There may, however, be help in sight. In recent
years, the Small Business Administration’s (SBA’s) guaranteed-loan
program has become an attractive potential solution to business
owners facing capital restrictions. The problem is, many shop
owners have little knowledge of the program’s advantages or believe
it to be too complicated.
"The SBA was formed more than 40 years
ago to help small businesses get started in business and to help
them grow once they are in business," says Mike Stamler,
an SBA spokesperson. "I think we’re accomplishing that from
year to year.
"The SBA is a good potential source of
financing for any business owner, particularly if he can’t get
conventional financing from a commercial lender."
"Wait just a minute," you say. "I’ve
heard that the SBA creates a mound of paperwork and months worth
of headaches for even the smallest loan request. This SBA guy
must be talking about a different program!"
Same program. New rules.
The Transformation Begins
Up until the late 1980s, the SBA’s reputation
as a bogged-down government bureaucracy was well-founded. It wasn’t
unusual for a loan request – consisting of several inches of paperwork
– to take months to process.
That’s no longer the case.
The SBA has undergone a number of radical
changes in recent years that make it one of the most user-friendly
government agencies for small-business owners. Not only has the
program been revamped to allow easier access, but a number of
new guaranteed-loan programs have been started to meet the financing
needs of more small-business owners.
In October 1995, President Clinton signed
into law The Small Business Lending Enhancement Act of 1995, which
made the SBA’s guaranteed-loan programs more user friendly. "This
is not your father’s SBA," Administrator Philip Lader was
quoted as saying.
What Have You Done for Me Lately?
The facts appear to support Lader’s claim
that the SBA has become a proactive supporter of small businesses.
Since its inception in 1953, the SBA has guaranteed more than
610,000 loans, totaling in excess of $83 billion. In fiscal 1996
(the government’s fiscal year end is Sept. 30), the SBA guaranteed
more than 45,000 small-business loans, which resulted in $7.7
billion being injected into U.S. small businesses. This was slightly
lower than the records established in fiscal 1995 for the number
of loans (55,590) and the total amount ($8.2 billion); however,
the agency was essentially closed for a month in fiscal 1996 due
to the much-publicized government shutdown.
The SBA also has played a prominent role in
providing financing for body shops. In fiscal 1995 (the most recent
year for which an industry breakdown is available), the SBA guaranteed
457 loans, totaling more than $70 million, to body shops around
the country. For the five-year period ending in fiscal 1995, the
SBA had guaranteed more than 1,300 loans, totaling in excess of
Advantages of an SBA Loan
How can you tap into this financing resource
for your body shop? With the guarantee program, a bank actually
extends the loan to the shop owner, with the SBA providing a guarantee
of repayment for a certain percentage of the loan amount (usually
The SBA offers four key advantages. First,
because the SBA assumes most of the credit risk, commercial banks
generally are more willing to consider riskier deals that normally
might not be considered "bankable." For instance, approximately
25 percent of all SBA loans extended are to start-up entities,
which are generally considered "hands off" for conventional
Second, the terms of repayment generally are
more favorable than those offered with conventional commercial
financing. For real-estate loans, the term can go up to 25 years,
which might be just the ticket for a shop owner who needs extra
capacity but can’t work a loan payment into existing cash flow
on the 15-year payback of a conventional commercial real-estate
For fixed-asset loans (spraybooths, frame
machines, fixtures, etc.), the term may be as long as 10 years,
depending upon the useful life of the asset being purchased; for
working-capital loans, the borrower may take as long as seven
years to repay the loan. These terms compare favorably with the
typical maximum terms for conventional business loans of seven
years for fixed assets and four years for working capital.
Third, the program is very inclusive. While
there are some restrictions in terms of how a small business is
defined, the SBA estimates that more than 90 percent of all businesses
in the United States qualify for SBA financing. And there’s no
minimum loan amount, with a maximum guarantee amount of $750,000.
In other words, a loan could be as high as $1 million with a 75
percent SBA guarantee.
The fourth key advantage is the relatively
low cost of financing. The SBA charges a guarantee fee for term
loans based on a sliding scale of 3 percent on the first $250,000,
3.5 percent on the next $250,000 and 3.875 percent on the remaining
guarantee amount. For example, on a $625,000/80 percent guaranteed
loan, the guarantee level would be $500,000. This would result
in a guarantee fee of $16,250 (3 percent x $250,000 plus 3.5 percent
The maximum rates that can be charged are
prime (based on "The Wall Street Journal" published
prime rate, which currently is 8.75 percent), plus 2.25 percent
for loans of less than seven years and prime plus 2.75 percent
for loans of seven years or more. Many banks will even do fixed-rate
SBA guaranteed loans.
