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Small Business Lending Guide

A PRACTICAL GUIDE TO USING LOANS TO FINANCE A SMALL BUSINESS

(The author is an experienced small business lender with over 30 years experience in banking and 20 years of SBA lending experience. The information contained in this document is based on his decades of working with small business owners in Hampton Roads and elsewhere in the Commonwealth,)

Introduction

Established and aspiring small business owners throughout Virginia as well as their SBDC counselors are frequently challenged by the confusing maze facing them when attempting to discern the range of debt financing options available to them. The advent of the Internet has opened up a plethora of additional financing options; some could provide sound financing for the business while others are akin to loan-shark activities of old. And, although there are hundreds of options now available to borrowers, the basis upon many credit decisions are made have remained the same as they were in the 1970’s when this writer commenced his banking career. It should be noted that this document will focus on debt financing as well as crowd-funding, but will not delve into equity or Venture Capital (VC) sources.

Section 1 – Lender’s Task – Risk Mitigation

The essence of the lending process are these immutable facts: 1) lenders are paid to minimize the potential risk of loss with every loan made, and 2) statistically only 50% of new businesses survive 5 years and in some industries (restaurants) the survival rate is only about 20%. Additionally, lenders have comfort zones that are based on their experience gained from prior loan losses as well as those zones dictated by the credit underwriting guidelines of their respective institutions. Some lending institutions are particularly risk-averse (i.e. no loans to start-up entities) or specific industries (i.e. no restaurants). Therefore, it is strongly recommended that the borrower and/or counselor investigate which lenders in their market are more “entrepreneurial” than their peers. One way to make this determination is whether or not the particular lender participates in loan guaranty programs offered by, among others, the Small Business Administration (SBA), Virginia Small Business Financing Authority (VSBFA), etc. Another consideration is where and how the credit decisions are ultimately made. Most mid-to-larger regional or national lenders have centralized their small business underwriting which means the local contact is more of a conduit to transmit information to the ultimate approval authority. This model helps ensure a uniform delivery of credit products, but at the cost of a reduction in risk taking.

A. Lender Underwriting Guidelines

Cash-Flow or Collateral Based Credit Decisions

Another salient factor is whether the lender makes credit decisions based on cash-flow or collateral. Locally, there are some financially strong, community focused institutions that are collateral-focused. In other words, they generally base credit decisions on the collateral available to secure the loan (a/k/a secondary repayment source). Other lenders focus first on cash-flow (a/k/a primary repayment source). Collateral is still important, but if cash-flow cannot be verified then, regardless of the collateral, the loan is not approved. Loan guaranty programs from the SBA and VSBFA are cash flow based. In short, lenders typically look for both a primary and secondary repayment source when underwriting loans.

Historical vs. Projected Cash-Flow

Some cash-flow lenders will gladly approve loans based on historical information (typically 2-3 years), which is a de-facto prohibition against start-ups and/or growing businesses where historical results do not support debt repayment. Other cash-flow lenders, using agency loan guarantees, will underwrite loans based on future income streams. These are the “entrepreneurial” lenders to which borrowers and advisors should seek.

Debt Service

Debt service is one of the ways a bank evaluates a potential borrower. Simply stated is it the total annual loan payments incurred by the borrower. One formula used by lenders to ascertain adequate debt service coverage is as follows:

Debt Service Coverage = net income + interest expense + depreciation

Various lenders have different Debt Service Coverage (DSC) requirements. The above formula is rudimentary. Frequently lenders have more sophisticated models used to calculate this ratio. Additionally lenders, as do loan guaranty agencies such as the SBA and VSBFA, periodically adjust their acceptable minimum DSC levels. Borrowers should also keep in mind that this ratio is supposed to be used only for term loans, but some lenders will use this calculation to address repayment ability for a fully-advanced line of credit that is placed on long-term repayment.

B. A Twist on the C’s of Credit

Additional Assessment Factors

When lenders assess the borrower’s risks associated with funding a new or expanding business they assess his or her creditworthiness based on several factors (visualize a 4-legged stool). The criteria include:

Experience – both general business and industry-specific experience. Open for debate is the impact/value of franchise affiliation to address experience.

