Tuesday, November 28, 2023

Four scenarios where an SBA loan may be perfect for your small business

By Jeff Magginnis

Most small business owners want to focus their time and energy on growing their company, but it takes a team of advisors working together to really make a business successful. One of those includes a bank and applying for a loan can be intimidating and difficult. The Small Business Administration (SBA) was created in 1953 to assist banks making loans in certain situations where they might not otherwise. While the SBA cannot overcome a lack of repayment ability or a poor credit history, it can help many companies obtain the capital they need to be successful. Here are four scenarios that, if applicable to your business, could indicate an SBA loan is a viable option.

Lack of collateral

The most common scenario is lack of collateral to fully secure the loan. With so many service businesses these days and banks discounting the value of the collateral they obtain, many companies simply do not have enough collateral to meet the bank’s policy. A bank can use the SBA to obtain a guaranty on the loan to cover the collateral shortfall. For example, a consulting company may need capital to fulfill a contract but has no significant assets as they rely on human capital. By backing the loan with an SBA guaranty, the bank is able to make the loan. 

Start-ups and ownership changes 

Another scenario for a bank to use the SBA guaranty is for a start-up company or one that is changing ownership, such as a business acquisition. Typically, these scenarios are considered high-risk loans by the bank due to lack of history of cash flow or new ownership has not proven its ability to run the company yet. For example, here at First Financial Bank we were able to help an owner who recently purchased an overhead door company secure financing through an SBA loan. 

High-risk nature

Banks also avoid certain types of industries due to their high-risk nature. For example, restaurants are considered high-risk due to competition and low profit margins. This scenario is pretty common. In fact, we recently helped a gentleman purchase a franchised restaurant through an SBA product. The SBA helped cover three main issues: the type of industry, the change of ownership and the lack of collateral support. 

Term flexibility

An SBA loan often grants longer repayment terms than a bank could offer in many cases. Perhaps a client wants to complete leasehold improvements on a rented space for their business. Most banks will do a max of five years for the loan, but an SBA loan for this purpose could go up to 10 years. The difference in cash flow could be a game changer. 

Banks use SBA loans in many ways to support small business and often have preferred lender status with the SBA to make the process more efficient.

To learn if an SBA loan makes sense for your business in Indiana or Kentucky, please contact vice president, SBA specialist Mark Schoettmer at mark.schoettmer@bankatfirst.com or 317-237-1511. In  Ohio, please contact vice president, SBA specialist Angelica Johnson at angelica.johnson@bankatfirst.com or 513-389-3315.

Jeff Magginnis is the SBA sales manager for First Financial Bank. He has more than 19 years of experience advising small businesses on the use of SBA loans to achieve their goals.

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