How can I get a loan for my small business through the U.S. Small Business Administration’s SBA Loan Guaranty program?
Many small business owners struggle to understand how SBA loans work and what it takes to qualify to receive one.
Does the money come from the government or from the bank?
Is 100% of the loan amount is guaranteed by the government?
Is it easier to qualify for an SBA loan than a traditional business loan?
Will I have to pledge my house as collateral even though an SBA loan is guaranteed by the Federal government?
These questions and many more are answered in this interview with two executives from M&T Bank, one of the most active SBA lenders in the country.
More Info: https://www3.mtb.com/business
What follows is a computerized transcription of our conversation. Please excuse the typos!
Frank Felker 00:38
Today, we’re going to talk about money, capital, it’s the lifeblood of every business. It does everything you need. It’s a lubricant that keeps things moving along, when it seems like nothing’s working. It’s something you got to have to get started. It’s something you have to have to keep going. And they call it working capital. And recently, I’ve been talking to founders of growth businesses, startups, that type of tech company that just takes off like a rocket and raises money from angel investors and venture capitalists and also recently had a lengthy discussion with Roger London, a former venture capitalist, and now angel investor about how the founder of a startup can raise money with people like him. But for most businesses, what I like to refer to as lifestyle businesses, a business like mine, a butcher, Baker, candlestick maker, doctor, lawyer, that type of Main Street business. Angel investors are not interested in putting any money into a company like that, they’re not going to put in what is called equity capital, those people are going to have to put their own equity capital into it.
And some of that is what is often referred to as sweat equity. But there comes a time when they need additional capital, they need to buy equipment, they need to invest in the build out of a retail location, they need to get vehicles, they get all kinds of different reasons why you may need additional capital beyond what you have. And when that happens. And you need that additional capital. Oftentimes, what you think about doing is going and getting a loan from a bank. And one of the most popular types of loans for a small business is a small business loan, something that involves the involvement of the Small Business Administration along with the local lender, but there is a lot of confusion regarding and that’s why I’ve asked two executives from M&T Bank to join me here today on Radio Free Enterprise.
First, we have Brian Seliber, who is the local branch manager at the Annandale branch of M&T Bank, which is where I bank and Brian’s my personal banker. And Brian’s also brought in the big guns, Brian brought in Carl Hairston, who’s the business banking Regional Manager for M&T Bank here in my local region, Brian and Carl, welcome to Radio Free Enterprise. Thank you.
Carl Hairston 02:57
Good to be here.
Brian Seliber 02:58
Thanks very much for having me.
Frank Felker 02:59
So what we’re going to talk today about is SBA loans, Small Business Administration loans, there’s a huge amount of confusion regarding them. And, in fact, I was at the Kauffman Foundation annual State of entrepreneurship event at the National Press Club a couple of weeks ago, just to drop a few names for you that there were a number of congressmen there and a variety of people who were very well known. And I was surprised how often the topic of SBA loans came up. There were so many other things to talk about technology, the presidential campaign, but kept coming back to SBA loan SBA loan. So it’s clearly something that’s on the minds of the constituents of these Congress, people. And so let’s start with with this, I want to ask you, Carl, exactly what is an SBA loan SBA loan, then what makes it different from other types of commercial loans?
Carl Hairston 03:54
Sure. Yeah. First of all, I totally agree there, there continues to be so much confusion regarding Small Business Administration, SBA loans. The reality is, what an SBA loan is, it’s really designed to support the economy, where banks are able to leverage the SBA, in essence, to say yes, more often than No. So it’s really an incentive more so for the banks to approve more loans to those lifestyle businesses that you refer to. So what really what it does is if a lender is reviewing a credit request, or a loan request from a small business, and let’s say we’re reviewing it, and we like we pretty much like the business, you know, but there’s one or two things that really concern us, you know, and give us pause. The SBA guarantee, really is to provide the bridge for that concern that we see so to speak. over whatever that wound is that you’re worried about. Exactly. So pretty much it then says and the SBA says, okay, M&T Bank, if you agree to approve this loan for this small business owner will provide you with a 50% or 75% guarantee that the worst case scenario, if something goes wrong, you know, you’ve got 50% of your capital, or 75% of your capital that you can fall back to.