Character – this is especially true for agency guaranty lending. Small business lending, and especially SBA lending, are viewed as character-based loans. To this writer’s knowledge, no lender has devised a “character test”. As a result, institutions resort to various algorithms derived from personal credit reports to determine creditworthiness. This assessment of personal credit is frequently the first factor used to winnow-out marginal loans. There is a practical reason for this assessment tool as well. Thru experience lenders have found a direct connection between the way a small business owner handles his or her business and personal credit. Even the SBA has begun using credit “scoring” to underwrite loans up to $350,000 (i.e. small loans). For this reason, it is very important for borrowers to assess personal credit as one of the first qualifying factors when assessing creditworthiness.

Oftentimes, borrowers will question whether their personal guaranty is required. The short response is YES. Most lenders require personal guarantees from any/all owners with a 10%+ ownership interest. Interestingly, though the SBA is somewhat more “liberal” in that they require the same for all 20%+ owners. However, if a spouse owns 5% or more of that same entity then he or she will be required to guarantee the loan. Also, if there are any key managers in the business, then they too may be required to guarantee the loan even if they have no ownership interest. In addition, any owner/guarantors will need to complete a personal history document, at which time prior criminal history must be disclosed, and they will probably also be required to submit several years of personal tax returns.

Equity – the amount of dollars that the borrower has at risk as a percentage of the total funding need. Frequently, this is a subjective value that can vary from one lender to another. In the past even the SBA assigned fixed equity injection values to their loans, but, in more recent years, they have modified that requirement so that each lender can determine the acceptable level of equity required. This being said, lenders in most cases will seek a minimum of 10-20% cash equity. Interestingly, the SBA also permits lenders to consider equity other than cash (such as tools, etc.) but many SBA lenders do not give credit for any equity other than cash.

Collateral – even SBA lenders are required to address the adequacy of collateral. However, it is generally understood that in most cases there is some level of collateral shortfall present. Interestingly the agency has, in recent times, modified its collateral adequacy definition. However many SBA lenders continue to operate under the premise that borrowers need to pledge “all available collateral” to address the risks inherent with agency-backed loans. An additional consideration is that a borrower needs to understand the true amount needed to launch or expand his or her business and also need to request the proper type of loan (i.e. a line of credit for short-term needs vs. a term loan for longer-term financing. Lenders use these factors to assess the risks associated with each loan. If all legs are equal in length the stool is steady, but if one leg is shorter than the rest then the stool is shaky. One solution would be an agency guaranty that would level the short leg. However, if more than one leg is short, then the guaranty of an agency such as the SBA is not sufficient to get to “yes”.

C. Additional Lender Considerations

Other Factors to Consider

A recent survey of small business owners who attempted to obtain bank financing found several consistent factors that impacted the approval process. These include:

  • Personal credit issues that either resulted in an overall low credit score, or included issues serious enough to disqualify them from obtaining credit (i.e. recent bankruptcies, judgments, collections, charge-offs, delinquent child support, back taxes, defaults on previous government-backed loans, etc.)
  • Inadequate/insufficient historical cash-flow/income to support current and projected debt levels
  • Industry risk – high risk industries typically included, among others, restaurants, hospitality, convenience stores, service businesses
  • Inadequate secondary repayment source(s)
  • Insufficient industry experience
  • Waiting until after a borrowing need was established to apply for the loan or not allowing sufficient time to obtain funding
  • Unwillingness of owners to personally guarantee loans
  • Mis-match between stated reason for the loan and the proposed repayment source(s).

These reasons were supported by this lender’s experience who found that, over time, approximately the 50% of applicants (those that were unable to obtain financing) frequently had one or more of these issues which precluded obtaining financing. Additionally, good preparation by applicants, including addressing these issues in advance (i.e. the other 50%) was a critical success factor in obtaining financing.

