Small businesses often win and grow with adaptability and agility that larger businesses can’t match. When it comes to financing, owners struggle to find loans with the flexibility and risk tolerance that matches their business. While 70 percent of small business owners feel they can access credit easily, most owners are using credit cards or personal funds to support their businesses. Only 1 in 5 use some sort of business loan or line of credit and only 5 percent take advantage of U.S. Small Business Administration (SBA) loans.1
Conventional credit can be difficult to come by for small businesses. Large down payments and restrictive use requirements often rule out traditional financing for initiatives like partner buyouts, financing goodwill or the purchase of real estate to maximize equity and decrease rent. In these situations, SBA lending excels in promoting small business growth and health.
Understanding SBA lending
Many business owners assume SBA loans are administered by the federal government, but they are actually administered and processed by local, regional and national commercial banks. With SBA loans, the federal government guarantees the funding, enabling lenders to accept additional risks for financing that might not otherwise qualify for conventional loans. With SBA loans, business owners accept attractive financing to grow their businesses and fulfill the federal government’s policy goal of generating overall economic and employment growth.
SBA loans are designed to share or support risk, giving business owners access to market opportunities for improvement, growth and restructuring. Conventional financing typically requires collateral and down payments of 20 percent or higher, specifies a single use and limits goodwill financing when restructuring ownership or funding acquisitions. SBA loans provide flexibility across the board with loans for multiple purposes such as real estate, working capital or equipment and favorable down payment and collateral terms.
Covering a broad range of financing needs
Funding business partner buyouts
Business owner confidence and a strong economy have pushed the sales of small businesses to record levels over the past few years.2 The aging population means that older owners look to retirement through outright sale or partner buyout, creating opportunities for business acquisition and buyouts. The SBA 7(a) loan is uniquely suited to finance buyout of partners who are no longer interested in the business or who want to retire. While conventional financing may be hard to obtain, the SBA 7(a) loan is an effective strategic opportunity because:
- SBA 7(a) loans allow the acquiring partner to put down just 10 percent of the deal value and finance the remaining 90 percent.
Goodwill is an intangible asset not often recognized as collateral or a leverageable asset by traditional financing. The SBA recognizes that for many small businesses, goodwill is not only a real asset, but also a financeable tool that can guarantee the long-term sustainability of the business.
- Unlike conventional loans, the SBA 7(a) program could be used to fund goodwill in the business.
- The exiting partner can stay on for a maximum of one year to help the business transition.
- Flexible minimums on required business valuation.
Moving from renter to owner
Rental expense can be a significant cost factor for many businesses. Many owners can’t see beyond rising real estate prices to realize the benefits that owning, rather than renting, facilities may offer. The SBA 504 loan program provides owners a unique opportunity to affordably purchase the facilities they need with the following flexibilities:
Capital plans that include two uses for capital – one for real estate and the other for equipment, acquisitions, etc. – can sometimes combine the 504 program with the 7(a) program to access greater amounts of capital.
- The business must occupy a minimum of 51 percent of the purchased property space.
- The remaining property space can be rented or leased, providing owners with an additional income stream.
- Only 10 percent down payment is required.
- Loan terms can extend up to twenty-five years.
Innovation comes to business owners via many avenues, but most require some sort of investment in areas such as human capital, product development, supporting technologies or manufacturing enhancements. The financial benefits of innovation often take time to pay off with solid profit and revenue returns, so for many business owners, acquisition of a complementary or competitive business can prove to be a faster road to financial growth. An SBA 7(a) loan offers attractive terms for the capital infusion necessary to move quickly to close on a purchase that will enhance the growth potential of your business:
- You can typically finance “Goodwill” from any patented process or other innovative intangibles held by the acquisition company that directly applies to your business.
- A down payment of only 10 percent of the acquisition price is required.
- The seller is not required to continue with the business but can only remain as a consultant for up to one year.
Teamwork and preparation
Like all financing, it pays to prepare before seeking an SBA loan. Preparation starts with creating the financial documents needed to submit an application. SBA lending expertise varies by bank and can have an impact on your business’s ability to access SBA funding. Yet, from the right bank, today’s SBA loan can be an easily accessible, effective capital source for your business.
Documentation will vary depending upon the use of the funds. The following provides a thumbnail sketch of documents necessary for SBA different loan scenarios:
- A business plan or business summary with financial projections.
- Identify the capital needs and how your business will benefit from a capital infusion for ownership restructuring, business acquisition, equipment purchases or working capital.
- Project the impact of the financing cost on the business financials.
- Match the timeline of the need to the ability of the business to sustain the financing.
- Obtain a business valuation (needed for a business partner buyout).
- Outline thoughts about implementation – any residual expenses, investments, skill required, etc.
- A business plan or business summary with financial projections.
- Present a clear understanding of business goals, cost drivers and how the investment in real estate will affect the bottom line.
- Quantify the required capital investment.
- Develop financial projections illustrating how the cost for accessing capital would pay back in a reasonable number of months.
- Identify incremental, ancillary expenses associated with implementation – moving costs, renovation expenses to bring new property to code, continued rental expense during renovation, changes to property taxes, property insurance, etc.
Outline changes over time in the cost and impact of financing.