Frank Felker 05:31
That’s pretty impressive. I didn’t realize they guaranteed that much of it, I thought that percentage was lower. So we’re going to talk in a minute here about what it takes to qualify for a loan and or any type of loan. But what is the difference in terms of the application process? Here’s what here’s what came up at the at the state of entrepreneurship event was the was one congressman said that he hears all the time from his constituents, that it’s too confusing the SBA loan application process, and it takes too long and they keep calling back to the constituent calls back and gets no answer. And then the paperwork falls between the cracks. And it just never seems to get anywhere. And so then the congressman said he was actually grilling the administrator of the SBA in front of you know, his committee, he was the chairman of the Small Business committee about this. So how big of a role does the bank play in this? What is the application process? Is it really as difficult as he described? And how much of that is in your control as the lender?
Carl Hairston 06:33
So it’s a great question. And let me first of all start off by saying all banks are not created equal, as it pertains, okay, SBA loans, there’s different levels of authority that banks have within the SBA guarantee structure. M&T, for example, has the best level we have a preferred lender status. preferred lender status, in essence means we literally act as if the were the SBA. Oh, no kidding. We stamp it. We know the SBA is operating guidelines and procedures, or what they refer to as their SLP, their standard operating procedures. So as a preferred lender, as long as we’re operating within the SLP, the standard operating procedures, we stamp it, hmm. As if though someone at the SBA reviewed it, and they don’t. It’s amazing. What they do is they come in once a year, or more frequently if they need to, but at least once a year, they come in and they audit our SBA loan portfolio. Now,
Frank Felker 07:43
let me ask you this. I know that you guys are among the top 10 SBA lenders nationwide. Correct. And you’re the number one SBA lender here in this region. Okay, so is this why is this as based upon your success and production? Is this why they’ve blessed you with his preferred status?
Carl Hairston 08:01
Well, we’ve had it for years, I think we we’ve had our preferred lender status dating back for years. So M&T has always been very committed to making an extending SBA loans across all of our footprint. It’s just it’s a cornerstone of who M&T is. So that’s been consistent and even when we grow when I moved into this market six and a half years ago, M&T wasn’t the number one SBA lender, we were like number 10 or 11. Mm hmm. And for the last five consecutive years, M&T has been the number one SBA lender, so to really speak to it even more. So we’ve got a back office infrastructure, that a lot of banks don’t have to support our SBA lending platform. And a lot of banks don’t have that they’re not as interested in SBA loans, so they don’t make the kind of investments and infrastructure to support it. Great.
Frank Felker 09:01
I appreciate exactly what you’re saying. So let me ask you again, then. And maybe the answer is it depends on who you’re banking with. But how does the application process differ for an SBA loan from a traditional commercial loan?
Carl Hairston 09:16
So it’s a great question. So on the front end, it really doesn’t differ significantly on the front end your it’s going to be just as if though you were applying for a conventional non-SBA Guaranteed Loan, it’s really going to look and feel very similar to Okay, once it goes through our credit analysis process. And we sort of determine Okay, it looks like we’re going to need to approve this loan with an SBA guarantee under a specific SBA program. Then the follow up, once we approve it, subject to the SBA, providing a guarantee. Then we’ll come back ask you for some additional information, there may be a specific form or two that were required to complete on behalf of the SBA. But that’s a part of the follow up process, not the veteran, not the upfront, but that is probably where you hear a lot of, you know, as you said, you know, consumers, or business owners expressing frustration, you know, saying, okay, the process is cumbersome, because that second time when we come back after we approve it, yes, there are additional documents or forms that have to be completed, because at that point, we know, we’re going to be tapping into a specific SBA program that we may not know, on the front end,
Frank Felker 10:45
I see until after you’ve had a chance to review the initial Exactly.