Section 2 – The Role of Guaranty Agencies

A. U.S. Small Business Administration

The Commonwealth of Virginia has two major sources of 3rd party/agency guarantees; the U.S. Small Business Administration (SBA) and the Virginia Small Business Financing Authority (VSBFA). The SBA is the more senior of the two, having been founded in June 1953. Over time the agency has evolved from the “lender of last resort” via their direct loan programs, as well as one known for its unending documentation requirements and slow approvals, to one that relies on its lending partners (banks and non-bank lenders – “preferred” lenders – a/k/a PLP) to approve loans based on the agency’s proportional and conditional guarantees. The agency has also begun to embrace technology to help speed up approvals and has simplified approvals for loans up to $350,000 (via the Small Loan program). Guarantees range from 50% (Express up to $350,000) to 85% (term loans up to $150,000). Larger loans receive a 75% guaranty. Over time, the SBA has added guaranty programs which include both general and specialized lending programs, including the following:

  • Express loans/lines – 50% guaranty for loans up to $350,000 (program maximum). Guarantees can be used for both term loans and lines of credit and some larger-volume SBA lenders use this program
  • CAPLine – these are guarantees for credit lines, with the maximum loan amount of $5million. There are several sub-programs under the CAPLine, including: asset-based, Seasonal, Contract, and Residential Construction. Of these, the asset-based and Contract lines are the ones most often used
  • Export Express – this is term loan or credit line for a program maximum of $350,000. For amounts up to $150,000 the guaranty is 90%, and for larger amounts it is 75%. These facilities are to be used for export-related funding and the lender must have the ability to offer other export-related services to manage the credit properly
  • Export Working Capital (EWCP) – is the big brother of the Export Express program and provides a 90% guaranty for loans up to $5million. Like the Export Express program, lenders are required to offer other export-related services to properly manage the facility. It can also be used to guarantee letters of credit, which is unique in the SBA program.

These programs are available to all lenders for their use. There are a plethora of options available in the market from, regional, and national lenders. However, in addition to these programs, there are lenders that provide funds via specialized programs and unique delivery methods. These will be discussed in greater detail later in this document.

B. Virginia Small Business Financing Authority (VSBFA)

This is a state agency that provides loan guarantees and other programs that offer some innovative ways for lenders to minimize their exposure on loans and/or portfolios. At this time they do not offer expedited approvals similar to the SBA, but some of their eligibility guidelines provide options for financing not available from the SBA. Program guidelines for loans offered by the VSBFA are included below as is a list of local lenders which utilize their programs. The role of these agencies is to reduce the risk “profile” of a loan from an unacceptable level to one that is acceptable to an individual institution. Some lenders take a “wholesale” approach to using these guarantees for an entire strata of borrowers while others use the guarantees more judiciously.

In addition to loan guarantees the agency provides some direct financing options as well as some other programs unique to them. Like the SBA, the VSBFA reduces the bank’s credit risk and helps businesses qualify for financing that would otherwise not be available.

Loan Guaranty Program

Uses of the loan guaranty program include:

  • Lines of credit for inventory or accounts receivable
  • Permanent working capital or fixed asset purchases
  • Debt refinancing that reduces interest rate, and/or longer repayment term

Maximum amount – $750,000 or 75% of the loan amount, whichever is less (program maximum)

Maximum term – term loans 7 years; credit lines, annual renewals for up to 5 years

Application fee – $200.00

Guaranty fee – $150,000 or less, no fee; 1 year or less maturity, the fee is .50% and for a veteran-owned business the fee is .25%; loans over 1 year, the fee is 1.5% and for a veteran-owned business the fee is .75%

Other requirements – must be a business operating in Virginia, along at least one of the following:

  • $10 million or less in annual revenues during each of the last 3 years, or
  • Have a net worth of $2million or less, or
  • Have fewer than 250 employees, or
  • Be a 501(c)3 not-for-profit entity
  • Generally have been in business for at least 2 years

Similar to the SBA, the VSBFA guaranty program is not intended to offset fundamental weaknesses with the borrower. In addition, funds cannot be used for passive real estate, purchase residential housing, or real estate construction of development. Unlike the SBA, the VSBFA guaranty program cannot be used to finance goodwill.

