A Bank Loan, the SBA, and Traditional Business Financing Options
6 questions to help address your business financing options
No discussion of business financing options would be complete without talking about the local bank or the Small Business Administration (SBA). The last few years have proven difficult for small business owners as many bankers have moved upstream to bigger and potentially more lucrative opportunities. And the average loan size for SBA 7(a) loans (their most popular loan type) continues to move out of reach for the average business on Main Street. If the costs associated with underwriting and processing a small business loan of $50,000 is about the same as a loan of $500,000, it’s hard to blame bankers who see the value of hunting for bigger loans.
Access to capital isn’t the only challenge facing small business owners today, but it’s a challenge they are forced to grapple with any time they consider growth—which makes job creation problematic. I’m a big fan of community bankers like Traci Flynn at Holladay Bank & Trust. I did a podcast interview with her in September where she outlined what her bank does in addition to looking at credit score, time in business, and collateral, to find good small business loan candidates. She argues, and I agree, that there are hundreds of community bankers all across the country who take this same type of approach, you just need to look for them. Here are a couple of questions you should ask that should give you a leg up:
- Does the bank specialize in small business loans? Don’t simply assume that every bank is prepared to provide a small business loan. In fact, some banks specialize in particular types of small business lending. For example, Holladay Bank is known for commercial real estate loans. Another banker I’ve become impressed with is David Normandin at Banc of California. His bank specializes in equipment loans to small business owners all across the country. Both of these bankers understand the role financing plays in helping small businesses grow and look at their role as a partnership with local businesses, in the case of Traci Flynn, and the national community, in the case of David Normandin, to help them achieve their goals.
- Does the bank and your banker know your industry? Years ago some partners and I purchased a photography supply business to infuse some life into what had become a lack-luster operation. We believed an influx of cash, a little bit of marketing, and a good dose of elbow grease would make a difference—which it did. One of the things I wasn’t expecting was the very engaged relationship with our banker. He understood the photography industry, was very motivated to see us succeed, and I don’t think I ever met him in his office during that time. He regularly visited us. You might be surprised to know that he wasn’t from a community bank either, he was from a large bank with a national footprint. At the time I took that relationship for granted, but I’ve come to appreciate that we had a very special banker.
- Are they on the SBA’s list of approved lenders? If you’re looking for an SBA loan, this is a big one. You can access the list on the SBA website. In October the SBA removed fees on loans of $150,000 or less, which I think is a good move for Main Street businesses. The SBA doesn’t actually make small business loans, they simply guarantee them. Additionally, it can take months to process the paperwork with no real guarantee a small business owners will ever see a loan. That said, the low-interest term loan can be a great vehicle for growing an already healthy business. There’s nothing ‘quick’ or ‘short-term’ about the SBA.
- Are you looking for an amount compatible with the bank’s normal lending limits? Most banks not only have ceilings for how much they’ll lend to any one small business. And that includes open credit lines, credit cards, and any other loans you may already have. If you reach or exceed that limit, particularly in smaller community banks, your loan request will likely get turned down. Some banks also shy away from smaller loan amounts. For many banks, it costs just as much to underwrite a small loan as a large one, so a banker not used to dealing with the typically smaller loan amounts associated with a Main Street business, will likely turn down a loan request he or she perceives as too small. In fact, most of the time, the problem with traditional small business lending is that business owners aren’t asking for too much, they’re not asking for enough to fall within the bank’s normal lending limits. The average SBA loan last year may have been around $380,000, but to my dad’s Main Street industrial supply store, a $40,000 loan was a big loan.
- Can you meet with the person who will be making decisions about you and your loan request? Don’t be surprised if you can’t. One of the advantages of working with a community banker like Traci Flynn, is that all the decisions are not only made locally, they’re made within the branch where you do all your business. This gives you an opportunity to speak with members of the loan committee. Instead of becoming a number on a balance sheet, you and your business are a recognized face. Speaking from experience, I know the banker I mentioned above felt far more invested in our photography supply store because he had spent time to get to know us, he watched how we interacted with our customers, and wanted to see us succeed.
- How green is your loan officer? Like any business, there’s a significant amount of turnover at most banks. Everyone has to learn the ropes somewhere, but it doesn’t have to be on your small business loan. Make sure you’re working with someone who has enough experience to help you through the process and expedite your loan request.
If I could wave my magic wand, I believe local community banks are the best places for small business owners to do business. Unfortunately, I don’t even have a magic wand and over the last 10 or 15 years as many community banks are either consumed by bigger banks or simply disappear, that isn’t the case. Nevertheless, if you have great credit, a healthy business, and acceptable collateral, traditional financing options like a term loan at the bank or an SBA loan are great options. Hopefully asking these questions will help you choose the right bank for your small business.
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