SBA Bridge Loans

SBA Bridge Lending Options

SBA loans are a useful financing options for small businesses in the United States and their use is becoming more and more important. In the US, SBA gross loan approval volume has increase by about 40% over the past few years, with total SBA 7(a) financing having reached $17.5 billion, up from just under $11B in 2012. The availability and use of SBA-enhanced financing is expected to grow among lenders in the years to come, as more and more lenders take advantage of the SBA-enhancement to help reduce their risk exposure when lending to small businesses.

What is SBA Lending?

SBA lending is traditional bank rate lending provide by large banks, small banks, community banks, credit unions and non-profit community lenders to small businesses as part of the U.S. Small Business Administration’s lending program. The government will approve specific lenders to be SBA-preferred lenders, and then those banks will provide financing to companies that meet the Small Business Administration’s definition of small business, and if they meet certain financial and business criteria. In return for providing financing to the small company, the SBA agrees to cover a large percentage of the lenders’ losses if the small business fails to repay the loan. The purpose of the program is to increase the availability of funding to small businesses by reducing the lenders’ risk, thus: provide quality financing to companies that wouldn’t get approved for financing otherwise. SBA loans are offered as either a term loan ranging from 3-25 years or a line-of-credit.

What is the SBA Lending Process?

The SBA lending process can slow and drawn-out. Of all the small business lending options, an SBA loan requires more paperwork, and the approval process can take longer than any other form of commercial financing. Usually the process starts with a lender looking at a company’s financials as well as the owners finances. All owners with 20% or more of equity share in a company will have to submit personal financials to the bank and the Small Business Administration in order to secure financing (as these owners will be required to personally guarantee their SBA loan).

After submitting all business and financial information to the bank, the lender will then business loan application checklist and figure out if the company meets the most basic requirements to qualify for financing. Some of the requirements include:

• Does company meet SBA’s definition of “small business”
• Is company for-profit?
• Has company been profitable at least once is past 2 years?
• Is the company in a business that meets the SBA’s criteria?
• Does borrower have a credit score above 650?
• Does the company show it has the ability to repay the loan?
• Does company have sufficient collateral?
• Does borrower have a strong enough personal financial statement to back up personal guarantee?

Documents Needed for SBA Funding?

In order for the lender to start the underwriting process for SBA lending, they will need specific documents to figure out what the company’s ability to repay new debt will be, as well as possible savings by consolidating and refinancing other higher-interest debt. To begin this process, the documents lenders would need are:

• 3 years business tax returns
• 3 years income statements
• 3 years balance sheets
• 3 years personal tax returns
• Schedule of business debt
• A/R and A/P aging schedules
• Personal financial statement
• Appraisals

What is Bridge Financing?

Traditionally, bridge financing is a short term business loan used as temporary financing until a more permanent financing facility is in place. Most bridge loans are used for immediate working capital needs and are usually paid-back in 1-12 months. Being that an SBA loan may take up to two months for funding to be accomplished, a company may find themselves needing immediate working capital that wouldn’t be available for weeks. In those instances a company may seek a bridge financing option to help meet their needs until permanent SBA financing is completed.

SBA Bridge Loan Options

Alternative SBA Bridge Lending

Alternative marketplace business lenders offer companies seeking SBA financing with quality bridge financing without paying extremely high rates and fees like other forms of alternative business lending. Mid prime lenders are considered the middle path between bank-rate financing, and high-interest merchant cash advance funding. Mid prime loans are especially useful for SBA borrowers because most mid prime business loans are available without a prepayment penalty, allowing a borrower to use proceeds to payoff the bridge loans without fear of additional fees. Documents needed for funding include:

• Credit application
• 6 months bank statements
• 2 years business tax returns
• 1 year personal returns
• Profit and loss statement
• Debt statement

Cash Advance Bridge Loans

Cash advance bridge loans aren’t actually loans, but are a business-to-business sale of a company’s future bank or credit card deposits in return for upfront cash. This type of financing is especially useful for company’s that have a high volume of credit card or bank deposits per month, and have a solid daily balance in their accounts. Repayments for merchant cash advances are usually made daily or weekly, and can be extremely expensive and don’t offer savings if paid-back early. Documents needed for a cash advance include:

• Credit application
• 6 months bank statements

Asset Based Bridge Loans

Asset based business loans are a type of business financing that involves using a company’s balance sheet in return for immediate funding. Asset used for collateral are usually accounts receivable, commercial and personal real estate, and inventory, although lenders have used other forms of a company’s assets as the basis of funding. Documents needed for asset based bridge loans include:

• Tax returns
• Income statements
• Balance sheets
• List of collateral and appraisals

Equipment Financing

For companies in the middle of the SBA lending process that may find themselves in immediate need of equipment, a capital lease may be a good option. Equipment leasing is a process where a commercial lender purchases equipment for another company, and then leases it to that company for a period of time. At the end of the set leasing period, the small business is usually given the option to purchase the equipment outright (for as little as $1) or provided the option to extend the term. Documents needed include:

• Leasing credit application
• Purchase order
• Profit and loss statement

Invoice Factoring

Another form of business financing that may help a company bridge its obligation while in the middle of the SBA lending process is invoice financing. Invoice financing (or invoice factoring) is the sale of a company unpaid invoices in exchange for immediate funding (as soon as one day). Documents needed include:

• Application
• Unpaid invoice