Specifically focused loan programs offered by the VSBFA include:

  • Virginia State Small Business Credit Initiative – Cash Collateral Program (CCP)
  • Child Care Financing Program
  • SWaM Business Microloan Fund
  • Economic Development Loan Fund

Additional details on various VSBFA programs are included in the addendum.

Some VSBFA programs are guarantees (akin to the SBA), while others provide other loan structures. All have been established to help small businesses start, enhance, or expand their operations and in turn, create new jobs. Critical to approval is evidence of sufficient cash flow to repay the debt with the understanding that there is likely a collateral shortfall present. Under this program, the VSBFA will provide the lender with cash collateral equal to 40% of the loan amount, up to $500,000.

Loan proceeds can be used for the following purposes:

  • Lines of credit to finance working capital
  • Term loans to finance equipment and other fixed asset purchases

Section 3-Available Lending Sources

Once a borrower generates the documentation to seek funding they are frequently overwhelmed by the various options available to them. This section of the document will address loan programs that focus on the needs of new or growing businesses. One key assumption is that most established firms already have an established relationship with a financial institution. Also, firms that are more established generally have more conventional credit options available than ones that would be using the services of the SBDC. One goal of this document is to focus on some of the more “legitimate” sources of funding, based on the size of the funding being sought in the following strata:

Micro-loans ($5,000 – $50,000) Small loans ($50,000 – $350,000) and Large loans ($350,000+)

Micro-loans

Of these three strata, the heaviest concentration of loan options can be found in the “micro-loan” range. A recent Google search uncovered almost 500,000 micro-loan “hits”, with most being Internet-based lenders. However, a closer analysis finds that a majority of these are actually short-term, accounts receivable based lenders that charge extremely high interest (many times in excess of 100%). Additionally, the majority do not provide any sort of technical assistance counseling to the borrower. Borrowers, who use these lenders, and who are properly disciplined, may find them helpful but for many they cannot do so. Consequently they end up paying a significant price for the “convenience” offered by these sources.

One possible way to find micro-loan funds from a non-predatory lender is to work either with non-profit entities, including SBA-funded non-profit micro-lenders and/or Community Development Financial Institutions (CDFIs). However, due to the costs associated with providing loans of this size as well as some of the technical assistance (TA) requirements related to SBA micro-loans, there is a dearth of available non-profit lenders in the Commonwealth at this time.

The SBA office in Richmond has provided a list of SBA micro-lenders that serve Virginia including:

  • Accion East (service area is all of Virginia, but the SBA program is limited to home-based or incubator-based businesses)
  • ECDC (service area is in northern Virginia)
  • People Incorporated Financial Services (service area is western Virginia)
  • Staunton Creative Community Fund (service area is counties and cities surrounding Staunton)
  • Total Action Against Poverty (service area is counties and cities around Roanoke)

Accion East is the sole member of this group that serves Hampton Roads via a representative located in Northern Virginia. It is a member of the nationwide Accion Network, which in turn, is part of an international micro lending group entitled Accion International. Accion states that it is the largest and only nationwide non-profit micro and small business lending network in the US. The organization also states that it uses a one-on-one lending approach that considers character and other business strengths in addition to the borrower’s credit history. Accion is also a Community Development Financial Institution (CDFI) and is a certified SBA Micro Loan program and 7(a) program lender. Loans range in size from $500 to $250,000, and since its creation in 1991, the US member has helped over 57,000 small businesses and has loaned over $500 million.

