Small business lending is one of the most important things banks can do to help small businesses grow. In 1953, the Small Business Administration was established as an independent agency of the federal government to aid, counsel, assist, and protect the interests of small business concerns, preserve free competitive enterprise, and maintain and strengthen the overall economy of our nation. The SBA has evolved over the last 70 years.
Most business owners and the general public knew almost nothing about them until the pandemic hit the United States. During 2020, the SBA stepped in to help save every business in the United States from going out of business by offering PPP and EDIL loans to every qualified business.
The SBA has actually been helping throughout the years by offering 7(a), 504, and Emergency Disasters loans. The mission of the Small Business Administration is “to maintain and strengthen the nation’s economy by enabling the establishment and viability of small businesses and by assisting in the economic recovery of communities after disasters.” The agency’s activities have been summarized as the “3 Cs” of capital, contracts, and counseling.
The SBA usually offers its programs through banks. The SBA gives a government guarantee to banks for doing loans that usually are not bankable. Lenders with their own in-house SBA lending departments are PLP lenders, meaning that a bank or lender is a Preferred Lending Partner that can underwrite, approve, and fund the loans in-house and does not have to send them out to the SBA to be underwritten. That usually speeds up the closing time of a loan.
Banks that do not have in-house SBA departments have to send their loan packages to a 3rd party processor that will help package the loan to be sent out to the SBA processing in Sacramento, CA for General Processing (GP). This process takes longer for borrowers to get approved since the loan could get kicked back with items that are missing or needed. Ideally, the best way is to work with a bank or lender with a PLP department.
The most common loan that is funded in Eastern Pa is the SBA 7(a) program. The program is good for loans up to $5,000,000. A business owner can use this program to purchase businesses and owner-occupied real estate purchases. The program is not rate-driven but driven for leverage for business owners who may be short on down payments or who do not fit the bank programs. When using the SBA 7(a), you can finance the purchase of real estate, business acquisition, build-out of space, remodel, purchase of new equipment, franchises, liquor licenses, working capital, and closing costs. The business owner only has to come to the table with only 10% of the overall total project, which is considered the capital injection. The other 90% can be financed over 25 years with real estate and 10 years without real estate.
In reality, if a business owner is purchasing real estate for their business, they will need to have 20% down, plus closing costs and the balance of 80% can be financed over 20-25 years. If they are looking to buy a business, no bank will finance a business that essentially has no assets to cover itself in case of a loss. The SBA programs are sometimes the only way to fund real estate and a business purchased or a buyout of a partner that may be retiring. The SBA program is not for the fainthearted but for business owners who understand how to get through the paperwork requirements, questions, and items needed. If you are a sloppy business owner, you will likely not qualify or make it through the process. If you plan on doing an SBA loan for your business, work with a bank, lender, or commercial loan brokerage firm with years of SBA lending experience. That will make your life easier and help your business get off to a good start.
Jeff Barber is the President and Owner of Lehigh Financial Group LLC in Allentown Pa. Jeff’s firm has been helping real estate and business owners arrange financing for over 24 years throughout the Lehigh Valley and surrounding area.