Carl Hairston 10:47
Okay. So
Frank Felker 10:49
now, we wanted to talk about things that decision criteria that bankers use, when deciding whether to extend a commercial loan to a given business, and you guys have broken it down. And Brian originally talked to me about what you refer to as the five C’s of credit. And before, I’m going to ask you, Carl, to speak to what those five C’s are. But can you tell me I mean, it seems like almost too rudimentary. You know, there’s a handful of things that we look at 12345, it has, in your experience, has it really come down to where, basically, if you can ring the bell on each of these five points or come close, then you have a high level of confidence that things are going to go well with the lung?
Carl Hairston 11:35
Yeah, it’s a great question very, very much. So I think when you look at over the years is lending has continued to evolve, and how banks lend to small businesses up to a certain dollar threshold, typically, up to $100,000. It is almost like going into a branch and applying for a home equity line of credit, there’s very specific criteria that we take a look at, because we want to make sure that, you know, if it’s $100,000 loan, it we don’t need to spend as much money underwriting $100,000 loan as we do a million dollar loan. So yes, our credit criteria, you know, up to typically that $100,000 threshold is much more streamline, than if you come to us and you ask for a million dollars. Sure, that is a completely different process. Well, that makes complete sense.
Frank Felker 12:34
Alright, so the first C of the five C’s is character. And you know, that sounds like a pretty subjective criterion. How can a lender factor something that nebulous into a loan decision? I mean, it’s I take it, then Brian, this is kind of where you come in, you’re the boots on the ground in the local area. You’re the one who knows that business owner, you see him out at networking events at the chambers of commerce and that kind of thing. Tell me what does character mean relative to a loan application?
Brian Seliber 13:03
Sure. Thanks for asking. Yeah, characters, the one I enjoy talking about most, because it’s where the human element does play a part in the relationship that the bank has with the client or the applicant. So there are there are quantitative aspects to the idea of character, when it comes to a credit decision or a situation, which is that we do the bank is interested in some ways credit history that they have a track record of paying their bills, starting as simply as that. And then we will want to know what their educational level is, what their mastery is on their on their resume, we might not always ask for a professional resume. We want to know what this person is all about. Do they have the experience and the knowledge in the industry they’re working in? Do we think that they have? Is there a good reason to believe that they’ll have a high level of success? Or if they’re clearly successful already? Can it grow even bigger and better.
But in addition to the quantitative side, there, yeah, there are some qualitative aspects as well that are more important than the layman might realize, which makes it a very interesting conversation, every situation truly is different. Because we want to know that they that the client has a good relationship with the bank, we want to know the type of person they are, how they operate. When the bank asks a lot of questions on front, we want to get to know people. It’s not because we’re trying to be nosy, it’s because we want to feel comfortable with the person in the room with us. We want to know what their operating model is like, how they, how they run their shop, how they plan to grow. And the more that we can get to know somebody on a human level, the more comfortable we’re going to be with the overall conversation because as Carl mentioned, these can get into rather large requests. These are not small deals that we’re working on, sometimes big or small. The banks take it very seriously. And most of our all of our clients take very seriously as well. These are, these are important discussions and ultimate decisions that affect the lifeblood of a business. So we want to know the person really well. It’s interesting, so it’s not just
Frank Felker 14:59
Just how I look on paper, right?
Brian Seliber 15:01
Yeah, there, there really is a human element to it, we need somebody that’s going to be forthcoming, just like we strive to be forthcoming. And the more the more familiar we are with the full, big picture, the easier all the other credit sees will be, the more, the more everything will make sense to us. And the more informed your banker is, the more streamlined the rest of the process can be.
Frank Felker 15:25
Well, you know, that’s really good to know, Brian, I, we always think of banks as sort of, you know, faceless entities out there that are rubber stamping, yes, no, yes, no. And so it’s good to know that there’s, there’s more that goes into it than just black and white and dollars and cents. So let’s, let’s go on to the next scene. I want to come back to you on this, Carl. The next thing is capital. And, you know, I thought that was what I was borrowing here, what, why, how is capital and aspect of how you decide whether or not my loan application is going to be approved?