Loan program availability varies from one region of the country to another and currently in Virginia there are several loan programs available with the following common eligibility elements:

  • Loan term – 6 months to 60 months
  • Prepayment penalty – none
  • Closing costs – 3-5% of the loan amount
  • Processing fee – $135 (only if the loan closes/is made)
  • Credit score minimum – 575 (other criteria may apply)
  • Cash flow – sufficient to support monthly loan payment
  • Bankruptcies – none within past 12 months
  • Foreclosures – none within past 24 months
  • Late payments – none on rent or mortgage for past 12 months

Specific loan programs are included in Addendum 2:

In addition to Accion, there are Virginia-based Community Development Financial Institutions (CDFIs), each with its own approach to small business lending. These are non-profit entities that operate like their for-profit cousins except their charters are geared towards focusing on the underserved in their communities. There are four DCFIs in Virginia, but most are limited in their charters to specific geographical areas (see below):

  • Freedom First Federal Credit Union (service area is counties and cities surrounding Roanoke)
  • People Incorporated Financial Services (service area is western Virginia)
  • Virginia Community Development Fund Inc. (service area is in counties and cities surrounding Richmond)
  • Virginia Community Capital (service area is statewide)

Virginia Community Capital is the only statewide CDFI, was founded in 2006 with funding from the Commonwealth of Virginia. Subsequent to its founding, a for-profit subsidiary, VCC Bank, was established as a Schedule “B” corporation (Benefit Corporation), with all profits flow to the non-profit parent organization. VCC Bank is regulated like its for-profit cousins. One way they attempt to differentiate themselves is by offering greater flexibility to take on slightly more risk than traditional banks, especially if it receives grant funding to help specific mission aligned projects. Other means of mitigating risk includes employing guarantees from the SBA, USDA, and VSBFA.

Additional requirements/features from VCC Bank loan applicants include:

  • Historical financial results, including tax returns, projections, personal financial statements, current period financial results (P&L and balance sheet), and other financial documents
  • The typical approval-to-closing cycle is 45 days
  • The borrower works with a lender in the local market
  • Start-ups can be funded, with additional considerations, including prior industry experience of at least 5 years, 25% cash equity from the borrower, detailed analysis of the market, competition, and customer base included in the business plan, detailed, reasonable projections, and if possible, prior business ownership experience
  • Minimum equity (established business) – 15-25%, with real estate loans possibly as low as 10%
  • Personal guarantees – all 20%+ owners must guarantee the loan
  • Loan amounts – $50,000 – $5,000,000 (average loan $250,000 – $1,500,000)
  • Interest rates – generally WSJ Prime + 2.75%, variable, adjusted quarterly, with some rate reduction possible depending on adequacy of collateral and high historical DSC
  • Lending restrictions – will not refinance personal debt incurred for business, nor will they typically lend against contracts

In a subsequent meeting the following additional information was discovered during a discussion with the local small business lending representative for VCC, Chris Topping (757-962-1268; ctopping@vccva.org). The discussion unearthed the following:

  • For loans up to $1million VCC Bank uses its recently-acquired PLP status
  • For loans over $1million it uses the agency’s standard processing
  • Their “sweet spot” is loans $250,000 – $1million
  • Their primary focus is 7(a) lending but VCC Bank is now underwriting 504 loans with Tidewater Business Financing Corporation (TBFC)
  • Approximately 20% of its small business loan portfolio are conventional vs. guaranteed loans
    VCC sell some of their loans in the secondary market. However, most loans are held in their portfolio at this time. It will also either fix interest rates for an extended period or reduce interest to make a project more affordable
  • It is currently doing a limited number of credit lines and VCC Bank does not provide factoring
    Experience is of great importance in their analyzing loan applications and for some borrowers with limited experience they may require more owner cash equity (25-30%)
  • VCC Bank will consider restaurant financing, and some hotel financing; especially boutique hotels that are community focused and/or to fit an economic development need
  • In general the minimum loan VCC Bank will make is $50,000
  • In eastern VA VCC Bank focuses on the entire HRSBDC footprint and it is starting to provide loans on the E. Shore
  • One unique factor is that VCC Bank uses a community impact score – when a loan will impact an underserved market it might receive more favorable response than a similar project not in such a market
  • VCC Bank will also leverage grant funding for specific projects – using such funds to fund loans in a targeted market (i.e. a food desert)

In addition to these entities there are a diverse group of nationwide and regional online lenders that purport to provide small business loans, but these are not under the auspices of the SBA’s program guidelines. In these cases, “Caveat Emptor” (“Let the buyer beware”) should govern any decision process.

