SBA Lending – Key Hurdles for any business owner

Whether you are a seasoned business professional who has achieved great levels of success or just staring out, there are several (ever moving) factors in the financial industry. There are certainly an abundance of loan and lending options available, however – the one that fits well with ‘small’ businesses is the Small Business Administration (SBA) loan program. The program was designed to help financial institutions gain greater appetite for smaller transactions with removing risk on highly leveraged transactions in a guaranty from the government.

Despite the guaranty tied to these loans, the SBA imposes their rules on how to achieve financing through their program – outlined in the Standard Operating Procedures. As noted, this document is quite extensive and covers almost all scenarios in one shape or form. A few of these topics which generally drive the major decisions for a bank including down payment/capital injection, collateral, cash flow, and past credit of the business owner.

Addressing one of these topics, there are several hurdles and points of mitigation business owners should consider – before applying for a new loan: Down Payment / Capital Injection.

If researched, it will quickly be discovered that the SBA allows business owners to put down as little as 10% against the cost of a project (business acquisition, commercial property purchase, soft costs, etc.) with the financial institution financing up to 90% of the project / transaction. Aside from the possible risk of having higher leverage (90%), in theory, it is a wonderful tool for those who fit the mold and credit guidelines from the lender. In the case of commercial real estate, this lower down payment option is what separates SBA from conventional financing; conventional financing typically requires a 25% down payment or greater to achieve at least 75% loan to value.

There are two important items to note for the prospective buyer – with 10% being the minimum – SBA Collateral and Debt Service is directly impacted by this minimum. Finally, ‘skin in the game’ – the less personally committed in the transaction, the greater level of difficulty to obtaining a commitment letter from a lending institution and higher likelihood that pledging personal residential property will be a requirement.