Transcript: CIBC US Financial Toolbox podcast, Episode 6 — Unlocking the SBA advantage: Financing solutions for small businesses
Welcome to Financial Toolbox, a podcast series sponsored by CIBC Bank USA that understands that financial wellness is not innate, it's learned. Whether you're a member of the next generation wanting to start your financial journey out strong or you're a lifelong learner looking to improve your financial standing moving forward, our team of experts are here to equip you with the information you need to help make your financial ambitions a reality. And now for our next episode.
>> Kevin Kehoe: Hello and welcome to Financial Toolbox. My name is Kevin Kehoe and I lead the business banking group for CIBC Bank USA. I'm pleased to be your host today. For this episode, we will discuss what SBA lending is and how you can qualify as a small business owner looking for financing. Joining me today to discuss further is Paul Liles, who manages our SBA team here at CIBC Bank USA. Thanks for joining me, Paul.
>> Paul Liles: I'm very happy to be here, Kevin, and thanks for the introduction.
>> Kevin Kehoe: Let's start with you telling the audience a little bit about yourself and how long you've been in banking.
>> Paul Liles: Sure. I've actually been involved with SBA lending and business banking for over 18 years. And I've been with CIBC more specifically for over 13 years, running the SBA group. And so I've had a lot of opportunity over the years to help thousands of business owners get access to capital and hopefully realize some of their dreams with some business financing through the SBA program.
>> Kevin Kehoe: That's great. So let's dive in and can you help us understand what exactly is an SBA loan?
>> Paul Liles: Sure. That's a great question. An SBA program, basically the way that we look at it is, it's a government guaranteed loan program that partners up with banks and financial institutions and typically will come in and guarantee up to 75% of the loan. So that helps banks and again, financial institutions be able to lend to small businesses when maybe conventional financing isn't available. So it really is a great tool for small business owners and for banks to be able to get that access to capital.
>> Kevin Kehoe: What would be reasons you would look to do an SBA loan versus a conventional business loan where there's no SBA guarantee?
>> Paul Liles: Yeah, and I think the easiest way that we look at it is breaking it down to three main reasons that you would apply for an SBA loan and typically what we're seeing. Those three reasons are: if there's a collateral shortfall, which typically is about, I'd say 90% of the loans that we look at, there's some form of collateral shortfall; the second bullet point would be equity injection; and the third would be extending the term or the amortization of the loan. And I'll just go briefly over each of those three just so you have a better understanding. But the first reason is really collateral shortfall, which again makes up for a good portion of what SBA financing is for. If you're looking to acquire a business or maybe refinance some debt, there's not a lot of collateral that supports those requests. And when you're looking at conventional financing, typically a bank's going to want 100% collateral coverage in order to lend out to that specific purpose.
>> And so the nice thing is with the SBA, they do allow for collateral shortfalls when you're doing SBA loans. And in fact, you can't really decline somebody because you don't have enough collateral. We just have to be able to attempt to fully secure that loan. So it really does make a unique situation where traditional financing may not be available where collateral shortfalls are allowed through the SBA program. The other main bullet point there is with equity injection. The SBA typically is only requiring up to 10% of the total project cost or a 10% equity injection where when you're looking to purchase a business. Or say you're looking to purchase some equipment, it allows you to only put that 10% as a borrower so you can keep your liquidity for other purposes for the business or for personal reasons. And so it does allow a lot of business owners to come in to acquire, say, another business with putting not so much equity in.
So it really is a nice tool for business owners to get, again, access to capital without putting, which maybe a traditional financing situation would require a 20, 30, 40% down payment. And then the third main reason why we see SBA is when clients are looking to extend the term or the amortization of the loan. The nice thing is with SBA financing for pretty much all business purposes, you can go up to about a 10-year term or amortization on the loan. And if there's real estate, you can actually go up to 25 years. And so when you're looking at traditional conventional business banking financing, say you're refinancing some debt or you're getting an equipment loan, you're typically not going to see a 10-year amortization or term on that. It's typically going to be maybe around five or seven years. So SBA allows you to extend out that debt service and allow for additional cash flow in the business.
And then in some cases, if we have real estate and we have say business acquisition and we have some debt refinance, you can blend that all in to a longer term or amortization. In some cases, if say the real estate is the largest piece of the proceeds of the loan, you can, in those cases, maybe go up to 25 years for everything. So it really does give you more flexibility as a business owner to be able to extend the term. And so those are kind of, again, not all the reasons why SBA, but I'd say those can be put into those three particular categories of why somebody would want to get SBA financing.
>> Kevin Kehoe: Those are great details regarding some additional information to help borrowers qualify for a loan. Two points, I guess. What are some of the other qualifications needed for an SBA loan? And obviously banks look at cashflow. So maybe talk a little bit about cashflow as well when we factor in an SBA loan.