Community Advantage

This is a SBA pilot that is authorized through March 31, 2020, and is aimed at helping businesses located in underserved communities. Loans are provided via mission-focused, community-based lenders – CDFIs, CDCs, and SBA approved micro lenders, and these entities are charged with providing technical assistance (TA) or business counseling when deemed appropriate. In addition to loans, these lenders provide technical assistance (TA) and economic development support. One unique requirement for lending participants is that 60% of their loans must be made in underserved markets. These include:

  • Low-to-moderate income (LMI) communities
  • Businesses where more than 50% of the full time workforce is low-income or resides in LMI census tracts
  • Empowerment Zones and Enterprise Communities
  • HUBZones
  • New businesses (less than 2 years old)
  • Businesses eligible for SBA Veterans Advantage and/or
  • Promise Zones

This program includes the following features:

  • Loan size – $50,000 – $250,000 (this is also the program maximum)
  • Term loans only – no credit lines
  • Maximum interest rate – set by lender but with a maximum rate of WSJ Prime + 6.0%
  • Maximum term – 10 years for working capital, 10 years or the useful life of the asset for equipment, 25 years for owner-occupied real estate
  • Loan guaranty amounts – up to $150,000 – 85%; higher amounts – 75%
  • Guaranty fees – loans up to $150,000 – fee is 0%; higher amounts – 3% for maturities longer than 12 months (Veterans Advantage borrowers pay a 1.5% fee)
  • Personal credit score – program minimum (but recommends scores above 700)

Note: these loans are credit scored by the SBA as part of a pre-qualification process. Also, eligibility and underwriting guidelines are the same as for other SBA-backed loans of similar size.

Providers in Virginia

ECDC Enterprise Development Group (service area includes northern Virginia)
Local Initiatives Support Corporation (LISC) (service area includes Richmond and Petersburg)

Business Finance Group (service area is statewide) – contact is Amy Rowan – (703) 667-5049; arowen@businessfinancegroup.org

Business Finance Group (BFG) is a not-for-profit lender located in Northern Virginia that is primarily known as a provider of 504 loans and they have been making these loans for over 3 decades and they are one of the top 504 lenders in the nation. BFG became a Community Advantage lender several years ago (at the request of the SBA), and thus far its production of these loans has been much lower than the 504 program. BFG also participates in a program developed by their trade group (NADCO) in conjunction with the SBA for Veteran-owned businesses, named the ILP. Specific guidelines include:

  • Loan size – $50,000 – $200,000
  • Term – working capital 5 years; equipment, up to 10 years
  • Interest rate – 7% (fixed)
  • Fees – 1% of the loan amount
  • SBA fees – 0
  • Closing costs – amount can be funded with loan (these sums vary greatly depending on collateral, etc, and are only incurred for funded loans)

Note: start-ups are not eligible

There are other SBA small loan options (credits under $350,000) which include both non-profit and for-profit lenders. A recent list (as of 7/31/17) of the top Virginia lenders participating in various SBA loan guaranty programs shows the following:

Rank

Lender Name

Total loans/ $ of loans

Ave. Loan Size

1

Wells Fargo, N.A.

77/$14,243,500

$184,980

2

Sonabank/EVB

58/$22,780,400

$392,765

3

Union Bank

57/$12,830,000

$225,087

4

M&T

38/$4,717,400

$124,142

5

BB&T

29/$7,611,800

$262,415

6

Live Oak

24/$37,183,900

$1,549,329

7

SunTrust

19/$10,981,800

$577,989

8

Celtic Bank

17/$2,045,000

$120,294

9

First Bank & Trust

13/$8,813,300

$677,946

10

Community Capital Bank

13/$3,074,900

$236,530

11

Village Bank

13/$5,427,800

$417,523

12

First Home Bank

13/$2,725,000

$209,615

13

Independence Bank

13/$1,195,000

$91,923

14

Fulton Bank, N.A.

