When two young and entrepreneurial-minded people found themselves furloughed during the pandemic, they decided to seize an opportunity they’d dreamed of for years – starting their own business.
After some research, they determined that opening a franchise business would give them a strong template to work from. They identified a concrete coatings franchise business they believed would be a good option for them. There would be many expenses involved with getting their business established. They would need to lease space, invest in equipment and supplied, hire employees and market their new company.
The COVID-19-induced economic conditions were uncertain, tightening credit markets and making lenders more hesitant to lend to businesses without an established track record. The business partners didn’t have enough cash-on-hand to fund the entire start-up of their venture and would therefore need a business loan to fill the gap. Obtaining business financing in 2020 was considerably more difficult because of the heightened risk environment for lenders.
They needed approximately $150,000 to launch their new franchise, and they began meeting with different banks to explore financing options. They discovered that the amount of collateral they had available would only allow them to obtain a $50,000 loan, requiring them the cover the additional $100,000 on their own – which far exceed the amount of equity they had to invest in their business.
As they networked with other small business owners, they began to learn more about loans offered through the Small Business Administration (SBA). Because their business was new and not yet operating when the pandemic struck, they were not eligible to obtain a Paycheck Protection Program (PPP) loan through the SBA, but an SBA 7(a) loan was an excellent option. They just needed to find a bank that offered SBA 7(a) loans because they are not available everywhere.
After discussions with many potential banking partners, including the “big four” national banks, the business partners selected a VITAL partner bank – a community bank that provided the level of customer service they were looking for, and was also knowledgeable about SBA loans. They were able to provide both SBA expertise and efficient service through their partnership with VITAL which provided comprehensive SBA loan services.
The SBA 7(a) loan allowed them to obtain the full $150,000 loan amount they needed with a much lower equity injection of 10%. Because the 7(a) loan was backed by a guarantee from the SBA, the lender did not require the loan be fully secured with collateral. SBA loans also have longer terms than conventional business loans, lowering their monthly payments and helping them to maintain positive cash flow as their business got started.
Additionally, as part of the SBA’s COVID relief efforts, they were eligible for six months of payment relief, which was considered nontaxable income, and the standard SBA fees were waived.
Benefits for the Lender
Standard SBA loan guarantees are 75-85%, but during the pandemic, the SBA raised the 7(a) loan guarantees to 90%. This greatly offset the bank’s risk, and also generated noninterest income from the sale of the guaranteed portion, which was $127,500. VITAL facilitated the secondary market loan sale, earning the bank $14,648 in noninterest income, collected that year. It was particularly beneficial during the extremely low interest rate environment.
Because the borrowers had such a positive experience, they provided the community bank a testimonial and have recommended them to other small business owners.