5 Things You Probably Didn’t Know About SBA Loans

Hey, we're talking SBA loans. We're going to share with you five things that I'll bet you didn't know. And real quick, do me a favor, hit the like and subscribe button. You're listening to Financial Cents, Arizona's financial podcast that gives you insights that you can only get from a friend in the business. Recorded and brought to you by National Bank of Arizona, the only bank you need. Hello, I'm your host, Frank Cannon. I'm the executive vice president and director of the Community Bank here at National Bank of Arizona. Thanks so much for joining us today. We're going to give you five things you should know about SBA loans. Returning, we have John Lewis, senior vice president and regional manager here at National Bank of Arizona. Welcome, John. Thanks, Frank. Glad to be here. As you know, John, we like to give viewers insights that they can only get from having a friend in the business. So let's get started. Hit me with five things people should know about SBA loans that they probably don't. And maybe start with what does SBA stand for? SBA stands for Small Business Administration, which is a government entity that allows banks to be able to provide loans that are guaranteed by the government. Five important things to keep in mind are that SBA loans can be used for a long-term working capital, short-term working capital, or to purchase assets. Secondly, you know that you're eligible for an SBA loan if you're a small business that is established within the United States of America. Third, although it's a business loan, it's important to remember that having a good personal credit history is also going to be important in getting an SBA loan. The fourth thing is that the loans are tied to Wall Street Journal Prime and are variable interest rate loans. And the fifth thing is to be able to apply for a loan, you need to contact a financial institution that's able to process an SBA loan. So John, before we get into the detail of the five primary areas that we're going to cover on SBA loans, what I'd like to do is share with the listeners, provide them some insight on your background. It'll probably surprise most of our listeners, but we're not professional YouTubers, we're actually bankers. So share with the listeners your background. Yeah, so my background is that I've been with the bank for 19 years, had the opportunity to work throughout the state, working with a lot of small and medium-sized businesses. I have the opportunity now to lead teams throughout the state that help businesses continue to thrive within the state and to be able to access capital through small business loans. Additionally, I've been our small business subject matter expert for SBA loans for a number of years within the bank. So you've, I mean, just for everyone's knowledge, you've worked in the White Mountains, which is for those who are not aware, that's the Show Low area. You've worked in Flagstaff, worked and lived in Flagstaff and all that that entails. You've been very active, what we call the river, which is, you know, really Kingman down to Lake Havasu. You've lived in Yuma, worked in now in Phoenix. So you've literally seen small and worked with small businesses all throughout the state. Yes, I have. And it's been great to be able to see all the different aspects from the different areas. You've probably worked in more markets throughout the state than any other banker at National Bank of Arizona. Yeah, quite possibly. Yeah. So we'll just say you are and we'll have a trophy at some point. It's great. It's great. Perfect. So let's jump right in. Let's talk about the first item you mentioned, which was what SBA loans can be used for. And I do think this is an area of great confusion for a lot of small businesses. They just don't know if small business administration loans apply to them. Yeah, I think that's a really great point. The small business administration loans can be used for a wide variety of things. What's really important is to understand what they're going to be used for, not I just want a loan. Right. You know, what was it going to be used for? We've got short term working capital, long term working capital, and to purchase, acquire assets, whether those assets are equipment or real estate. Right. Obviously, there's a great opportunity with SBA loans also to purchase other businesses, to buy a business, to start up a business. If you have a great business idea to put something together to get the capital necessary to be able to start that business and help that business grow. Before we go on any deeper, for the listeners, an SBA loan is not made directly from the small business administration. That's right. So talk about the mechanics. And what does that mean from a borrower? What does that mean? The small business administration partners with financial institutions to be able to provide loans to small businesses. For the bank, the loan is then guaranteed by the government for a certain percentage, rolling from 50% to 85%. And allows banks to provide more flexible terms for the small business owners with that guarantee from the government. And they do that because small businesses, especially early stage small businesses have more risk. That's right. And the government provides a guarantee to the bank that if they'll make a loan to the business, there's some portion of that loan will be guaranteed by the government. That's right. Yep. And that's why it's such a valuable asset for small business and should be having those conversations with their banker. Yeah, exactly. And these small businesses wouldn't be able to access that capital without this SBA guaranteed program. So it's really important. Banks generally aren't going to just lend money to a startup business without the SBA being involved. So those are a lot of uses. Do you have any stories of real-life examples of different businesses and how they've used the funds? Yeah. So I've seen a lot of great things happen over the last couple of years from startup ice cream shops to startup pizza joints to a flight school needing some financing. The flight school was here in Arizona, I take it. And they had a number of airplanes that needed some financing on. We're able to provide them some much more flexible terms to make it a lot easier for their cashflow to use an SBA loan structure. So that really is a good segue into what does it take to be eligible to get an SBA loan? That's a question I get from a lot of business owners. What's the eligibility requirements? Yeah. So one of the main things you have to be a for-profit business. You can't be a non-for-profit. Be a for-profit business that's been organized within the United States. Those are the main requirements. Then after that, you need to be a small business. So what's a small business defined as? It can be actually pretty big because the small business