My wife and I will meal plan for the week based on the sales occurring at each of the three grocery stores we shop at. Yes, I said three grocery stores. Hard to imagine, but produce and meat are not of equal quality at each grocery store. SBA loan lenders can be viewed in the same manner. Like grocery stores, there are numerous financial institutions in any given location, not to mention with the introduction of the Internet, one has countless options for obtaining SBA loans.
Shopping around for an SBA loan is not as exciting as grocery shopping, but it is an area that should be examined before obtaining an SBA loan. My wife and I experienced trial and error before realizing what we enjoyed most at each grocery store, the same goes with obtaining an SBA loan. I would argue that most individual’s tenure with banks date back to high school or college. While you may be settled and comfortable with your current bank, there may be better options out there, especially around the topic of SBA loans.
There are hundreds of banks and several non-bank lenders promoting SBA loans. Not every lender or bank is the same. As such, navigating lenders can be challenging. A lender should be admired and viewed as an advisor to the business. In order to identify the right lender, there are 8 questions one should ask, three of which you should ask personally and the other five to the potential lender of the SBA loan.
Questions to Ask Personally:
1. How will I utilize the extra capital?
By articulating the purpose of the loan, the borrower will be able to answer the next two questions. Identifying the purpose of your loan will assist in identifying the terms of the loan that best suit your needs.
2. How much do I really need?
After understanding the purpose of the capital, the borrower should look into how much is needed. Purchasing a business or a commercial property may answer this question quite simply. However, seeking an SBA loan to expand business operations may present challenges. As such, most businesses should seek out business advisors that can set realistic estimates on how much capital is actually needed.
A borrower, should ensure that the funds will result in either increasing return on investment and/or adding value to the business. Additional funds, could potentially diminish return on investment. This is often the most difficult decision to make. Discuss with the lender what seems appropriate. This will provide another way to vet whether or not the lender is looking out for your best interest.
3. How quickly will I need the funds?
I spoke with an individual last week that was looking to obtain a loan within 5 weeks. When I reached out to this individual, 18 weeks had passed since the loan process began. This individual was frustrated for a good reason. The added value that was expected for this year will not be recognized until 2019. The speed of funding is most often viewed as the primary reason for selecting a bank lender. Understand the need for financing will directly correlate with how quickly you will need the funds. Timing will ultimately impact the lender you decide to work with.
Questions to Ask a Potential Lender:
1. Does the lender lend to businesses in your industry?
Each bank and non-bank lender have a list of industries whom they do not serve. For example, this morning I spoke with a lender that does not service loans used for gas stations, assisted living and car washes. Ask this question early on.
2. What terms will best suit the business?
Since you have identified the purpose of the loan, you can determine whether or not you are looking for a short-term or a long-term loan. Interest rates fluctuate, depending on the duration of the loan. In the case of an SBA loan, interest rates will vary depending on the bank. The lender I spoke with this morning, mentioned that their current rate on an SBA 7(a) loan is PRIME (currently 5.25%) + 2.25%. Most likely, you will not understand the exact terms of the loan until further into the underwriting process, but ask early on.
3. How long will the application process take?
Refer to my response for how quickly you will need funding. The average loan process is between 30 and 40 days. However, the process depends greatly upon the lender and it could take anywhere from several weeks to months. This question will weed out lenders early in the process. Understand, that there are several reasons as to why a particular loan may take longer than originally estimated.
4. May I speak with current and past customers?
Just like you search for customer reviews for restaurants and products, you should ask to speak with customers of the bank lender. Document your findings and seek out current and past customers. Do not hesitate to ask about concerns or questions. If the lender is unable to address your concerns, move on to a different lender.
5. What resources are available after the loan closes?
I have spoken with several lenders that do little after an SBA loan closes. One simply mentioned that they collect payments and pass the relationship back to the relationship manager. However, the relationship manager may or may not follow up and keep in contact with the borrower. In contrast, there are several lenders that keep in close contact with the borrowers in order to find ways to educate or assist the borrower. If a lender is able to assist the borrower, then the borrower has a higher probability of being able to service their debt. In addition, it provides a way for the lender to stay forever present in the borrower’s mind as a reliable resource.
There are several financing options available to small businesses. By simply asking these questions, you will be able to identify the lender that best suits your business’s needs.
Feel free to share other questions that I may have missed in the comments.