small business administration loans
September 13, 2022
In this podcast, Andrew Marques, VP and Commercial Loan officer at Cape Ann Savings Bank, talks with John Maher about Small Business Administration loans. He explores the benefits of these loans and talks about the application process.
Transcription Disclosure: Below is a transcript of the conversation between John Maher and Andrew Marques. Please note, this is an unedited "word for word" rendition of the actual conversation and is not intended to be grammatically correct.
John Maher: Hi, I'm John Maher. I'm here today with Andrew Marques, VP and Commercial Loan Officer at Cape Ann Savings Bank. And today we're talking about Small Business Administration loans. Welcome Andrew.
Andrew Marques: Thanks John.
What Is a Small Business Administration (SBA) Loan?
John: So Andrew, what is a Small Business Administration loan or an SBA loan? And how does it differ from other types of business loans?
Andrew: Yeah, so the SBA loans are programs put in place by a Small Business Administration and banks or other qualified lenders have delegated authority to be involved in those programs. The SBA has multiple different loan programs. Each one has specific rules regarding eligibility, uses, and loan terms. So they provide access to capital from the smallest needs in microlending to substantial debt and equity investment capital.
Their programs or guarantees provide capital in situations that a traditional lender may see as too risky or outside of their comfort zone. So the Small Business Administration is there to provide increased access to capital for small businesses across the United States.
Most Common Types of SBA Loans
John: Okay, and there are a couple of the most common types of SBA loans. What are SBA 504 loans and also SBA 7(a) loans?
Andrew: These are specific loan programs where the borrowers work with the bank, such as Cape Ann Savings Bank, to meet their funding needs through the program guidelines. 7(a) loans are business term loans made by the bank and guaranteed by the SBA. They have a wide array of uses, terms and repayment structures. Those are the most common SBA loans we make, and that are generally made by banks across the country.
504 loans are really a loan package with the bank and a delegated certified development company, which we call CDCs. And that's to provide financing to the borrower. The allowed uses are much narrower and generally limited to commercial real estate or equipment. And they have different and longer loan terms than the 7(a) program does.
Requirements for SBA Loans
John: Okay. What are the requirements for getting an SBA loan?
Andrew: Generally you have to be a for profit business, and it really depends on the specific loan program. Each loan program has a large list of pre-qualifying requirements or specific uses.
As I mentioned, with the 504 program, the borrower has to occupy at least 51% of that commercial real estate. It's just one of the examples of a guideline or requirement to qualify for that program.
The 7(a) loans have fewer requirements restricting the use of the funds. But again, they do require that you're under a certain size standard, meaning you're a small business and that it's going to be used in a for-profit way that doesn't go against certain things. You can't use it for strictly speculative nature investments and certain things that would be against the law in some cases.
So here in Massachusetts, we allow for certain things that aren't allowed on the federal level, and those businesses don't qualify for federal funding.
How Does the SBA Define Small Business?
John: What qualifies you to be a small business, according to the SBA? Is it a certain size like the number of employees that you have, or is it a certain dollar amount in terms of your sales for the year, or what are the things that qualify you as being a small business?
Andrew: Both actually. That's a great question. So there's a couple different tests. One is the number of employees, under 500 is generally considered a small business. And then they also have an industry size standard, which is based on that specific industry. The gross revenues of that business on average, over the last three years. And the SBA breaks that down in good detail based on specific industries.
So that is one thing that we'd have to look back to find the average sales in the applicant and make sure they do meet that size standard. But as a community bank, it's sometimes shocking to see how large a small business is considered because the businesses that we generally work with are well under that size standard and would certainly meet those guidelines.
John: Right. I mean certainly in a lot of cases, a company that has 400, 450 employees would be considered a large business to a lot of people.
Andrew: To a lot of people.
John: Yes. But in this case, it's considered a small business.
John: As long as those gross revenues, like you said, over the last few years for your particular industry, meet that standard as well. So it's both the employees and gross revenue.
Andrew: That's right. And if it doesn't qualify under one test, it may qualify under the other. And so the SBA provides that flexibility in that case, again, to promote lending to small businesses, to meet their mission.
John: I see. So you might be able to qualify under one or the other option. It's not that you have to meet both standards.
Andrew: Correct. Correct.
What Does SBA-Guaranteed Mean?
John: What does SBA guaranteed mean?
Andrew: The SBA is there to provide access to capital for small businesses. I mentioned it earlier, sometimes a business may not have been open for very long. They may be a startup business. They may be in certain industries that are considered riskier. And so a bank always has a certain risk threshold that they're willing to follow in making their loans because ultimately we have to work to reduce our risk as a bank and ensure that our depositor's money is safe.
The SBA provides a guarantee in a certain amount to make those loans, I guess, more palatable or to mitigate that risk of loss to a bank. And this allows more loans to be made to a broader array of businesses and industries ultimately. To provide capital for startup businesses or change of ownership in industries that again, that may be considered more risky in a traditional business banking sense, but a strong guarantee from the SBA could mitigate those risks significantly for the bank.
The guarantee means you have to meet the requirements of the SBA's loan program. And assuming you make those requirements and handle the loan as agreed, if there is a loss they, SBA, is saying that they would cover a certain percentage of those losses, meaning they would pay back a certain percentage of that loan you made. So it's not a risk-free loan from the bank, meaning we can't just go to the SBA and say, "Okay, pay us back our money. We made this loan."
We still have to follow the general lending practices that we would have. But if there was to be a loss if... You always hear the statistics of a new business failing, the percentage of businesses that fail within the first X number of years. The bank might not be willing to take the risk in some cases, but with the SBA guarantee, we can make more loans like that happen.
John: Right. So you're more likely to maybe be able to get an SBA loan because of that guarantee, as opposed to just maybe going directly to the bank and getting a loan from them. Because depending on your situation, you might qualify for the SBA loan, whereas maybe you wouldn't if you just went directly to the bank for a loan.
What Is an SBA-Preferred Lender?
John: Okay. What is an SBA preferred lender or an accredited SBA lender?
Andrew: Yeah. So the SBA has a direct relationship with every bank enrolled in their lending programs. Cape Ann Savings Bank is considered a delegated lender under the SBA express program, which is a specific 7(a) program under that 7(a) umbrella. So we have the authority to make loans, follow the SBA's procedures and basically ratify those loans, once the loan is closed and get a smaller guarantee than if the SBA was to look at it in detail. So we are considered a delegated lender.
We're also an accredited lender under the SBA 7(a) and 504 programs. And really they're looking at the banks' regulatory history and the exams that they are at. They want to make sure that the banks have good lending practices and they look at the bank's portfolio, default rate, different things like that. So there's a process to become a SBA lender and they also monitor that and track it over the years. So they're looking for banks that are making business loans that are safe and sound and following their mission and making those loans to people that need to access that capital.
Contact Cape Ann Savings Bank to Talk About SBA Loans
John: All right. Well that's really great information about SBA loans. Thanks for speaking with me today, Andrew. Andrew: Great. Thanks for having me, John. John: And for more information on commercial lending and business loans, visit the website at capeannsavings.bank.
Cape Ann Savings Bank, member FDIC, member DIF, equal housing lender.