by Joni Per-Lee, Georgia SBDC Many entrepreneurs seek outside funds to either start or expand their small businesses. According to the Small Business Administration, 37 percent of small firms utilize some financing from commercial banks each year. Unfortunately for some borrowers, lenders' reactions can range from apathy to humor when they are approached for a small business loan. How can a small business owner get a loan when all the banks say "No?" Krakow luxury hotelsIt helps to understand how the traditional lending process works. An individual seeking a small business loan approaches a lending institution. The lender reviews the request and evaluates it on experience and the five Cs:
credit record,
capital invested,
collateral offered,
cash flow available, and
conditions in the local economy. If the borrower is strong in each area, the loan is quickly approved. If, however, one criterion falls a little short, the lender may make the loan only with a Small Business Administration (SBA) guarantee. The lender takes responsibility for processing the guarantee request. An approval means the SBA agrees to pay, in the event of default, approximately 80 percent of the loan amount and charges the bank a guarantee fee of about 3 percent, which is passed on to the borrower. Still, the entrepreneur gets a loan. But some rejected business owners may believe that they haven't received a fair hearing. What happens if this traditional approach isn't successful? By using an intermediary, like a Small Business Development Center (SBDC), a borrower can approach the SBA directly for a loan guarantee under its Pre-Qualification Loan Program. Together, the borrower and the intermediary complete an application, including a business plan and projections, and send it to the SBA. The SBA must review every application and evaluate the loan using the same (though in some areas less stringent) criteria as a bank. If the loan is approved, the SBA issues a guarantee letter, up to $250,000, that the borrower takes to a lending institution. This guarantee letter gives more credibility to the borrower and, understandably, gets the attention of the banker. There is no charge for the SBDC's assistance. Sounds pretty simple. In truth, there are some obstacles. First, a borrower must have good credit. Understandably, the Small Business Administration will not guarantee a loan for someone with a poor payment history. Owners must improve their credit before pursuing outside financing. Second, the bank still makes the final decision on a loan. While the SBA pays off a percentage of an unpaid guaranteed loan, it does not completely remove a bank's hassles or losses with a delinquent or defaulted loan. So lenders still try to avoid making questionable loans even with a guarantee. Guarantee recipients often have to approach more than one bank before receiving final approval. Finally, the application process can be tedious for both the borrower and the intermediary. Try to get a loan the traditional way before pursuing the Pre-Qualification Loan Program. Finally, does Pre-Qualification work for those first-round rejects? This SBA program is fairly new, but in the Clayton State SBDC, we have assisted four clients in obtaining an SBA guarantee, and all four were able to get a bank loan. Our success certainly exceeds the state average. To determine the chance of success, review again those five Cs of credit: capital, collateral, cash flow, and conditions. If your credit is poor, fix it. If your business is solid in 3 of the other 4 areas and you have already been rejected by a couple of banks, contact your local Small Business Development Center for assistance in preparing a Pre-Qualification application. You may turn those rejection letters into cash. To obtain small business assistance contact a consultant at a Small Business Development Center. > See also: Loans & Capital |
