Faced with rising costs for talent, facilities and other materials, small business owners are turning to a familiar and reliable funding source.
A traditional loan from the Small Business Administration can help business owners meet their obligations and hedge against inflation, said Cashin White, director of growth and innovation at BOK Financial®.
"Anyone wanting to acquire anything—a building, equipment, competitor or seeking to hire—is seeing that prices are through the roof," White said. "For owners not wanting to drain their cash to acquire something, be it equipment or a competitor, the SBA can be a real help here."
During the pandemic, Payroll Protection Program (PPP) loans and other pandemic-era programs were a badly needed lifeline for many employers. The program approved 12 million applications and distributed $800 billion.
With those loans now in the forgiveness phase, White sees the tried-and-true SBA 7(a) loan as a timely and effective tool for business owners.
Does your business qualify?
Applicants for a SBA 7(a) loan must have net income of less than $5 million over the last two years and a tangible net worth of less than $15 million. Nearly 99% of small businesses are eligible for SBA loans, according to White, though government entities, nonprofits and venture capital firms are not.
Businesses tend to use SBA loans to:
- Purchase buildings or equipment with a low down payment and longer repayment terms.
- Refinance or consolidate current debt that may have begun as high-interest credit card or family and friend funding.
- Clean up their balance sheet through debt consolidation and establish more predictable monthly payments (this can be particularly beneficial for growing and emerging companies).
- Acquire companies, competitors or partners, or to facilitate business succession or transition plans.
"Change-of-ownership is one of the hottest things we're seeing in SBA now due to the huge generational transfer of wealth," White said.
SBA loans are a solution for up to 70% of companies in buying mode his firm sees, said Doug Hubler, CEO of Apex Business Advisors in Overland Park, Kan., a business brokerage firm that has worked with BOK Financial. The companies often look to supplement 401(k), retirement or other funds due to the seller at closing as a down payment, or as a "get started" capital infusion.
Buyers are often family members, long-term employees, or mid-career or recently retired workers seeking entrepreneurship.
SBA benefits
Borrowers have traditionally valued the SBA's 7(a) loans because they allow for flexible use of the funds and require relatively low down payments (as little as 10%), longer repayment terms and a $5 million maximum loan amount. SBA loan fees and guarantees were relaxed during the PPP era but are now "returning to normal," White said.
From the lending side, banks like SBA loans because of the government's willingness to guarantee up to 75% of the loan amount, mitigating the lender's loss exposure. White said this allows the lender to focus more on the borrower's business operations and cash flow—and less on the collateral—when considering a loan request.
The most common SBA loan types are the 504, which is typically used for real estate, buildings and equipment, and the 7(a), which is less restrictive and often used for operating expenses, debt refinancing and acquisitions.
Where to start
Contrary to popular belief, not all banks are SBA lenders. Qualified lenders, including BOK Financial's 80+ commercial bankers in eight states, must be approved by the agency.
Qualified lenders with deep SBA operational experience can be the easiest to work with, according to White.
“SBA is complicated and can be a clumsy experience for the borrower if their bank lacks relevant expertise.”- Cashin White, director of growth and innovation at BOK Financial
Applicants can expedite the process—up to 90 days, but often less—through preparation, according to Bobby Byrum, lead SBA analyst at BOK Financial with more than 10 years of SBA experience. "To get started, applicants should have on hand at least their financials, tax transcripts, appraisals and business plans," he said.
He often collaborates with bankers, borrowers and credit approvers during the application process. Byrum also prepares side-by-side comparisons of SBA and conventional loans.
"Seeing the dollar difference between a 5%-10% down payment using an SBA loan compared to up to 50% for a conventional loan, and then the ripple effects through an SBA's longer repayment term can help make an easy decision for borrowers," White said. "Most would rather put the difference into growth instead of a larger down payment."
70 years and counting
Begun in 1953 under President Dwight D. Eisenhower and continuously operating through 13 presidencies, the Small Business Administration was a successor to other government organizations dating to the Great Depression. It was designed to protect the interest of small businesses, particularly those emerging from the post-WWII era, and to "ensure small businesses a 'fair proportion' of government contracts and sales of surplus property," according to the SBA website.
Its services have since expanded to the broader population and provide relief to victims of natural disasters. Loan activity has declined in recent years, possibly due to misperceptions about the complexity and length of time to close. For fiscal year 2021, approved 7(a) loans totaled about 23,000 compared to 35,000 in 2017—a 27% drop—though annual dollar volume has remained consistent near $14 billion.
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