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SBA Start Up Loans

We discuss SBA start up loans as far as current market conditions as well as general loan terms below.  It is currently very difficult to secure start up financing and those that do, are very strong, almost to the point that the borrower really doesn’t need to capital.

 

Current Market Conditions – SBA Start Up Loans

Due to the current and ongoing credit crisis, start up loans via the SBA or any other loan programs out there, are very conservative and as mentioned, difficult to close.  These are the riskiest loans for banks, as there as so many unknowns with the proposed business as well as for the borrower personally.   It’s commonly said that 90% of businesses fail in the first 5 years and banks are painfully aware of this.

The financial projections that start up loans depend on, are really guesses to what the real income and expenses will be.  They are normally incorrect and just a couple of over looked expenses can easily kill a business. 

Bottomline, start ups that do receive financing are very strong.  Typically the borrower has more than enough outside income, from another business or job, to cover the proposed monthly payments and all debt associated with the borrower (business and personal).  This is normally referred to as Global Income within the banking world.  And it means that ALL sources of income and expenses are underwritten and reviewed.  If any one of a borrowers businesses is struggling this could ruin all chances of securing the start up financing. 

Experience has to be impeccable.  A minimum of 5 years as an owner or manager in the exact same industry and same geographic area/market is now normally required.  The borrower will also have to demonstrate success within that previous business.    

Post close liquidity, meaning how much cash you have left over after the proposed loan closes, is extremely important.  On startup’s expect a bank to want to see at least 6 months worth of payment reserves...   Including personal expenses and any other business expenses, whether directly tied to the start up or not.  Depending on your situation this could be a lot of cash.

This is the reality we see in the market.  You may not like it, but for now as far as securing SBA start up loans, this is what you’re dealing with.  Despite our pessimistic view you may find a bank that is not as strict as the current overall market.  Keep in mind you only need one bank to say yes.  Finding a small local bank that is just getting started in SBA lending maybe your solution.  As they might  be more eager to fund riskier deals than more established SBA banks/lenders.        

Typical Terms On Start Up Loans

Most SBA start up loans are done under the SBA 7a loan program.  Most of the terms depend on what exactly you’re trying finance, ie working capital, lease hold improvements, inventory, commercial real estate, etc.  Amortization schedules are tied to the useful life of the collateral.  For example, real estate is normally amortized over 25 years while working capital is tied to a 5 or 7 year schedule. 

75% financing is currently the realistic/max level of leverage we currently see.  So this means you’ll have to come in with 25% of the total project with cash. 

Interest rates are normally floating tied to Prime or LIBOR.  The banks margin cannot exceed 2.75% so you should currently expect the rate to be approximately 6% (Prime is currently at 3.25%).

As noted SBA start up loans are difficult to secure.  However you only need one bank to say yes.  Smaller local banks maybe your best source of lending.  Especially those that are newer to SBA financing, as they may not see as many loan requests.

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