>> Paul Liles: Oh, no, those are all great points. And to go to the cashflow point, SBA lending truly is cashflow lending. When you look at the requirements that the SBA puts in place, it really comes down to from a lender standpoint and the SBA standpoint, is how does the cashflow look and does the borrower have the ability to repay back the loan? And so typically what we're doing is we're looking at historical cashflow of the business. So we're looking at the last three years and determining is there enough cashflow on a historical and a go forward basis to be able to repay back the loan. So on our side, what we're usually looking at is, again, the historical last three years of business tax returns and financial statements to determine the cash flow, as well as looking at the interim financials in the trailing 12 months. So we can get a great picture of what's going on currently and what they've done in the past.
Outside of just the cashflow, there are some other main qualifications that the SBA does require, to your point, on eligibility. And some of the bigger ones that wanted to discuss today are, in order to be eligible for an SBA loan, you must be organized for profit and be based in the US. All owners must be US citizens, US nationals, or lawful permanent residents, as well as we have to be able to show that they could not get credit elsewhere. And this is a big point. This has been something that the SBA's had out there for a long time. And in essence, what they want us to do is to make sure that the borrower wouldn't qualify for traditional or conventional financing because the SBA is really there to enhance business lending when it may not qualify for conventional financing. So if it does qualify for a traditional loan, or the SBA wants the bank to do it that route.
But in those cases, like we talked about with collateral shortfall, extending the term or the amortization and equity injection, those are all great purposes that the SBAs therefore that conventional financing wouldn't allow for. So we just need to be able to document that. Some of the other key criteria for eligibility or size standards. So the SBA does have a couple size standards that it wants us to look at. And what that means is this program is truly meant for the small business and the mid-size business owners. And so they don't want enterprise middle market companies being able to take advantage of this because they should have more access to capital than the small business owner. And so they usually look at, when it comes to these size standards from an SBA perspective, there's either an amount of employees or it's the actual size of the company itself. And what they look at is a lot of times what's called an alternative size standard. And what that states is that the company cannot have a tangible net worth of more than $20 million and an average net income on their taxes over the last two years of more than six and a half million. And so as you can see, that's a pretty big gap that a lot of small businesses and medium-sized businesses quite frankly can qualify, but trying to eliminate some of those larger companies that you'll have other options for access to capital.
A couple other pieces here is that any owner of 20% or more must be a personal guarantor for the loan, as well as there are some requirements on the individuals themselves. If they've incurred a loss to the federal government in the past, they wouldn't be eligible because obviously you don't want to be lending out to somebody who's already defaulted on a government loan, as well as they look for good character. So somebody who's got good character. They look at their personal credit and things of that nature. So we have to look at all those factors from an eligibility standpoint. And one thing that we always look to do is make sure that if you're looking to get financing, make sure you're working with a preferred lending partner because a preferred lending partner's going to be able to understand all of these policies, these procedures, and be able to determine the eligibility that the SBA is set
>> Kevin Kehoe: That's a very good point with all these details and qualifications. Explain a little bit more what an SBA preferred lender is and is CIBC Bank USA one?
>> Paul Liles: Yes, great question. Again, CIBC Bank USA is an SBA preferred lender, and basically the way that it's looked at is, there's two different types of lenders. There's a preferred lending partner, or a PLP is what we use for short, as well as there's certified lenders who they submit things directly to the SBA. And so there is a big difference between the two. If you're a preferred lending partner, you've actually gone through and done quite a few loans to where the SBA's approved and said, you have the knowledge and expertise to do these loans on your own without the SBA's assistance.
And so as a preferred lender, you're able to come up with decisions a little faster. There's the expertise on structure and eligibility. And so it definitely makes sense to work with a preferred lending partner if you're looking to navigate some of the SBA eligibility rules and structure.
There also is certified lenders and in certified lenders, they work directly with the SBA. So they put together the loan packages and the SBA eligibility that they've determined and they submit into the SBA for their approval. And so both ways you can get SBA loans completed. But as far as preferred lending partners, it definitely helps when it comes to the speed of the transaction, being able to make our own decisions in- house versus having to submit things to the government and hope that they have the ability to pick up that file and work through it at a rapid pace.
>> Kevin Kehoe: I know that SBA department has a lot of different programs, a lot of different products, but let's maybe talk about what types of loans you can get or maybe the more popular loans you could get through the SBA department.
