like Project Teddy Bear that are spreading holiday cheer this December.

Michelle McCullough, Michelle has spent the last 11 years working in marketing and advertising. She’s worked in all aspects of the industry from production to creative and sales to management. On top of her full-time jobs, Michelle has cultivated her love for entrepreneurship by running a successful business, Doodads Promotional Products. She also has two kids ages 3 and 1. Michelle is also the Startup Princess Business Development Director.

Startup Princess and Bank of American Fork offer 10 Scholarships for Touchpoint

Touchpoint, the Startup Princess Annual Conference for Women Entrepreneurs with presenting sponsor, Bank of American Fork is pleased to offer 10 Scholarships this year for those in need. NOTE: Scholarships are for the event ONLY, no travel, lodging or food outside of the lunch provided at the conference.

Women who have strong business ideas and challenging financial circumstances will be considered and are encouraged to apply. Deadline for application is Sept 18th.

To apply, please email Kelly <at> startupprincess.com with 1 paragraph of why you’d like to attend and why you feel that you deserve a scholarship.  ”Scholarship Application” in the subject heading. Thank you.

Many thanks to Bank of American Fork for making these scholarships possible!

You’re Invited! Startup Princess Salt Lake City Chapter “Ask a Lawyer” – March 25, 2010

SLC Startup Princesses! Please note The Ask a Lawyer event next Thursday has changed locations and will be held at the Bank of American Fork in Riverton! Bring all your burning legal questions with you.

We’re excited to announce our next event in 2010 for the Startup Princess Salt Lake City, Utah Chapter! Please join us  Thursday, March 25th at 7pm at Bank of American Fork (2691 West 12600 South, Riverton), for an evening of inspiration, networking, and fun featuring local attorneys Len Carson and Gregory Steed.  Len and Greg will be presenting “Ask A Lawyer” and answering your small business legal questions!  Learn more about Len and Gregory and their practices at www.carsonlaw.net and www.rbmn.com.

The cost of the event is $15 for pre-paid attendees (by March 24th) or $20 at the door.  First time guests are free!  To pre-pay please use the Paypal button below. Thank you!

Special Thanks to 2010 SLC Chapter Sponsor:

You’re Invited! Startup Princess UT County “Dress Your Body Type and Clothing Swap” – April 8, 2010

We’re thrilled to announce our first event in 2010 for the Startup Princess Utah County Chapter! Please join us  Thursday, April 8th from 7pm-9pm at the Tahitian Noni (333 West River Park Drive, Provo, Utah), for an evening of inspiration, networking, and fun for Dress Your Body Type and Clothing Swap!  This exciting event will feature clothing designer and personal stylist Mindy Batt of Fabulous Living.  With more than 10 years in the fashion industry, Mindy will teach Startup Princesses how to dress their body and lead an exciting clothing swap!  For more information on  Fabulous Living, visit them online at www.fabulousliving.net.

To participate in the Clothing Swap, please bring clean items of clothing to exchange for another fabulous clothing find.  If you bring three pieces, you’re entitled to swap for three pieces.  Any leftover clothing will be donated to charity.

The cost of the event is $15 for pre-paid attendees (by April 7th) or $20 at the door.  First time guests are free!  To pre-pay please use the Paypal button below. Thank you!

Special Thanks to our Utah County Chapter Sponsor:

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Your Personal Trainer for Financing Fitness

Guest writer, Lynette Hilgenberg, Vice President and Advertising Manager of Bank of American Fork shares her expertise on getting a loan: Every year hundreds of thousands of people turn to a personal trainer to help them get in shape. Some of them are already in good shape, some not so much. It is the trainer’s job regardless of the person’s condition to provide motivation and support in order to help clients improve their exercise techniques. A personal trainer is familiar with the way the body works. In fact, most fitness workers need to be certified. When a person hires a trainer she knows the trainer will do everything she can to make sure her body is in tip top shape. Similar things could be said of loan officers.

A loan officer will help guide you through the process of applying for a loan and when you are ready he or she will stand before the loan committee and present your case. The loan officer who is familiar with the way lending works will be more than willing to help you get things in order. There are many factors that banks must consider in approving a loan. These range from recent changes in lending regulations and market conditions, to the character of the loan applicant and the condition of the application itself and the financials included. Let your loan officer be your personal financing trainer.

The first and most important thing your loan officer will look at is your character. It’s important that you help him get to know you. One way that you can present yourself in a positive manner is to be prepared.

So what do you need to show the officer? She’ll want to see your capacity to repay the loan. The lender will look at the cash flow from your business and the probability of successfully paying the loan back on time. You’ll want to have very good accounting records that go back at least a few years. Have your financials supervised by an accountant if possible. Can you show that your currents assets outweigh your current liabilities? A current ratio of assets to liabilities of 1.5 to 1 is good, but it can depend on the industry you work in. Can you show that your business has a history of profitability? Are your records reliable and consistent?

To give the loan officer a complete picture of your financial condition be sure to bring a balance sheet, an income statement (less than a year old), statement of cash flows, statement of net worth or retained earnings and footnotes.

The loan officer will want to know how much of your money you have invested in the business, an indication of how much you have at risk if the business fails. She wants to know what’s at stake for you.  The lender also needs to know that you can provide additional forms of security if you’re unable to repay the loan. Be prepared to tell the officer what you plan to do with the money. Is it for equipment, inventory, or working capital? In addition the lender will be taking the economic temperature of your industry and the industries that could affect your business.

After looking over all of your information the lender will then do some research. She will confirm balances with banks and creditors, trace transactions, and count inventories. She will make sure your financial statements fairly represent your financial condition. If everything is in order and she thinks you are ready she will make your case to the loan committee.

When everything is said and done it, whether your loan is approved or not, do not take the result as a personal validation or rejection. It is important to remember that there are many factors that a bank’s loan committee must consider that go beyond the application. Economic and market conditions are important factors. And State and Federal regulators play a strong role in managing the parameters of a bank’s loan portfolio—how much the bank can lend in each area, such as commercial or real estate lending. All of these additional factors combined with the fact that business financing will continue to be an important element of your business strategy throughout the years support the need for developing a long term relationship with a community banker. Your personal financial fitness trainer can be a valuable partner for the long-term success and strength of your business.

Lynette Hilgenberg has had 29 years of experience in the banking industry and is the  current Vice President and Advertising Manager at Bank of American Fork in Provo, Utah. When Lynette isn’t working she likes to spend time with her family, sew, read and go horseback riding.

Thank you Lynette!

Utah! Teddy Bears Wanted for At-Risk Kids * Donate at Bank of American Fork

Here’s a great opportunity to spread some Christmas cheer with the Bank of American Fork Annual Charity Event: Project Teddy Bear. Over 6000 bears were donated last year to help at-risk children at two different facilities in Utah. This year Bank of American Fork hopes to exceed that number. (50,000 Bears are needed to meet the demand!) The drive goes now through December 16th at all Bank of American Fork locations.