definition allows up to $20 million in net worth and $6.5 million in net profit. So if you're a small business, more than likely you're going to qualify unless you are potentially a business that would be ineligible. There's a few ineligible businesses out there. Those would be pyramid schemes or pyramid businesses, private clubs where you're exclusive. You only let certain people join your club. If you're on probation or if you're in the penitentiary, you're not eligible to get an SBA loan and anything that would be not legal by federal or state government rules. So generally speaking, small businesses that are chartered in the U.S. and have everything kind of take care of or for-profit will generally be eligible. Generally, yeah, absolutely. Gotcha. So the third item you talked about was the importance of credit history, especially personal credit history. Why is that important relative to an SBA loan? So one thing that always intrigues me is when I talk to small business owners or people that are starting small businesses, they often say, well, it's a business loan. Why does my personal credit matter? And in small business lending, really you and the business are the same person. So having good personal credit history is going to be important because a lot of the decision is going to be driven based off of that credit history, your FICO score. That FICO score leads into what's called a small business score that is created by the SBA to be able to identify your credit worthiness. And so even though it's a business loan, it's important to remember that your personal credit is going to make a big impact on the ability to obtain that credit. So what's the minimum credit score? Can we share that for the audience? Yeah. So the SBA has a minimum credit score of 622 for a FICO score. 622? Yeah. And then other financial institutions will have other metrics. There's what's called a small business score that's created that the SBA also relies on, which has a minimum of 155. Gotcha. That's not as well known, I think, for most people as a FICO, personal FICO. So one thing a small business owner could do is there's many ways to check your personal credit and probably a good step to check your personal credit before you maybe go begin the SBA process. Yeah, absolutely. Everybody has the opportunity to pull their credit for free once a year. So it's a great thing to look and see how that is. And if there's things that need to be cleaned up, spend some time working with a banker or somebody else to kind of help with those things. Yeah. We share this with so many different folks as bankers, both on the consumer side and the business side, but taking care of credit and making sure your scores are appropriate is critical to accessing capital. Yeah, absolutely. So we've talked about uses for SBA loans. We've talked about eligibility and we've talked about the importance of credit history. Now I'd like to talk about the interest rates, and it's especially relevant in today's interest rate environment. Yeah, absolutely. There's lots of people that had loans that were maybe 5% and now they're 10% today. And so it's important to understand how the SBA loan product works with interest rates. I've had a lot of customers in the past that have said, oh, are the interest rates for SBA loans lower than the interest rate I get on a regular conventional bank loan? And the answer is generally no, because the bank rates are going to be a little bit higher because SBA loans could be considered to be a little bit more risky. And they are tied to Wall Street General Prime, which has fluctuated quite a bit over the last couple of years. On top of a prime rate for an SBA loan, is there usually a margin or some amount above that? Yeah, generally there is a margin above the stated prime rate. And we might see spreads going from 2% to 5%, but the SBA maximum rate is a 6.5% on the smallest end of the SBA loans. Now, are most of the SBA loans variable? They are. Meaning they move with the index. They do, yes. As that index- In this case, prime. As prime moves, the rate will also move. And that is done monthly. That's reset monthly. As prime moves, they'll do a reset each month. A lot of the SBA products will be on a quarterly reset, or some could be reset over five years or a number of years, depending on what your financial institution does. So a very important aspect to an SBA loan, or any loan that's variable rate, the interest rate risk of your payment going up needs to be considered in depth. Would you agree? Yeah, absolutely. You don't want to just be able to squeak by with the lowest interest rate that there is today. You just need to understand that that rate could go up in the future. And you started talking about this point with, we had a lot of borrowers before this last 24 months of rate increases at 4% or 5%. Today, those loans are at 11%, 12%. That's a significant difference, especially if the loan is fairly large. That's right. That will impact the small businesses because as rates go up, their payment will also go up as the rates go up. Also, as rates go down, then their payments will go back down. It's very difficult for businesses to pass on every rate increase or any kind of inflationary. You can only pass on so much to the customer. At some point, it starts eating into the company's cashflow. Yeah, absolutely. Final point you had brought up is applying for an SBA loan. What's the process? What's important for a customer to think about, to know about? What questions should they be asking? Yeah, absolutely. There's a lot of great resources out there at sba.gov. We'll give you some great insight onto SBA lending, the products, and what's available. So those are great places to go. Additionally, to connect with a financial institution, to connect with a banker who understands the SBA process. Certain financial institutions will be designated as a preferred lender. What that does is allows for the SBA process to be smoother. The bank processes everything, obtains an authorization from the SBA, but the file is not required to be sent to be fully reviewed a second time by the SBA. So the process is a lot smoother. So working with a preferred lender generally is going to make your life a lot easier as you go through that process. And the borrower can ask the bank that question, right? They can find out if they're a preferred lender? That's the bank they're working with? They can ask the bank. And a lot of banks, quite honestly, will have something displayed at the bank saying that they're a preferred SBA lender. Got it. Yeah. So I think that's, to me, if I were a business owner, that would be one of the most important questions I could ask because the last thing you want in a credit approval process is multiple approvers. That's right. Because it's just one more party or person that can decline or counter or add conditions. So having the