By Mac Wilcox
Loans guaranteed by the Small Business Administration are a vital source of entrepreneurial business funding. In 2017, more than 68,000 SBA-approved loans provided around $30 billion in working capital, asset financing, export support and loan refinancing. Indications are that those numbers will be even higher this year. And yet, despite these facts, many small business owners remain misinformed about what SBA loans are and what it takes to qualify for them.
For instance, there are business owners who think the SBA is the actual lender, rather than the guarantor, and that perfect credit is required. Others perceive the agency as a lender of last resort. Some assume that the SBA loan process is unavoidably long and drawn out, mired in red tape and not worth the trouble. None of these perceptions is accurate.
Not only are SBA loans potentially advantageous for all small businesses, but they are especially helpful for businesses that historically have faced greater challenges in financing. These includes women- and minority-owned businesses as well as those owned by disabled veterans. These groups received more than $18 billion in SBA loans last year.
Banks and other lenders approved by the SBA can make loans that are guaranteed by the SBA. That guarantee allows lenders to grant loans at lower rates than those of conventional loans even to borrowers with imperfect or adverse credit histories. After all, an “imperfect” credit history is not necessarily a “bad” credit history. Therefore, [each individual business’s] creditworthiness is a consideration in the loan approval process. It does not take ‘forever’ to close an SBA-approved loan. However, many loan applicants slow down the process through their own lack of preparation. The SBA has designated several of its lenders - including Savoy Bank - as “Preferred Loan Providers” (PLPs). These lenders have the authority to actually approve loans on behalf of the SBA, not merely to originate and underwrite them. This eliminates a major step in the process and also accelerates the closing process.
There are two basic guaranteed loan programs administered by the SBA: The SBA 7(a) program, covering a wide range of small-business needs; and the 504 program, which provides relatively low-cost, fixed-rate financing for fixed assets, such as real estate and machinery.
The SBA504 program works very differently from the 7(a) program. The 504 loan is secured by a small business partnership with a certified development company (CDC), a non-profit organization set up to promote economic development within a community. There are more than 260 CDC’s located throughout the U.S. Usually, the SBA itself contributes 40 percent of the project cost, with the lender covering 50 percent and the borrower the remaining 10 percent. *
In short, SBA loans are a wonderful tool if you need working capital, debt refinancing, or new facilities for expansion. Don’t allow misunderstandings, misperceptions or lack of preparation prevent your business from enjoying the advantages that SBA-guaranteed loans can bestow.
* Under certain conditions the borrower may have to contribute a higher percentage.
Qualifying for a conventional business loan can be difficult especially for small to mid-sized businesses and organizations. But for businesses that are committed to promoting the economic development of an underserved area, a community development bank may be an ideal financial partner. Community development banks, or community development financial institutions (CDFIs) have a special focus on businesses and organizations serving low-income and economically distressed communities who may have a problem getting a loan from larger banks. CDFIs do not rely as heavily on credit scores; instead, they concentrate on developing long-term relationships with members of the business community in which they reside to help them build credit and drive community revitalization
Obtaining financing for a small or young business can be hard enough –
but for a women or minority owned business it can be much greater.
As a result, women and minorities often turn to riskier, high-interest
lenders that can further complicate their financial situation. CDFIs are
a much safer alternative. Loans are designed specifically to support
the financial needs of these underserved communities and fill a gap
left by financial system.
Bottom line, borrowers are more likely to be approved for a
CDFI loan. According to the Federal Reserve survey, the approval rate
for small businesses that applied for loans or lines of credit through
a CDFI was 77 percent, higher than at online lenders, credit unions,
or banks of any size. This is mostly due to the flexible credit requirements
that CDFIs offer to borrowers.
CDFIs can also offer lower interest rate loans than many other alternatives. A 2012 study performed by the CDFI Fund showed that the median interest rate for CDFI loans with a 48-month payoff was 7.75 percent, as compared to popular SBA 7(a) loans paid off in less than seven years, which was eight percent. And CDFI loans offer lower interest rates than non-traditional lenders like online lenders, credit cards, merchant cash advances, payday loans.
CDFIs also offer simpler products, designed to minimize risk for the borrower. Mostly fixed-rate loans, payments are predictable so there are no surprises. And they are usually self-amortizing, which means borrowers are paying back both interest and principal. CDFI loans often omit any sort of origination fee, also saving borrowers money.
Surveys have shown that community development banks have better,
more personable relationships with borrowers. CDFIs are committed to helping economically revitalize disadvantaged neighborhoods, so they are more likely to understand and support the goals and financial needs of local businesses and community organizations.
As a CDFI, Savoy Bank is committed to providing all small business and
community development organizations the access to investment capital and financial services they need to prosper. If you are in need of financing, ask Savoy Bank if you qualify for a Community Development Fund loan.
Main / 646-775-4000
Fax / 212-956-7381
600 Fifth Ave. 17th Floor
New York, NY 10020
*APY is based on interest compounded daily.
Rates subject to change at Savoy Bank's discretion.
**Data used to calculate rates gathered by ratewatch as of 4/30/2019.
Ⓒ2019 Savoy Bank
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