Startups with little to no operating history can find the process of seeking credit quite trying.
The U.S. Small Business Administra-tion, which lends money to small businesses through various banks, credit unions and other lenders, provides a government-backed guarantee on part of the loans, and the agency has increased lending volumes in the past several years as part of federal economic recovery efforts.
But some entrepreneurs in Orange County say they’ve encountered significant obstacles during the loan application process.
Difficult
For Paul Ward, founder of eSports Arena, which aims to be North America’s first dedicated facility for competitive video games, the process began in September.
“We went through a difficult process to find the right lender,” he said.
He approached several lenders with little luck.
“We kept hearing that it wasn’t a good time for business lending, especially for a startup, and that things would have been different three to four years ago,” Ward said.
Ward said most lenders wanted “considerable” collateral and cash commitments—often a combination that totaled more than the loan he requested.
Finally, eSports approached the Santa Ana-based Orange County Small Business Development Center in December to help find a lender and ended up getting a loan through CDC Small Business Finance Corp. An eSports investor put up collateral, and the company now is in the final stages of acquiring the funding. Ward said eSports is scouting locations in Orange County with the hopes of a summer launch.
“In order to get lending or to even have a chance to get lending, you need to have considerable assets, cash or money down, or you’re not going to have a chance,” he said. “That piece of information isn’t listed on the SBA’s website.”
Challenging
Kevin DiCerbo, director of Orange-based cosmetic dermatology company Celibré Inc., described the loan application process as “challenging,” primarily because of the paperwork that underwriters and the SBA required.
Celibré received its first SBA-backed loan in 2004, a year after the company’s founding. It used the initial loan from U.S. Bank to purchase equipment. Last year, the company refinanced the SBA-backed loan and consolidated it with two non-SBA loans, working with Irvine-based Sunwest Bank after unsuccessful attempts with several other lenders.
Celibré went through several rounds of paperwork with Sunwest and the SBA before it got approval for the consolidated loan. It also took out a lien on all of its assets except for accounts receivable, and amended leases for office space. It even extended one lease to the term of the loan in order to mitigate risk for the bank. The loan process began in December and took about 90 days to close, according to DiCerbo.
SBA officials said the agency’s target processing time on a standard 7(a) loan is six business days, but the process can take much longer—sometimes as many as 60 days from the time of the initial application, said Jim Ely, an associate at Newport Beach-based Stultz Financial Inc., a consulting firm specializing in financing for small businesses that helped DiCerbo get Celibré’s loan.
SBA officials said getting an agency-backed loan can be quicker and easier through preparation and information gathering before talking to a lender.
Typical documentation re-quired for an SBA-backed loan includes a business plan, three years’ worth of financial statements and personal and business tax returns, said Adalberto Qui-jada, district director of the SBA’s Santa Ana district office.
Setting a realistic target is also key, said Ely of Stultz.
“I think there may be a misconception that SBA loans may be difficult to get or may take forever,” he said. “There’s a right way and a wrong way to do it. The right way to do it is to have your initial information upfront and have an idea of what you want. Don’t say, ‘I want to borrow as much as I can.’ Know what you want, and then it gets a lot easier to get approved.”
Collateral
SBA-backed loans may be a good option for small businesses seeking funding, but getting them often hinges on collateral, such as real estate, and repayment ability, which many small-business owners may have a difficult time showing in early stages of development.
Agency officials, though, say it has built in alternatives to help small businesses clear collateral requirements.
“SBA’s collateral policy allows participating lenders to make loans to businesses that aren’t able to fully collateralize a loan, so long as lenders take the collateral that is available through their business and through the personal assets of the principals,” Quijada said. “Further-more, lenders are advised not to decline a loan solely on the basis of inadequate collateral.”
The SBA offers several lending programs for small businesses, including:
• its flagship 7(a) program, which can provide funding of up to $5 million for a variety of general business purposes;
• the 504 program, which provides small businesses with long-term, fixed-rate financing to buy assets;
• and the Small Loan Advantage program, with maximum loans of $350,000 for small-business formation and growth in underserved communities.
Currently, 20 SBA lenders are headquartered in Orange County, Quijada said, but lenders from across the state and country can grant loans to businesses here.
And the number of SBA-backed loans has been rising, according to SBA statistics. The agency saw a 9% year-over- year increase for the six months ending March 31 in the number of loans made to OC businesses and a 34 percent increase in gross dollar amount, according to Quijada.
In the first six months of this fiscal year, which started in October, the SBA backed 388 loans totaling $231 million for OC-based businesses, compared with 169 loans totaling $96.4 million in Riverside County, and 163 loans totaling $102.1 million in San Bernardino County. That’s still well below totals in the recession’s early days in late 2007 and early 2008—but also a big rise over loan numbers at the height of the downturn, when it backed just 213 loans in Orange County, 108 in Riverside and 104 in San Bernardino.
Small businesses in sectors such as accommodation and food services, healthcare and social assistance, wholesale trade, manufacturing and retail comprised the bulk of the loans, according to data provided by the SBA.
SBA-backed loans’ advantages for small businesses include availability and lengthier terms than conventional loans, Ely said.
“If you went to a bank to buy a business or to buy equipment, you might get a four- to five-year term,” he said. “With an SBA loan, you may get 10 years.”
But he added that early on in the application process, small business owners should address credit and eligibility issues, along with repayment ability. Lenders take a close look at those conditions when determining whether a small business is a good candidate for an SBA-backed loan.
“They want to know that a company is going to be generating enough cash flow to pay back that loan,” Ely said. “If you have a company with a track record that is trending in the right direction, it can get an SBA loan.”
