Loans from the Small Business Administration enable business owners to have more money to inject into their businesses. That’s because the SBA requires less money as a down payment.
SBA loans can be easy to obtain, said a lender who’s spent decades helping small businesses obtain financing.
While one local SBA lender reports his SBA loans are flat this year, another reports a 50-percent gain in loans from the first quarter last year.
Inquiries about Small Business Association loans are flat, according to a banker with Wells Fargo, the bank with more SBA loans in Colorado than any other lender.
JP Morgan Chase Bank’s SBA loans are significantly ahead of last year, said a specialist in SBA lending there.
The SBA offers many different types of loans; the primary business loans are the 504 and the 7(a). The 504 loans tend to be for commercial real estate, commercial construction or heavy equipment, and the 7(a) loans tend to be for working capital.
Wells Fargo has more SBA loans and lends more money through the SBA than any other lender, and “that’s something we’re very proud of,” said Mike Matthews, business banking president for Colorado. “We have been the leader in Colorado and the country in loan volume.”
SBA 7(a) loans have variable down payments, he said. They’re more like a traditional loan with 15 to 20 percent down. In a 7(a) loan, the bank makes the loan, but the SBA guarantees it.
“It has to be underwritten by the Small Business Administration,” but because the bank is a preferred lender and has its own division that underwrites, “we don’t have to send it to the SBA,” Matthews said.
SBA loans are preferred over regular commercial loans because they allow the bank to be more aggressive on the length of time the loan is amortized over, Matthews said.
In Colorado, Wells Fargo made $84.1 million in SBA loans last year. This year the bank’s goal is $100 million, Matthews said. The bank markets to current customers and potential clients, and because it is a certified lender, the bank has more loan products to offer, he said.
Wells Fargo spokesperson Cristie Drumm listed some highlights from a Gallup poll:
• Small business optimism is at a positive 47, the highest it has been in six years, in the latest Wells Fargo/Gallup Small Business Index.
• Capital spending continues to be more positive. More small business owners expect to increase the amount of money allocated for capital spending (28 percent). Slightly fewer — 23 percent — reported they expect to decrease the money for capital spending.
• When business owners were asked to identify the most important challenge they faced when they opened their business, the top challenge was securing accounts and customers. Two percent reported long hours would be their largest challenge.
The most rewarding aspect of being a business owner identified by respondents was the independence of being your own boss (42 percent). The Gallup poll was conducted in April, Drumm said.
Chase makes more SBA loans nationally than any other bank in the country, said spokesperson Mary Jane Rogers.
Lending has increased, said Garrett Gibbons, business area manager for the bank.
“As businesses are having more success, they’re looking to borrow more money,” Gibbons said.
The first quarter this year, the bank processed $5 million in SBA loans, he said, up by 50 percent during the same time frame last year.
“I would expect we’d stay at that pace for the next two quarters,” Gibbons said.
Getting an SBA loan requires a three-party interaction — the lender, the SBA and the client. The process is very similar to getting a loan conventionally, said Robin Roberts, president of Pikes Peak National Bank, which typically makes 504 loans.
Roberts spoke specifically about those loans.
“You’ve got to qualify. Your down payment is lower, and there are two loans instead of one,” Roberts said.
Typically, a client will come in able to make a 10 percent down payment, said Roberts. Pikes Peak makes 504 loans, which typically revolve around commercial real estate.
In addition to the 10 percent down, the lender will provide 50 percent, and the SBA will loan the balance, or 40 percent of the loan, Roberts said.
A business loan is different than a regular mortgage or car loan in that with a business loan, the client must provide annual income statements and other requirements of the loan. For commercial loans, banks are required to monitor the loans on an annual basis
“Making your payments is one part of making your agreement,” Roberts said. “There are a lot of different covenants. It’s really important for people to read and understand those covenants.”
Benefits of an SBA loan
One of many benefits of an SBA loan, Roberts said, is the low interest rate. The SBA loan is a fixed loan for 20 years. Currently, the rates are fairly low, around 5 percent, she said.
“We all know interest rates are going to go up,” Roberts said. “To have an SBA loan fixed for 5 percent at 20 years is outstanding.
“The SBA is really beneficial to people who want to purchase property.”
Another difference between a conventional loan and an SBA loan is that typically there is a pre-payment penalty.
“They’re selling the loans to investors and investors are expecting a certain rate of return,” Roberts said.
Also, SBA loans have different costs up front, but typically the fixed low-interest rate makes up for any packaging fees.
In Colorado Springs for the past eight months, the Colorado Business Bank is a certified SBA lender.
“We have managed to already identify some SBA opportunities,” said Tim Stack, branch president.
Stack added the SBA has “significantly” changed the offerings. For example, in the past, a client may have had an idea meriting an SBA loan, but he couldn’t apply “because they personally had a very good net worth,” Stack said. “They were too wealthy to qualify for an SBA loan.”
That income requirement has been eliminated, he said.
The SBA and Colorado Business Bank have helped a Colorado Springs medical provider open a second location in Fountain. Also, the bank helped a startup in Manitou Springs, he said.
Colorado Business Bank, with its 13 locations statewide, has historically had “very good participation” with the SBA, Stack said, adding that the Colorado Springs market is one that will benefit from that relationship.
“We are fortunate Congress continues to fund it,” Stack said.
Tony LeVeque’s focus was on SBA lending while working at Wells Fargo for more than a decade. With the same task, he moved to Central Bank and Trust as executive vice president and senior business development officer.
Pikes Peak National Bank refers customers to LeVeque, Roberts said. A preferred lender, Central Bank and Trust is “the only local bank that has an entire team dedicated to SBA lending,” LeVeque said. “We approve, process and close every SBA loan locally.”
Last year, the bank processed more than $10 million in SBA 7(a) loans.
Being an SBA preferred lender gives the bank control over every step in the process. Certified lenders are “still sending packages to the SBA for approval,” LeVeque said.
SBA loans will provide a longer term, helping keep payments lower so business owners can retain the cash flow for their businesses, LeVeque said. Similarly, a lower down payment is required, leaving more cash for the business owner.
SBA loans also provide significant flexibility on collateral, LeVeque said. For example, a CPA firm with a $1 million sales price has only $10,000 in collateral.
“An SBA loan would allow them to finance all that,” he said.
Also, the SBA can sometimes have a negative reputation, he said.
“It’s important for the community to know that SBA loans can be easy to obtain,” LeVeque said, “if you use an experienced lender that understands the program.
“It’s work for the lender, but I don’t have to bother the customers with the minutiae.”