Carl Hairston 15:58
Sure, very simply, you know, Frank capital means to us that if you’re looking to borrow a million dollar million dollars for your business venture, we don’t want to finance 100% of your business venture. So there’s a percentage of the capital that has to come from you, or is what folks traditionally hear in the industry, you need to have some skin in the game, we’re willing, typically to put in the majority of the capital that’s needed, which we understand that that’s our role as the lender. With that being said, Our expectation is 10 20% of the capital that you need, you need to demonstrate that you’re so committed to it, that you’re willing to put your capital at stake to make sure that makes complete sense. And also, I know from my own experience, that that helps keep you focused later on down the road, when a little
Frank Felker 16:54
obstacles keep popping up. If you’ve got some skin in the game, and they literally skin in the game is a good expression, you want to get that skin out of the game, at some point. And so you need to keep working and keep, you know, keep your nose to the grindstone. Well, that’s good, I did not understand that. Okay, so the next C is capacity to repay the loan, how his capacity to repay the loan measured and evaluated upfront.
Carl Hairston 17:20
So very another one to just take some of the mystery out of what capacity means it really is, Do you have enough cash flow to repay the loan that you’re looking to borrow. So it’s just like, if you go into a residential mortgage loan officer, they’re going to do your debt-to-income ratio, it’s very simply doing a debt-to-income ratio on the business, I see just the factors are different, the way that we do it is different, but the concept is the same.
Frank Felker 17:50
That’s great. And, you know, I have a model I called the m cube is six sides of small business success, and I put marketing ahead of money. And the reason why is, as Roger London said, the venture capitalist, he says, revenue is the best source of capital, because you don’t have to pay it back. And you don’t have to give up any equity. And so what I hear what you’re saying right here is, maybe you better have some revenue going on before you come to us and ask for some money. Because if you don’t have revenue, then it impacts your capacity to pay back the loan.
Carl Hairston 18:26
But that’s where your capital comes into play, because you’re always going to put your capital in first. So your capital already has to be at work.
Frank Felker 18:32
But then on an ongoing basis, like a cash flow basis, working capital basis, if I don’t have sales going on that are generating revenues and profits. How am I going to make my loan payment? Exactly. Great. Well, let’s move on to the next see. And this seems to confuse me at first is you the word is conditions. And so am I correct in assuming that this means that your willingness to lend to me can be impacted by exogenous conditions, economic conditions, marketplace conditions and other things that are totally out of my control?
Carl Hairston 19:07
Yeah, it really doesn’t. It’s far more objective in terms of conditions. So give you an example. If you come to us, Frank, and you sit down with Brian at the Annandale branch of M&T, and you say that you want to borrow $100,000 The first thing you know, one of the first things Brian is going to talk to you about is to say, you know, I want you to you know, are you clear that you will provide a personal guarantee, one of the conditions of the loan is you will personally guarantee the loan.
Oh, I so when we start talking about conditions, we’re talking about conditions under which we’re willing to extend the loan to you, when we do our credit analysis, we’re already analyzing for the macro and micro environmental factors, and do we feel comfortable extending the loan based upon the industry risk? That’s associated with your type of business, but the conditions that we’re talking about are more specific to the under which we’re willing to extend the loan to you. Yes, we want you to personally guarantee it. Yes, you have to provide us with a updated tax return once a year, you have to give us a personal financial statement once a year. Those are the conditions that we’re talking about.
Frank Felker 20:23
I see I completely misunderstood that. So these are conditions almost like contingencies on a real estate loan. Absolutely, we will approve this mortgage contingent upon that appraisal.
Frank Felker 20:32
Right. Exactly, exactly. Okay, great. Well, I’m glad you cleared that up, because I obviously was great. Now, the last C is something that collateral is the last C. And you know, there’s always been a joke, or at least I’ve heard many people say that, you know, if I had the dang money, I wouldn’t be here asking for a loan. You know, if I could afford to buy that printing press or that tractor or that Baking Oven or whatever it is. So why not so much why we can ask why till the end of time whenever we get the answer to that. But what exactly do you mean by collateral? What sort of collateral are you guys looking for, particularly when I thought that if the SBA is coming in and going to guarantee this whole dang thing? And why do I need to have collateral?