bank, working with a bank that's a preferred lender that has the ability to make the decision is, in my mind, one of the most important aspects. I would agree. So talking about preferred lender, is National Bank of Arizona a preferred lender? We are, yes. As being part of Zions Bank Corporation, we're a preferred lender providing services throughout the United States. And we ranked in the first quarter of the SBA's fiscal year this year, we ranked fifth? Yep. In Arizona, number five. Excellent. So we're very active and let's talk about SBA programs. Any programs you'd want to highlight and share with the listeners? Yeah, absolutely. And one of the things that has been a challenge for a lot of small businesses, especially the younger businesses or startup businesses accessing capital, oftentimes there just wasn't a whole lot of options. One of the things that we've looked at at the bank is to be able to provide smaller loans for those businesses, but large enough for them to be able to access the capital that they need. Currently, we have a product that is up to $150,000 that businesses can access by just providing an application and a business plan and a few financial statements to be able to help us understand the credit and to be able to provide the opportunity for them to access that capital, even if they're a startup business. So thinking about who this program really, a type of business of the needs it meets, startups like Day One, was this program for a brand new startup? Yeah, it will work for a startup. And all that we ask is to be able to provide a business plan that explains the product or service that you're providing, where you're providing, the demographics around that, and what you're going to do to be able to find success with that business. Obviously important that you have some experience and understanding of the industry, some knowledge of that to be able to help us be comfortable with that. What about collateral? So with the SBA loans with collateral, we're asked to take whatever collateral is available. For these loans that are up to $150,000, that means whatever's going to be available within that business. And so if you're purchasing something specifically with those funds, we'll use that as collateral. We'll take what's called a UCC filing on all your business assets. But if your business assets are only $50,000, but the you need $150,000, it's still attainable through the SBA structure. Oh, that's good. That's really good information. So this SBA program up to $150,000 is really a National Bank of Arizona program. Yeah, it's something that we've put together based off of SBA guidelines, where you can rely on this small business score to be able to make a decision. And so that small business score allows us to use less financial information to be able to make the decision if this is a credit worthy customer. Another great reason why you want to work with a bank who's a preferred lender, because these are the kinds of things that a preferred lender can put together. Absolutely. Any stories, real life stories we could share? Yeah, I saw one recently where there was a small company, they've been in business a little bit less than a year, and they needed to grow and expand into another small market. And with that, they were able to provide a two page business plan, an application, and a personal financial statement, and be able to access $80,000 to be able to make the move to expand into the other market. That's very difficult to do for a business that's not even a year old. That's right. So that's a great example of what this program's for. And the capital it's providing to these, in many cases, what we call micro small businesses, smaller businesses, but they're just getting off the runway, and they need that capital. So they need that lift. That's a great, great, great story. So you're a small business owner, and you need a business plan. Let's say you're a baker, you're building a landscape company, you have no idea how to write a business plan. Where can a small business go? Yeah, there's a lot of great community resources out there. In addition to your bank that you may be working with, to be able to give you some guidance and some direction. At National Bank of Arizona, oftentimes we work with organizations such as SCORE, who helps businesses create business plans, or the small business development centers that are established at the various community colleges throughout the state. Great opportunities to sit down with somebody that that's what they focus on full-time, is putting together business plans. They have some technology to be able to help bring that together, to look at other pieces of your industry, to help give you guidance. And I believe those resources are generally free. Yes, generally they are free. To the business. Yes, absolutely. And some of them are given funding through the SBA, to be able to have these things available for people. Perfect. You know, John, that's why I like working at a community bank, and that's why you like working at a community bank. We're aware of these community outreach efforts, and we partner with them all the time. For anyone watching this podcast, we provided the links of a number of these great resources. See the links in the description, click on those, and get to work on writing that business plan. So John, just wrapping up, anything else you'd like to share with the listeners regarding SBA loans? Yes, I think it's really important to know that SBA loans are not mysterious or scary. That's right. Oftentimes I talk to small business owners and they think, oh, SBA, that makes me nervous. That's going to be a hard process, very challenging. But in all reality, if you work with the right partners, the right financial institution, you partner with the right resources, you'll be able to, you can get through the process without it being too challenging. And I would just like to follow up. I also believe that's the reason why it's so important that you work with a really good banker in a community bank. I'll say this to anyone, if you don't have your banker's cell phone number, you're working with the wrong banker. And if you're working with a banker who doesn't understand SBA loans, the importance, the use, if you're not working with a preferred lender, a bank that's a preferred lender of the SBA, I would encourage you to go find a bank and a banker that A, you get the cell phone, you can contact, and B, a bank that understands not only the needs of your business, but special tools like Small Business Administration Guaranteed Loans. I agree with you a hundred percent, Brent. About time, John. Finally. So thanks so much for checking out this episode of Financial Cents. If you like the content that you saw here today, hit the like and subscribe button. Don't forget, check us out on your favorite podcasting platform or watch us on YouTube.