Working Together to Put You in Business

Credit unions now have a means to expedite loans to credit-worthy businesses that might not qualify through other lending channels.

The Credit Union National Association (CUNA) has created a program that enables

credit unions to offer Small Business Administration (SBA) loans to their members and enhances credit unions' ability to provide long- and short-term loans to small businesses.

"SBA is a cash flow lender," according to Michael Hearne, SBA expert and consultant for CUNA. "Most lenders require two forms of repayment: adequate projected cash flow and sufficient collateral in case the loan cannot be repaid. An SBA guaranty is often used when collateral is insufficient. This allows credit-worthy businesses to acquire the financing they could not otherwise obtain through conventional means."

"It takes money to make money"--especially if you're a small business owner. There were approximately 22.9 million small businesses in the U.S. in 2002, according to the SBA. Small businesses provide approximately 75% of the net new jobs added to the economy. Still, an estimated four out of five businesses fail. Why? Poor management is cited most frequently as the reason businesses fail, with inadequate financing a close second.

SBA loans only can be used to finance the start-up, operation, or the expansion of a business. You can't use the funds to repay other debts, reinvest in financial instruments, or speculate in real estate, financial, commodity, or other markets.

There are several SBA loan programs and services available, such as CommunityExpress, which provide loans to businesses located in low- and moderate-income areas. There is also an online women's business center that provides women entrepreneurs with business training and counseling, technical assistance, mentoring, and access to SBA's programs and services.

How to get an SBA loan

To obtain an SBA loan, you must demonstrate the ability to repay the loan from the cash flow and profits of the business. For existing businesses, "The main thing they need to do is show a profit on their tax returns. A lot of business owners don't use their taxes to show their business in the best light," says Hearne. A lender looks at a business's tax returns for proof that that business makes money and can repay the loan.

The second thing lenders look for is a feasible business plan. "If you're a start-up business, it's an absolute requirement," recommends Hearne. "If you're an existing business, it's nice to be able to show the business plan you used when starting up, how you've been following it, and how you've progressed."

Other things credit unions and the SBA look for in determining eligibility are:

• Sufficient collateral, "although lack of collateral is not a reason to be turned down for an SBA loan," according to Hearne.
• Reasonable personal contribution and/or business equity, which, along with the loan enables the borrower to operate the business on a sound financial basis.
• Good credit history of business owner(s) and the business.
• Management experience.

The credit union makes all necessary arrangements to secure a loan with SBA.

Your loan repayment schedule depends on the use of the loan funds and the ability of your business to repay the loan. Both fixed and variable interest rates are available for an SBA loan.

Borrowers should be prepared to pay closing costs on SBA loans, including all recording and packaging fees, title company and environmental reports, appraisals, and attorney fees. Total closing costs average between 1.5% and 5% of the loan amount. Other fees may be required.

The definition of a small business

To be eligible for an SBA loan, you must operate a business for profit and not exceed SBA's size standards. Size standards are based on either the average number of employees during the preceding 12 months or on sales averaged over the previous three years.

Size standards are:

• Manufacturing, from 500 to 1,500 employees, depending on the industry.
• Wholesaling, 100 employees for financial programs (500 for contracting-assistance programs).
• Services, from $4 million to $29 million in average annual receipts or 1,500 employees, depending on the industry.
• Retailing, from $6 million to $24.5 million in average annual receipts, depending on the nature of the business.
• General and heavy construction, from $17 million to $28.5 million in average annual receipts.
• Special trade construction, $12 million in average annual receipts.
• Agriculture, from $750,000 to $10.5 million in average annual receipts.

Bring your paperwork

Here are some things you should bring with you when you visit the credit union to apply for an SBA loan:

• Purpose of the loan
• History of the business
• Projected opening-day balance sheets
• Lease details
• Amount of investment in the business by the owner(s)
• Projection of income, expenses, and cash flow
• Signed personal financial statements
• Personal resumé

For existing businesses, also bring financial statements for three years, schedule of term debts, and aging of accounts receivable and payable.

Your credit union loan officer may help you with your business plans; visit or call the credit union today.

Published August 4, 2003

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