It can be difficult to secure small business funding as a business owner, especially if you’re just starting out or have hit hard times. In these situations, it pays to have a relationship with your local community bank. A local rep can take the time to get to know your unique needs and recommend solutions tailored to your financial situation. When it comes to securing funding, there are a number of programs sponsored by the Small Business Administration (SBA) that your local bank can leverage to help you secure the credit you need to fund both planned and unexpected expenses. Here are a few of the programs your trusted banking partner may be able to leverage to secure the funding you need.
There are a number of factors that can affect your ability to qualify for a small business loan, but there are three major indicators that most banks will look at: 1) your credit rating and history; 2) your cash flow; and 3) your collateral. If you show strength across these three factors, then you can make a great case for securing traditional funding. One of the issues that many service companies face is an inability to offer up an acceptable level of collateral. In such cases, the SBAExpress program is a great option.
Through this program, when a business owner secures a loan through their local bank, the SBA provides the bank with a 50% guarantee on the loan balance. What this means is that if the borrower has to default on their loan, then the SBA will provide half of the balance back to the bank. This guarantee doesn’t require the borrower to pay any extra fees, and the bank doesn’t have to shoulder the entire risk of lending to a business that isn’t able to offer collateral. This guarantee is intended for instances when the borrowing business owner isn’t in a position to offer sufficient collateral to the bank, so businesses that want to use the program to fund an equipment or building purchase should look for other options. In those cases, the equipment or building will serve as collateral, so the request wouldn’t qualify under the Express program. In many situations, the program is leveraged by banks to provide revolving lines of credit to businesses so they have a resource for sudden short-term capital needs, such as funding a large project or covering for seasonal cash shortfalls. The paperwork is minimal but the program is limited to loans up to $350,000.
2. CDC/504 Loan Program
While the Express Guarantee is ideal for business owners getting a business loan who are unable to offer a satisfactory level of collateral to qualify for credit, the CDC/504 Loan Program is designed to help finance the purchase of major fixed assets (such as equipment or commercial real estate) that can serve as collateral. With traditional financing, businesses usually have to put down 20% of the loan balance before purchasing the asset while the bank covers the remaining 80%. That portion of the balance that business owners have to cover is lowered to only 10% under the CDC/504 Loan Program, so it’s a great option for business owners who want to keep up-front costs to a minimum or don’t have the cash to cover the initial 20% of the balance.
Here’s how the program works – while the business owner pays 10% of the loan balance up-front, the bank shoulders 50% of the balance and partners with a community development corporation (CDC) to cover the remaining 40%. Examples of CDCs in Connecticut include the Community Economic Development Fund and the Community Investment Corporation. With the loan balance spread across these three parties – the borrower, the bank and the CDC – everyone benefits from shouldering a smaller portion of the amount. The downside is that it may be a little more expense for the business owner in the long run. For example, there are additional fees involved when partnering with the CDC. If the loan will be funding the purchase of real estate the business owner will have to pay for the cost of two closings (one on behalf of the bank and one on behalf of the CDC).
3. 7a Loan Program
Start-up and existing small business owners who need help securing a term loan for general expenses, which could span from equipment purchases to construction costs or debt refinancing, may qualify for a loan backed by the SBA’s 7a Loan Program. The small business lending program can cover financial needs for a range of expenses up to an amount of $5 million. If the loan balance is less than $150,000, the SBA will provide the lending bank a guarantee covering 85% of the balance if the borrower has to default on the loan. If the loan balance is more than $150,000, then the SBA provides the bank with a guarantee covering 75% of the balance.
The 7(a) Program is ideal for loans requiring longer amortizing periods or for otherwise restructuring existing debt. For loan balances that are more than $150,000, the borrower will have to pay a 3% fee on the guaranteed portion of the loan. However, there is no additional fee required when the loan balance is less than $150,000.
How To Get Started
This is only the tip of the iceberg when it comes to the number of programs out there for small business lending that can help finance your expenses. The best way to get started is to set up an appointment with your local banking rep to discuss your needs, your financial standing and the options that are available to help fund your success.
If you’re looking for more advice, make an appointment with your business banker to discuss the best solution to fit your needs.
Written by Jen Tomaino
VP Business Banking Relationship Manager, Union Savings Bank