As the economy has tanked, approvals of small business loans have dropped significantly. Whereas the Small Business Administration approved 473 loans, for $84.8 million, in New Jersey between October 1 and November 30, 2007, for the same period in 2008 the number had dropped to 142 loans, for $57 million.
The reason for this decrease, suggests Harry Menta, public affairs specialist for the U.S. Small Business Administration, is two-sided — lenders have backed off and small business owners are hesitant to take on new loans in an uncertain economy. Lenders, he says, are leery of taking unsecured loans, whereas previously some loans under $50,000, and in particular lines of credit, were being made without collateral.
“Lenders in this economy are not willing to take a chance without the security,” says Menta.
Menta adds that the Small Business Administration does have a stipulation that a loan should not be denied because of a lack of collateral, but since it is the banks that are actually making the loans, he says, “They call the shots.”
Menta will speak on a conference call about how to write a winning SBA loan proposal on Thursday, December 18, at 4 p.m. as part of NJAWBO’s Membership University. Cost: $25. To register, go to www.njawbo.org. For information contact email@example.com or call 609-799-5101.
The SBA works with a network of commercial lenders and guarantees their SBA loans. “Our guarantee sometimes pushes a lender over the fence,” he explains. Lenders will often entertain loans with an SBA guarantee that they would not do on their on. The SBA can approve loans for both startups and existing businesses, with loans that range from $1 to $4 million, depending on the type of business. For more information on SBA loans in New Jersey, go to www.sba.gov/nj.
When banks review an SBA loan application, they are looking at a number of factors to determine whether the business is likely to succeed:
Owner has experience. The person seeking a loan should bring industry experience to the table. If the person is already in the business, no problem. But people who want to open a new restaurant, say, should either have worked in a restaurant, including some aspects of management, or else surround themselves with experienced people.
Business fits size constraints. Maximums vary depending on the industry, and are indicated either by a required level of annual sales, averaged over three years, or the number of employees at the time of the loan application.
To find the maximum size for a particular business, go to www.sba.gov and follow instructions from there.
Minimums range widely. For full-service restaurants and hardware stores, the maximum sales is $7 million; for building construction firms, $33.5 million; for new car dealers, $29 million; and for plumbing, heating, and air conditioning contractors, $14 million.
For commercial lithographic printing, the maximum number of employees is 500, and for computer and computer peripheral equipment and software merchant wholesalers, 100 employees.
Credit is good. SBA lenders want to work with people who pay their bills on time, who don’t have any outstanding debt, who are not behind on payments, and who have no liens or judgments against them. “Basically stellar credit,” says Menta. “A lot of lenders that we work with, especially during this credit crunch, are using credit scoring, and if your score doesn’t meet their standards, that will be another strike against you.”
Owner has a significant investment. Before making a loan, SBA lenders like to see that owners have made a significant investment. If the business is ongoing, the owner should be able to show a 25 to 30 percent investment over time, whether in machinery, equipment, or assets. For a startup, lenders are looking for entrepreneurs to bring with them 25 to 30 percent of the total investment needed.
Business plan is finely tuned. SBA lenders are looking for strong business plans. Luckily, there are two organizations that can provide free consulting to budding small businesses.
SCORE (www.score.org), for example, offers mentoring from successful business advisors with experience in particular industries or business functions, either online or in-person. Another resource is one of the 11 New Jersey small business development centers (www.njsbdc.com), which offer counseling for small business owners on how to finance, market, and manage their ventures. In addition to free counseling, the centers offer an entrepreneur certificate program in partnership with New Jersey’s county colleges.
Menta emphasizes the value in having an outsider take an objective look at what is happening in a business. Referring to the mentors available through SCORE and the small business development centers, he observes, “these people can look at your draft and can tweak it or analyze whether a loan is the right thing to do at this time. Maybe you don’t need a loan, but help with marketing instead.”
Menta grew up in Plainfield. His father was a welder for PSE&G. Because Menta was already interested in journalism in high school, one of his teachers encouraged him to write for the Plainfield Times. He remembers particularly an assignment to write up a press conference by Congressman Mo Udall — with a great Polaroid snapped by his brother.
That story, which he wrote at age 18, ultimately landed him his first job with the Small Business Administration — as a student intern with the New York district office in 1978. The internship came through Northeastern University, a co-op school guaranteeing its students paid internships throughout college; Menta graduated from its five-year program in 1981, with a degree in journalism.
His internship led to a full-time job at the SBA as public affairs specialist in Syracuse; he then took the same position in the district office in New York, where he stayed four years, moving to the New Jersey district office in Newark in 1991. He also fills in as a business development specialist promoting SBA programs and services.