Carl Hairston 21:20
Absolutely, yeah. So there’s always this is always a tremendous point of discussion more than any of the other ones that you brought up in the five C’s. collateral is always the biggest point of discussion that we have when we’re when we’re looking at Linden request. And we’re interacting with borrowers that, you know, so there’s a misnomer, first of all, so if someone’s looking to purchase new equipment, and the new equipment is $250,000. Well, the equipment is the collateral. Now, with that being said, when you’re financing hard assets, collateral typically is not as much of a challenge when you’re financing hard assets. When you’re financing service types of businesses, and there’s no hard assets. That’s where it becomes more challenging to figure out, where do you get the collateral that you need as your secondary source of repayment? Mm hmm. You always have to have a primary source of repayment, which, frankly, is the cash flow.
22:22
Mm hmm.
Carl Hairston 22:23
But if the business is not generating an adequate level of cash flow, then you need collateral is your secondary source of repayment to fall back on. So when you don’t have that, guess, who is a great agency that we go to the Small Business Administration, the Small Business Administration says, okay, M&T, we realize that there’s not enough collateral, we’ll provide you with the 75% guarantee on this loan to encourage you to make this loan to this viable business. So with that being said, M&T Bank, if Frank has any personal assets that he can put on the table to serve as collateral, you are required to take them. Okay, so all of them as much of them as you need to.
Frank Felker 23:17
Okay, now, let me make sure I understand. Because, as you say, this is probably the number one point of discussion.
23:20
Yes.
Frank Felker 23:21
So does that mean, let’s say that the a given type of loan, SBA will guarantee 60%? So are you saying that you then want Frank to guarantee 40%? Or are you saying that if Frank can guarantee 50%, then we’re only going to ask the SBA to guarantee 50%? No,
Carl Hairston 23:39
so what it says is in a typical scenario, you know, let’s say that we can get up to a 75% guarantee, but we don’t focus as much on that percentage guarantee. The SBA says if you’re extending $100,000 loan to frame and you only have from the business itself $50,000 worth of collateral. So you’ve got a $50,000 shortfall in collateral. The SBA says, Well, if Frank has $50,000 of equity available in his personal residence, then you have to take a lien on his residence to shore up that shortfall in collateral. But Frank only has $25,000 worth of equity. And you’re still short $25,000. The SBA says as long as you’ve taken what’s available in collateral, and there’s still a shortfall will still provide you with a guarantee.
Frank Felker 24:41
So the arithmetic starts with the borrower, and then wherever the shortfall is, you come to the SBA and say, can you fill the gap? Absolutely. Okay. Because for me, I just assumed that, you know, hey, they’ll guarantee 75% so I only have to come up with 25%. But that’s the exact Opposite of the way it actually works.
Carl Hairston 25:01
We are huge fans of the SBA and we there. It’s a great entity that provides much needed credit enhancements in order to help banks make loans such as M&T. With that being said, Everyone has to be mindful that it’s a deficiency guarantee. I see. Meaning that the SBA says in a worst-case scenario, after we’ve liquidated the collateral, if it ever gets to that, and most times it doesn’t, but if it does, and, and the bank is still short, you know, $50,000, then the SBA says, well, as long as you’ve exhausted all other avenues to collect on this loan, then our guarantee will kick in. They seem to pay you out. But it’s not until we’ve come back to you, Frank and says, oh, Frank, we’ve got $25,000 lien on your resume. Oh, by the way, oh, by the way, yeah, exactly. So it’s a deficiency guarantee.
Frank Felker 26:01
So does that mean that the actual percentage that they guarantee is yet to be determined until the loan is defaulted upon, and you guys have to go to them? Exactly. Interesting.
Carl Hairston 26:12
So there may be a scenario where even though the loan was approved, and the SBA agree that we will provide you with up to a 75% SBA guarantee, but they may only have to tap into 40% of the guarantee when it’s all said and done. Great.
Frank Felker 26:29
Okay. Well, that’s, you know, for me, personally, that is an absolute gem of wisdom that I did not know and did not understand. And I think that that’s something that’s so important that prospective borrowers understand right from the get-go.
Carl Hairston 26:43
Absolutely.