>> Paul Liles: Yeah. And I think what we'll focus in on are the main three programs that we have that we typically work on. SBA has quite a few different ones, but really the main three that we typically see are going to be the 7A program, the 504 program, and the SBA Express program. The 7A program really is for all business purposes. So I'd say we see probably 90% of the loans are going to be an SBA 7A loan. And the reason is you can use it for business acquisition, real estate financing, equipment expansion, inventory, leasehold improvements, debt refinance, working capital. So those are just some of the things that you can use the 7A program for, which is nice. It's kind of all encompassing through that program. The next program that we see a lot of is the 504 program, and it's very similar to the 7A program, but it only is intended for real estate or equipment purchases or refinances. And so a lot of clients might choose to use the 504 program versus 7A, because sometimes there are some advantages from an SBA rate perspective. It may be a little lower than what the traditional or conventional rates are, but there are some prepayment penalties and things that you have to look into. So you always want to make sure you're talking to your preferred lender to see which program makes the most sense, whether 7A or 504. And then there's the third making program that we see, and those are the SBA
Express program loans. And typically what those are, they're either traditional term loans or lines of credit for a business. And I'd say most of what we see are lines of credit. We're giving this working capital line of credit to small businesses, usually with say, a 7A loan or a 504 loan. So they have access to additional capital for short-term working needs for the client.
>> Kevin Kehoe: Great. I think the SBA is a great program for many small business owners and as well as for the bank, based on some of the different variances that we have with collateral cashflow. But what are some of the benefits for SBA partners and borrowers, and are there any drawbacks with the SBA program?
>> Paul Liles: Yeah, good question. And I think there's a lot of benefits for both borrowers as well as for the bank with the SBA program. Specifically for the borrower, as I mentioned earlier in the podcast, when it comes to collateral shortfall, extending the term amortization or the equity injection, those terms or better repayment terms, allow some flexibility for small business owners to get access to capital. So it, again, allows them to take advantage of a program where maybe conventional financing isn't available and get the much needed funds to help their small business. And then on the flip side, for the bank, the reason why banks are involved in this program is the SBA does come in and guarantee typically up to 75% of the loan. So basically the SBA, the government is coming in as partners with us on this loan, which may have a little bit more risk as we may not have a fully collateralized loan or extending terms out longer than we normally would on a conventional loan.
So they partner up with us, which allows us to attract new customers and to meet some of these needs of borrowers. So there's a lot of advantages and benefits for both the borrower and the bank. Now, as far as maybe if there's any drawbacks, I'd say really the only drawback is that there is some cost involved with this program. Obviously, it's a great program that allows access to capital when conventional financing may not be available, but the way that the government runs the program is they do charge anywhere from a 2 to 3.75% fee on that guaranteed portion. So that up to 75% that we said typically is guaranteed, there will be a fee that's associated with that. And the reason the government has that fee is that this program for the most part has run at zero subsidy, which means zero subsidy, it doesn't cost the taxpayers any money.
They want the fees that are generated from this program to basically pay for the program itself. And so there are some costs that are involved, but the good news is on the flip side is that these fees can actually be built into the loan itself. So a borrower doesn't have to come to the closing table with additional cost or fees that they have to pay. Any third party fees and the guarantee fees can be built into the loan itself. So really they're just bringing in that typically 10% equity contribution, or if that's not required, they're coming in and they're getting the SBA financing piece without having to put in additional costs.
>> Kevin Kehoe: That's good to know and obviously helpful for borrowers typically that are trying to leverage the SBA department. So typically, how long does it take to apply and close on an SBA loan? And is there any additional documentation that's standard for an SBA loan?
>> Paul Liles: Yeah, so typically for an SBA loan, I'd say if you're working on a standard 7A transaction, you're usually looking at about 45 to 60 days from start to finish. Now, if you have real estate involved, that can take a little bit longer because sometimes you're dealing with environmental work, you're dealing with appraisal work. And so I'd usually say give yourself 60 to 90 days from start to finish if there's real estate involved. But really the key from a timing standpoint is we can close and get through the process as quick as the information is flowing to us. So if we've got information or questions that we have from an underwriting perspective that we're going to the business for, or if we're waiting on closing checklist items from a client to get to the closing table, the sooner we can get the access to all that information, the sooner we can close.
So that's where, again, I always emphasize, make sure that you're working with a preferred lending partner like CIBC USA that has the expertise and that has a process, so that way they can do a quick turnaround time. We can get term sheets, commitment letters and get to a quick closing for the client.
>> Kevin Kehoe: Well, I know there are more details that we have not had time to discuss, but how best would someone inquire about getting an SBA loan?
>> Paul Liles: Yeah, so I'd say the best way for somebody would be for them to reach out to their relationship manager or their SBA business development officer at CIBC. They should have all the tools and knowledge and expertise to be able to help guide them through any questions that they have with the SBA program and help to be able to set up the financing and the structure that's appropriate for the borrower.
>> Kevin Kehoe: Well, thank you, Paul, for all the details and information regarding the SBA department and SBA lending. If you have any additional questions, you can also check us out at cibc.com/US or across several social media platforms by searching @cibc_US. Thanks for listening. We look forward to catching up again soon.
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