11/$10,646,200

$967,836

15

First Citizens Bank

10/$6,682,000

$668,200

It merits noting that of these lenders, less than half have a presence in Hampton Roads, and only one (Community Capital Bank) is affiliated with a non-profit parent. Based on average loan size, the following five lenders appear to focus on smaller loans (either SBA-backed small loans or Express credits) listed in reverse order of average loan:

Lender Name

Average Loan Size

Independence Bank

$91,923

Celtic Bank

$120,294

M&T

$124,142

Wells Fargo, N.A.

$184,980

First Home Bank

$209,615

Independence Bank has its headquarters in Providence RI. This lender provides SBA finance nationally via an online application form and it specializes in the Small Loan program and focus on loans up to $150,000. It can provide larger loans but generally do not due to the amount of time and energy expended to provide the larger credits. This lender does not provide funding for start-ups, and typically wants to see a business in operation for at least 2 years, and they will fund business purchases.

Celtic Bank is located in Salt Lake City Utah. It too is a nationwide SBA lender, but Celtic does not have branches or lending operations locally. Celtic is a privately-owned bank which was founded in 2001. Its nearest representative is in central NC. Celtic offers 3 strata of funding, with the 1st being the “Celtic Express Term Loan”, ranging in size from $20,000 – $150,000; the 2nd being the “Celtic Advantage Loan” which ranges from $150,001 – $350,000; and the 3rd being the “SBA 7(a) Loan”, which ranges from $350,001 – $5,000,000.

M&T is headquartered in Buffalo NY and has 3 locations in Richmond. While it is also a nationwide SBA lender, it does not offer loans in Hampton Roads at this time.

Wells Fargo is well-known throughout the local market and is the successor to Wachovia Bank. Anecdotal information from applicants report mixed results and generally they do not approve start-ups or credits that do not fit their specific requirements

First Home Bank is a nationwide SBA lender located in St. Petersburg FL, but they do not have a local presence. All loans area processed via the Internet. They generally do not approve new businesses.

Virginia Community Capital Bank is a Virginia-based lender. It should be noted that it has been providing SBA funding for a short period of time, but have already cracked the top 10 guaranteed lenders YTD. This lender merits consideration for additional reasons, including:

  • It is a for-profit subsidiary of a not-for-profit parent organization
  • It has a local lender contact who is part of the decision-making process
  • It provides financing throughout the Commonwealth
  • It is actively seeking ways to expand their small business lending in Hampton Roads

Conclusion

The landscape of lending options continues to change as new sources enter the local market and others leave the Hampton Roads market. Some lenders are technology-focused in an effort to speed up their decision making and standardize their processes. The trade-off is that these typically are not “start-up” friendly; others are more mission-focused and therefore will review new firms on a selected basis. The critical element for borrowers and their advisors is to understand the “sweet spot” for lenders in our market so that the odds of winning approval of viable loan requests are maximized. It is believed that this document addresses at least some of the options available in our market.

Addendum A – VSBFA Programs

Other terms include:

  • Loan amount – maximum of $500,000 or 40% of the loan amount, whichever is less
    Interest rate – set by lender
  • Application fee – $200.00
  • Guaranty fee – loans of $150,000 or less – no fee; loans with maturity of 1 year or less the fee is .50%, and for veteran-owned businesses the fee is .25%; loans with maturities over 1 year, the fee is 1.5% and .75% for veteran-owned firms
  • Maximum term – term loan – 5 years; credit lines – annual renewals for a maximum of 3 years

Child Care Financing Program (CCFP)

This is a direct loan program intended to provide financing of fixed asset needs (including buses) and educational materials. Participants must be registered facilities, and includes child care providers that are 1) Virginia Department of Social Services (VDSS) licensed child care centers; 2) unlicensed but regulated religious-exempt child care centers, or 3) VDSS certified preschools. In addition, family home providers are eligible is they are 1) VDSS licensed or local ordinance family day homes; 2) voluntarily registered; or 3) part of a Licensed Family Day Care System, or 4) participating in the USDA Food Program. Applicants must:

  • Be in good standing with the Division of Licensing Programs of the Department of Social Services
  • Demonstrate a reasonable assurance of repayment
  • Maintain business operations in Virginia

Terms related to Child Care Centers:

  • Loan amount – up to $150,000
  • Maximum term – 7 years
  • Application fee – $100
  • Interest rate – as low as 2.44%, but no higher than 4%

Family Home Provider:

  • Loan amount – up to $10,000
  • Maximum term – 7 years
  • Application fee – $15
  • Interest rate – as low as 2.44%, but no higher than 4%

Note: start-up facilities are NOT eligible for financing under this program.