Frank Felker 26:44
Well, we’re running short on time, you guys have really shared a lot of great information and wisdom with our listeners. But I don’t want to let you go until I asked you. How does somebody go about finding an SBA lender? Let’s put M&T Bank over to one side? How do they know if their bank is an SBA lender? And how do they ask for an SBA loan?
Carl Hairston 27:10
The best thing that I would tell them any person and it doesn’t matter where they are in the country, is contact their local SBA office, contact your local SBA office. And one thing that the local SBA office is going to be able to tell them is who are the most active SBA lenders in their local community that is critically important to make it as seamless and as less frustrating of a process as possible.
Frank Felker 27:42
And that would be because the most active lenders, they understand how the whole process works, and they can make things happen very quickly. Okay.
Frank Felker 27:50
Absolutely. All right. Well, that’s great. And that’s great advice. And but but again, clear, want to make it clear that although you’re contacting the SBA to find out who the most active lenders are, you don’t apply for the loan through the SBA.
Carl Hairston 28:03
Absolutely not you choose a lender, that is an approved SBA guaranteed lender, on behalf of the SBA, and then you go to those respective lenders.
Frank Felker 28:15
Great, exactly what I needed to know. Okay, so let’s wrap this up. You know, there may well be people who want to talk to M&T Bank further about this. You guys are one of the top 10 lenders in the country for SBA loans. You’re number one here in the DC area, your preferred status and can, as you said, kind of rubber stamp things going through. So, Brian, what is the best way for somebody to contact M&T Bank and learn more find out? You know, maybe they’re not in the DC area? Maybe they’re an area that isn’t served by Mt. What How can we reach out to you and find out more?
Brian Seliber 28:54
Absolutely, I would say that the best way to start is always make the call. Because somebody in my position, I want to hear these stories. I want to hear what people are working on. And if you’re in our market here in DC, I’d be a great first contact for you. If not, we have a great network at a bank the size of mmt we have a lot of people who can help
Frank Felker 29:13
you regardless. So if somebody wants to give you a call and talk to you and by the way, I can say that Brian is a very easy guy to talk to. He’s very easy to get along with. And in fact, Brian is the reason why I chose to bank with M&T Bank. So I’m sure there are a lot of other Brian’s out there. But lucky for you listening you get to get Brian’s personal phone number right now his office number so how can they reach you?
Brian Seliber 29:35
I appreciate that Frank. Yeah, my direct number at my office. And my home base is Annandale, Virginia, in Northern Virginia near DC. My direct line is 703 to 563743. And yeah, just making that first call. That’s the way to start.
Frank Felker 29:50
I’ll put Brian’s contact information in the show notes page of this episode of Radio Free Enterprise. Well, guys, I really appreciate you being here. Is there anything I haven’t asked? Some pearls of wisdom that you haven’t shared with us that you thought you wanted to say, before we go,
Carl Hairston 30:06
The pearl of wisdom that I would share is at all costs, whether it’s M&T or any other lender that they so choose to work with, is do everything that they can to be open and upfront and avoid surprises. Because the more
Frank Felker 30:25
you mean as a borrower don’t surprise your banker surprise.
Carl Hairston 30:27
Because you know, when you’re when you’re talking about in is Brian did such a great job saying was, you know, assessing character? Those are some of the things that we take into consideration like, did the borrower disclose this to us upfront, or did we find it out when we pulled their credit report?
Frank Felker 30:47
Right, and what else might you find if you had to keep digging and just kind of dis reflects badly? That’s great. That’s a great, last thought, Carl. Well, Brian Seliber and Carl Hairston, I appreciate you guys being with us here today on Radio Free Enterprise.
31:03
Thank you. Thanks so much.
Frank Felker 31:04
Thanks again to Brian and Carl and thank you for listening. Now, what we need to do next is you need to go to the iTunes Store and subscribe to the Radio Free Enterprise podcast. While you’re there, why don’t you leave me a nice five-star rating and a nice sweet review. Just ask him. After that come on back to RadioFreeEnterprise.com and register with the site so you can stay on top of all the exciting doings here at RFP HQ. If you promise to do that, I promised to remain your fearless host Frank Felker. Until next time, I’ll see you on the radio.
