The American Dream – You Can Have Anything You Want; Just Be Prepared to Give Everything You’ve Got
Owning your own business may be your American dream. If so, getting assistance for your business from the U.S. Small Business Administration (SBA) or the U.S. Department of Agriculture (USDA)may be the way to achieve your dream. Both organizations have a wealth of information on their web sites about starting, managing, and expanding your business. However, as we learned from our year-long effort to receive a $250,000 SBA guaranteed loan, there were some “hidden” costs and requirements that we did not include in our business plan. This guide describes those loan requirements and may be things to consider so that you can better plan for success. Please keep in mind that these requirements may not apply to your application, but are meant only as information to make you aware of possibilities.
SHOP FOR EXPERIENCED LENDERS
Not all financial institutions offer SBA or USDA loans. Some only offer small SBA loans and you have to find a commercial lender for larger loan applications. Regardless of your need, shop around for a lender who has years of experience working with the SBA or USDA. We wasted five months working with small local banks, whose officers and board members all rejected our applications largely because they did not give commercial loans over $20,000. Interestingly, only one bank told us that BEFORE we went through the lengthy loan process with them. We ended up using a local office of a large, national lender that basically worked exclusively with SBA applications. You can get a list of approved lenders from the SBA web site.
The other reason this is so important is because experienced lenders know how to appeal loan rejections and in our case, they were successful and we received the loan the second time around.
REMEMBER THE ECONOMIC PURPOSE OF SBA AND USDA
The SBA and USDA exist to promote economic growth by helping to start or expand small businesses that provide jobs to U.S. citizens. When you develop your five-year business plan, be sure to include how your business supports the creation of jobs and economic growth in your community. Your plan will be even more attractive if you are able to provide jobs for other federally supported programs such as Americans with Disabilities, welfare reform participants, inmates released from federal corrections programs, students from federal job training programs, students participating in federal programs offered by public schools, or rural area economic development iniatives. Take a little time to learn about these programs and help to promote the purpose of the SBA and the USDA with your business.
THE SBA AND THE USDA DO NOT WANT YOU TO FAIL
We have all heard that 50 percent of new businesses fail in the first five years because of lack of experience, business and financial planning, and management skills. Be prepared with an extensive resume and references that prove how your knowledge, skills, and abilities will contribute to the success of the business. Also be prepared to show how your work experience is related to the business. In our case, we were buying a retail business and had to show at least five years of retail experience and management experience in a retail business. If you do not have business and financial planning experience, be prepared to show that you are hiring a CPA, a manager, or other staff who do have that experience. If possible, be prepared to also include resumes of staff and support personnel. If you are buying an existing business, the seller will have to provide his reasons for selling the business.
ANY SKELETONS IN YOUR CLOSET?
Be prepared to have an extensive background check and be able to explain any arrests – even if you were never convicted of a crime. Be prepared to explain a bankruptcy, court orders for child support payments, or other personal financial obligations. Be prepared to show your last three years of federal tax returns and bank statements. Be prepared to provide copies of a valid social security card, a valid driver’s license, a birth certificate, or other legal proofs of identification.
HAVE SOME MONEY SAVED BEFORE YOU GET THE LOAN
Here are some of the “hidden” costs we had in order to get our loan:
* we were required to purchase life insurance on each individual named on the loan, separate from our personal life insurance, with a face value covering the amount of the loan, and proceeds assigned to the lender and SBA as beneficiaries. Cost to us: $125 per month
* we were required to do a Phase II Environmental Study covering 5 miles surrounding the business property because our business had underground gasoline tanks. Cost of study by a certified engineer: $2000
* we were required to certify that we complied with other federal program laws covered by Americans with Disabilities Act, Department of Homeland Security, Bureau of Alcohol, Tobacco, and Firearms, and dozens others. Cost to us: $250 up front to install ramps at front door; $200 per year in licenses/fees
* we were required to submit financial statements to the lender each year including Profit and Loss, Income, Net Worth, and Balance Sheet. We also had to submit explanations of how we varied from our business plan. Cost of our CPA: $1000/year; Our cost for QuickBooks with payroll tables: $500 plus $240 per year to upgrade
SOME OTHER CONSIDERATIONS WHEN YOU BUILD YOUR PLAN
* we structured our business as an S Corporation, so we were required to provide a personal guarantee of the loan. In doing this, we could have lost all of our personal assets such as a home, car, etc., if the loan went into default
* we had to purchase self-employed medical insurance. This can be very expensive and do not expect the same level of great affordable benefits that you got from your employer plan. Our cost: $600 per month just for catastrophic; no dental, vision, or prescriptions, and limited to only one doctor visit per quarter with a $3000 deductible on each person
* if your lender changes names, gets bought by another lender, or goes out of business, be sure to notify the SBA and your insurance agent. When we tried to cancel our life insurance policies at the time we sold the businesses, our insurance company would not cancel without the permission of the lender. The original lender was no longer in existence and it took me 4 months to track the lender trail and prove that the new lender had the beneficiary rights. In the meantime, I still had to pay the premiums or face a lien on the corporation if I let them lapse.
* if you can, join the National Federation of Independent Business (NFIB) for $10 per month. They have great local and national support for small business owners and can help with insurance programs, lobbying for better laws related to small businesses, and resources for managing your business.
Good luck with the American Dream – you can have anything you want – just be prepared to give everything you’ve got!
