CLEVELAND — When drycleaning business owners need capital for equipment upgrades, expansion or real estate purchases, the maze of financing options can seem overwhelming.
Many owners assume they need perfect credit or substantial collateral to secure business loans, but they are often overlooking one of the most accessible funding sources available: Small Business Administration (SBA) loan programs.
Raymond Graves, the lead lender relations specialist with the SBA Cleveland District Office, outlined the three primary SBA loan programs during a recent Service Corps of Retired Executives (SCORE) webinar.
He shared his insights from nearly 30 years of SBA lending experience.
“SBA loans are incredibly common,” Graves says. “There are usually around 50,000 SBA loans done every year. Where I live in northern Ohio, we do about 2,000 loans every year.” The popularity of these loans, he says, comes from SBA programs’ ability to help businesses secure financing when conventional loans aren’t available or don’t offer favorable terms.
Three Distinct Programs
SBA lending has three distinct programs, each designed for different business needs and circumstances.
The 7(a) Loan Guarantee Program serves as the SBA’s flagship offering, Graves says. This is essentially loan insurance that makes lenders more comfortable extending credit to small businesses. Banks, credit unions and other approved lenders can receive SBA guarantees covering 50-90% of the loan amount, which significantly reduces their risk.
The 504 Loan Program operates differently, using what Graves calls a “50-40-10 model.” In this structure, he says, a conventional bank provides a first mortgage covering 50% of the project cost. Then, the SBA works with a certified development company (CDC), which funds 40% through a second mortgage — this is the actual 504 loan. Then, the business owner contributes 10%.
This program exclusively serves real estate purchases, heavy equipment acquisitions or the refinancing of these assets, Graves says. For a drycleaning business considering a $1 million property purchase, for example, it would break down into a $500,000 conventional first mortgage, a $400,000 SBA 504 second mortgage and a $100,000 owner investment.
The Microloan Program targets smaller funding needs. This typically means startups and businesses that can’t access traditional financing. Microloans are usually capped at $50,000 and provide capital for expenses like website development, initial inventory or hiring the company’s employees. Microloan recipients also receive technical assistance and business mentoring.
Who’s Eligible?
Understanding the options is only the first step toward securing funding.
“Being eligible is relatively easy,” Graves says, “but getting the loan still means getting the lender to agree to make the loan. You have to be a good credit risk.”
Basic SBA loan eligibility requires businesses to be:
- Small — Not publicly traded corporations
- For-profit and active — Not passive real estate investments
- Using loan proceeds to benefit the business — Not for the owner’s personal use.
The main purpose of SBA loans is for owners who can’t get credit elsewhere, Graves says: “If you can get a conventional loan, great, but these programs are available to help you if you need them.”
Personal guarantees are also standard with SBA loans, creating personal liability for business owners. Both business and owner become responsible for repayment. Real estate purchases must be occupied by the owner, as well, meaning the business must occupy at least 51% of the property’s square footage. This requirement, Graves says, prevents SBA programs from financing investment real estate.
The Flexibility Factor
Graves says that the 7(a) program particularly offers remarkable flexibility for using loan funds.
“It’s good for any kind of legitimate business purpose,” he says. “Anything that aids the business is likely going to be eligible.” This could include equipment purchases, working capital, inventory, facility improvements, or business acquisitions.
This means SBA loans could finance drycleaning equipment purchases and upgrades; facility expansions or relocations; working capital for seasonal fluctuations; business acquisitions from retiring owners; or real estate purchases for owner-occupied facilities.
The programs also support franchise acquisitions, Graves says, making them valuable for entrepreneurs considering established drycleaning franchise opportunities.
Come back Tuesday for Part 2 of this series, where we’ll explore the five C’s of credit and how to strengthen your business’ creditworthiness.
Have a question or comment? E-mail our editor Dave Davis at [email protected].