While the fees were increased in the Small
Business Lending Enhancement Act of 1995 (from a flat rate of
2 percent of the guarantee amount) and rates charged are somewhat
higher than those charged for conventional commercial loans, they’re
much lower than those charged by asset-based lenders and venture-capital
How Do I Get One?
Shop owners work with their bankers to fill
out the paperwork to apply for the loan; therefore, finding a
bank that has some experience in SBA lending is essential.
How can you find out which banks are in the
market for SBA loans? Call the bank directly and ask. You can
also check with your state’s SBA office. Additionally, you may
want to ask your accountant if he’s had any experience in working
with banks that participate in the SBA guaranteed-loan program.
Before finding a bank to handle the actual
loan request, several documents should be prepared to expedite
- A narrative business plan;
- Future profit-and-loss projections for three years;
- Résumés on key managers and owners;
- An outline of how the loan will be utilized, including a list
of assets to be purchased;
- At least three years of financial statements on the business
- Personal financial statements on all owners; and
- The proposed collateral structure.
The business plan may require only four or five pages to summarize
these areas, but the important thing is that the small-business
owner demonstrate to the banker and to the SBA that the idea and
potential pitfalls have been thoroughly considered. Some sections
to include are background, products and services, marketing, management,
operations, milestones you plan to reach and funds required to
run the business. Your local library should contain a number of
good books to help you with the preparation of your business plan.
There are also a few basic financial requirements for the program.
For existing operations, the SBA generally looks for a debt-worth
ratio (total liabilities/total assets) of not more than 3:1 subsequent
to the loan being made. A start-up must have at least 30 percent
in equity invested by the owners. In addition to the capital requirements,
the SBA looks very closely at cash flow (both historical and projected)
and at the background and competence of management.
SBA Low Documentation Loan Program
The SBA Low Documentation Loan Program is the best example of
the agency’s proactive attempts to provide lending programs that
adhere to the needs of small businesses, such as your shop. Over
the years, the SBA has heard many complaints from small-business
owners and bankers that the guaranteed-loan program is too cumbersome.
In response to these complaints and in an effort to reduce paperwork
requirements, the SBA created the Low Doc loan program. This program
was first offered as a pilot in 1993 in a few locations around
the country and was so well-received that it’s now offered to
small-business owners on a national basis.
The Low Doc program can be used for loan requests under $100,000.
As with other guaranteed loans, the borrower works with his bank
in formulating the loan request, with the bank actually submitting
the request to the SBA. The stated objective of the Low Doc program
is to put the emphasis on the borrower’s character, credit history
and projected cash flow, with less significance placed on percentage
of equity and collateral.
"The SBA has made it easier than ever before to get smaller
loans," says Stamler. "This program is new, but it’s
already proven to be extremely popular both with small businesses
Stamler’s point is well-supported. The Low Doc program went national
in July 1994, and in fiscal 1996, the SBA processed 20,728 Low
Doc applications, representing 45 percent of the SBA’s total loan
volume for the year.
The documentation requirements are far more manageable than those
imposed for a standard SBA guaranteed-loan request, which typically
involves the completion of 10 or more forms and/or narrative summaries
from the borrower. For a loan of $50,000 or less, the SBA requires
only a completed one-page application form; for a loan amount
of $50,000 to $100,000, the SBA requires a completed one-page
application form, copies of income-tax returns – Schedule Cs or
the front page of the corporate return – for the last three years
(if applicable), personal financial statements from all 20 percent
or more stockholders, and a brief internal loan report prepared
by the lender.
Start-ups are eligible for Low Doc loans, as are existing small
businesses. For an existing business to be eligible, it must employ
fewer than 100 employees and have average annual sales for the
preceding three years of less than $5 million. The restrictions
for maximum interest rates, terms and uses of loan proceeds are
the same in the Low Doc program as for the standard guaranteed-loan
program. And the guarantee fee is only 2 percent, which is lower
than those imposed for larger SBA guaranteed loans (outlined earlier).
Women’s Prequalification Loan Program
Another relatively new loan program for the SBA is the Women’s
Prequalification Loan Program, which recently became available
to every SBA district in the United States. "The SBA seeks
to improve on the number of loans to women-owned businesses,"
says Stamler, in response to why this program was started.
According to SBA literature, this program "allows a woman-owned
business owner to receive prequalification from the SBA for a
loan guarantee before going to a bank."
The key word here is before.
The women’s loan program is the only SBA guaranteed-loan initiative
that allows the borrower to go directly to the SBA for approval.
