Second Location
Q: All that red tape with a Small Business Administration loan is intimidating. Any tips on moving easier through the process?
The red tape part is life. You have to live with the red tape whether it’s a conventional or Small Business Administration (SBA) loan.
There is a certain amount of documentation that you have to do with any loan. That scrutiny is even tighter in today’s market than 12, 18, or 24 months ago. A lot of that is based on the sub-prime mortgage market debacle as well as the current state of the economy.
The key with the SBA process is to realize that when people ask you for things not providing them does not mean they aren’t going to ask for them again. When you get your checklist of all the things you have to have, you literally have to have those things. The loans just cannot move forward without them.
There are two parts to every SBA loan. The first part is the bank approving the deal and getting it ready for underwriting. The second part is them putting all the information into that loan file and documenting it in a way that qualifies for that governmental loan guarantee. That red tape doesn’t have anything to do with credit decision, but it has everything to do with what’s going to be required to ensure that the SBA guarantee is there in case that loan defaults.
In a conventional loan, the checklist most likely won’t be as long or as in detail. With an SBA loan, the typical borrow might say, “Well, why do they need to know that? It’s not even part of what I’m trying to do here.” Well, you have to address each one of those areas because they have to be documented for that SBA guarantee even if it does not apply. There is just a whole set of paperwork that goes along with it that the lender has to fill out if the guarantee is going to be in place.
When we say we need three years of personal and corporate tax returns and borrowers come back with the past two years and say, “The third year is in my attic in a file cabinet and it’s July and it’s hot,” that doesn’t change a thing. We still need that third year of tax returns. You just can’t skip any of the steps or the loan is not going to go through.
In this market, not completing a form or having bad penmanship or having a sheet with something spilled on it, the lender is also looking that the application as an extension of your ability to run a business. If you turn in your “homework” and it’s all messed up and you can’t read it, it’s going to be an indication of how you intend to handle a business, of how serious you are about getting this loan done. You’re asking these guys to trust that you’re going to repay the money.
You want to put your best face on literally everything. Over-provide information if you want the process to go smooth and quickly. I like to say there is $150 in great deals—and only $100 in cash. About a third of the deals don’t get funded. And the reason why is stuff like files are incomplete, unreadable, one guy looks like he cares more. It’s just like a job interview; you need to put your best face forward.
Two years ago it didn’t matter because everyone was go-go-go. The last loan an operator got might have been when things were a little looser. Not anymore. The pendulum has swung 180 degrees the other way. The ex-IBM guy with $800,000 to put down on a Ruby Tuesday’s would probably not get a loan today, even though he has that much money. Lenders are looking for someone with direct restaurant experience for three to five years. If you don’t have that, if you’re the money guy, you need to bring on a partner who does have that.
A lot of the conventional, private moneylenders have left the market, especially in the quick-service business. A lot of people, not knowing where to go, are migrating immediately to the SBA. But there are smaller, private money groups out there that are doing conventional lending for restaurants. Depending on the borrower and the concept, there are ways to get things done without going through the SBA.
Credit officers are now really underwriting the concepts, as well as the operator. The better the franchisor keeps its house in order, the better it can answer the questions of the lender, the more likely the franchisee is going to get the loan they are looking for. Not all franchises are created equal in the eyes of a lender. Experience cannot be overstated. Right now that’s the No. 1 focus of most lenders. Then it’s the operator’s track record, financials, the strength of the concept—anything we can use to buttress and make that case.
You’ll likely get more money in an SBA loan because they’ll fund working capital. A conventional loan might fund only all the hard costs and the franchisee fee. But the terms and conditions might be such that you’re much more comfortable in a conventional loan. SBA loans might have a lower rate, but that rate is going to be adjustable. I would bet over the term of that loan that rate is going to go above the rate of a conventional loan, which would typically be fixed.
Don’t just throw up your hands and lay down at the altar of SBA. It might be the best option for some people, but it’s not in the case of all.