SWaM Business Microloan Fund

The program is designed to help existing small businesses in the Commonwealth. The program also requires technical assistance (TA) from the SBDC network for approved applicants and for businesses that have already obtained SBDC assistance. Funds cannot be used to refinance existing lender debt, finance businesses engaged in residential construction or passive real estate investments, or compensate for a fundamental business weakness.

Use of Proceeds:

  • Finance receivables and inventory
  • Contract financing
  • Permanent working capital or fixed asset purchases
  • Leasehold improvements or expansions
  • Purchase machinery and equipment
  • Technology infrastructure

Terms include the following:

  • Maximum loan – $10,000 (possibly up to $25,000 if referred from SBDC office)
  • Maximum term – 4 years, or the life of the asset, based on repayment ability
  • Loan fee – $100
  • Interest rate – fixed at WSJ Prime + 3.0%

Economic Development Loan Fund

This program is designed to fill the financing gap between private (bank) debt financing and borrower equity. Job retention and/or creation are a critical element, and eligible borrowers include Economic Development Authorities (EDA), firms engaged in technology, biotechnology, tourism, manufacturing, renewable energy, government contractors, firms engaged in impacting local quality of life, and/or businesses derive 15% or more of their revenues from defense-dependent activities and show hardship from DoD downsizing.

Eligibility requirements:

  • Must create or retain full-time jobs with a minimum pay of $10.00/hr.
  • Inject new cash equity into project
  • Provide a 1st lien unless bank lender requires same

Terms

  • Loan maximum – economically distressed areas – the lesser of $1million or 40% of project cost. All other areas – the lesser of $500,000 or 40% of loan, whichever is less. Minimum loan amount is $50,000.
  • Loan term – repayment is to match the life of the asset purchased or the borrower’s ability to repay, with maturity of no more than 10 years
  • Application fee – $500.00
  • Interest rate – fixed rate tied to “like-treasuries” with a risk-based spread

As with the SBA, borrowers should contact their bank to access the program. Statewide participating lenders include:

  • BB&T
  • Virginia Community Capital Bank
  • Hampton Roads lenders include:
  • Sonabank/EVB
  • Farmers Bank
  • TowneBank

However, not all banks listed participate in all of the lending programs offered by the VSBFA.

Addendum B – Accion Loan Programs

Daycare Business Loans

  • Loan size – $500 – $10,000 for start-ups and up to $25,000 for businesses in operation over 6 months
  • Interest rate – starting at 8.99%

Business Loan

  • Loan size – $500 – $50,000
  • Use of proceeds – working capital, operating costs, vehicle purchase, inventory, equipment, location changes and/or marketing
  • Interest rate – starting at 8.99%
  • Other eligibility and credit criteria may apply

Start-up Business Loan

  • Loan size – $1,000 – $10,000
  • Eligibility criteria – in business less than 6 months and have a home-based or incubator-based business
  • Use of proceeds – working capital, operating expenses, inventory and/or equipment, and marketing
  • Interest rate – starting at 10.99%
  • Other income – must have either part-time or full-time job and proof of income
  • Business plan – must have a business plan to qualify
  • Other eligibility and credit criteria may apply

Food and Beverage Small Businesses

  • Eligibility criteria – business must be part of food, beverage or hospitality industries
  • Loan size – $500 – $50,000
  • Use of proceeds – working capital, operating expenses, vehicle, inventory, equipment purchases, marketing and packaging
  • Borrowers have access to coaching from Samuel Adams employees and an invitation to Brewing the American Dream Speed Coaching events

hampton roads chamber of commerce thomas nelson community college small business association george mason university