The bank becomes involved only after the SBA has signed off. This
is a big advantage because a bank is more likely to consider a
request for a new or young body shop that’s already been approved
with an SBA
As with the Low Doc program, the Women’s Loan Program focuses
primarily on the credit history, character and experience of the
borrower. Consequently, there are no stated minimum equity or
The maximum loan amount in the women’s program is $250,000. The
SBA will provide the bank with a guarantee of up to 80 percent
on loans up to $100,000 and up to 75 percent on loans between
$100,000 and $250,000. To be eligible, a small business must be
at least 51 percent owned, operated and managed by women; have
annual sales not exceeding $5 million; and employ fewer than 100
For loans under $100,000, the SBA requires only that the borrower
submit a one-page application. For loans of $100,000-$250,000,
the borrower must submit an expanded application, résumés
on the principals, a copy of the most recent year-end business
financial statement or tax return, and a personal statement. The
restrictions for maximum interest rates, fees, terms and uses
of loan proceeds are the same in the Women’s Loan Program as for
the standard guaranteed-loan program.
Loans Made Easier
The SBA program is one of the best-kept secrets in the intricate
world of financing. And, according to Stamler, we can expect to
see the SBA make its guaranteed-loan programs even more user friendly
– helping to make shop owners a little less leary.
"You’ll see an SBA that continually examines and adjusts
its product mix to handle various credit needs," he says.
"We’ll continue to fine tune. It’s an issue of adjusting
to what the consumer needs."
Writer J. Tol Broome Jr. is a contributing editor to BodyShop
Check It Out
Since the Small Business Administration (SBA) has been revamped
to be more user friendly, you might want to consider an SBA loan.
- Because the SBA assumes most of the credit risk, commercial
banks generally are more willing to consider riskier deals, such
as business start ups.
- The terms of repayment generally are more favorable than those
offered with conventional commercial financing, and the SBA estimates
that more than 90 percent of all U.S. businesses qualify for SBA
- Financing costs are very low. The SBA charges a guarantee
fee for term loans based on a sliding scale.
- Before finding a bank that handles SBA loans, prepare a business
plan, future profit-and-loss projections for three years, résumés
on key managers and owners, an outline of how the loan will be
utilized, three years of shop financial statements, personal financial
statements on all owners and the proposed collateral structure.
- For existing operations, the SBA looks for a debt-worth ratio
(total liabilities/total assets) of not more than 3:1 subsequent
to the loan being made. A start-up must have at least 30 percent
in equity invested by the owners.
- The SBA Low Documentation Loan Program can be used for loan
requests under $100,000. Start-ups are eligible. For an existing
business to be eligible, it must employ fewer than 100 employees
and have average annual sales for the preceding three years of
less than $5 million.
- The SBA Women’s Prequalification Loan Program is the only
SBA guaranteed-loan initiative that allows the borrower to go
directly to the SBA for approval. To be eligible, a business must
be at least 51 percent owned, operated and managed by women; have
annual sales not exceeding $5 million; and employ fewer than 100
CAPLine Revolving Line of Credit Program
The SBA’s CAPLine Revolving Line of Credit was yet another pilot
program tested in 1992-’93 that became a permanent part of the
SBA’s 7(A) program in fiscal 1994. The CAPLine program is designed
to help small businesses with short-term, working-capital needs
with a line of credit.
The CAPLine application process is the same as that of the 7(A)
term-loan process, but the structure for interest rates and fees
differs. As with the term-loan program, rates are negotiated between
the borrower and the lender, but they may not exceed prime plus
2.5 percent. The fee to the SBA is 1/4 percent if the line is
set up for one year or less, using the same sliding-fee scale
as the one used for the 7(A) term-loan program if the line is
set up for more than a year.
Other major provisions of the CAPLine program include:
- Maximum guarantee to the bank is 75 percent or $750,000, whichever
is less. In most cases, banks will cap a CAPLine revolving line
at $1 million.
- Advances on the line are generally limited to 50 percent of
the eligible inventory level and 75 percent of eligible receivables.
In other words, if your inventory level is $100,000, you could
borrow $50,000 against your line of credit. If your receivables
are $100,000, you could borrow $75,000 against your line.
- The inventory and/or accounts receivable are pledged as collateral
along with other business assets. The SBA/bank also may require
the pledging of personal assets from the owner(s) as part of the
- Lines can be set up for as short as a few months or as long
as five years.
- The borrower must have been in business for at least one year.
- The line cannot be used to refinance long-term debt.
- Taxes must be paid current.
- All owners with a stake of 20 percent or more will be asked
to guarantee the line.
- Quarterly financial statements must be submitted by the borrower.
- A borrowing base certificate must be submitted regularly by
the borrower. This provides information on the eligible inventory
and accounts-receivable levels that are available as collateral.
- The restrictions are somewhat lower for CAPLines of $200,000