Business is growing at West Coast Warehousing & Trucking. Owner Jay Patel has added new trucks and employees and is looking to buy additional yard space for the Compton, Calif.-based business he started in 2003.
Patel credits the growth in large part to a little-known finance tool he has used to make his business more attractive to potential lenders. He borrowed money from a major bank that approved his loans because they came with a repayment guaranty from the federal Small Business Administration.
“My business increased almost double or triple after the loan because I did get to purchase newer trucks and add to the fleet,” Patel said.
His company, which posted revenue of $3.8 million in 2017, up from $1.7 million in 2013, now owns 15 trucks and employs about 155 workers, he said.
Patel now has a second SBA loan. It’s a real estate loan he plans to use to buy more yard space for his company.
Unlike a conventional bank loan, SBA loans allow borrowers to pay back the money over a longer period of time, which makes monthly loan payments lower. That conserves cash.
“Trucking is a very capital-intensive business,” said Maggie Ference, senior vice president of business banking at Huntington National Bank, a top SBA Lender. Paying off a loan with smaller payments over a longer period of time “allows for more organic cash flow back into the pocket of the business,” she said.
Although the loans are not as well-known among trucking companies as they are among some other businesses, motor carriers have taken advantage of them.
In New Jersey, one of the nation’s trucking centers, trucking companies are among the top five industries receiving SBA-backed loans. Trucking companies there received 67 loans worth a total of $9.2 million in the SBA’s fiscal year ended Sept. 30, according to its New Jersey District office. So far this fiscal year, loans are keeping pace. Some 28 have been made to local and long-distance trucking companies for a total of $3.7 million.
Access to capital with reasonable interest rates is always a challenge for small businesses.
That’s where the SBA comes in. The federal agency doesn’t lend out its own money. Instead, it works with a network of banks and small-business finance companies. The SBA’s guarantee cuts a lender’s risk, which means better loan terms.
Think of it like an insurance policy, said Ference, whose SBA loans include those made for refurbished trucks.
“Rolling stock — the collateral that would traditionally secure a loan for a bank – could be located anywhere in the country or Mexico or Canada, which brings greater risk to a bank,” Ference said. “The SBA can play a critical role to make us comfortable that if that trucking company goes into default position we would have the backing of the government.”
SBA loans have pros and cons for borrowers, said Tom Pretty, head of SBA lending at TD Bank, another top SBA lender.
BENEFITS OF AN SBA LOAN
A longer repayment time is one benefit, he said.
If a trucking company wants to buy an asset with a long life, such as a warehouse, under an SBA loan it will have 25 years to pay back the money borrowed. A conventional loan has a 15- to 20-year term and often includes a balloon payment.
Smaller down payments are another benefit. A borrower can get a loan for up to 90 percent of the value of the asset being bought, compared with 75 percent or 80 percent for a conventional loan.
And the SBA caps the interest rates its lender network can charge.
SBA loans are typically more expensive than a conventional loan, according to Pretty. The business is paying interest for a longer time compared with a conventional loan.
Fees on an SBA loan are higher than on a conventional loan, although the fees can be financed.
Many lenders have floating interest rates on SBA loans. In a rising rate environment, that is a concern, he said.
And just because the government guarantees up to 85 percent of the loan doesn’t mean a borrower is off the hook. SBA loans, like many conventional business loans, require a borrower’s personal guarantee. That includes putting up personal property, such as home equity, as collateral.
Here’s a closer look at the two main SBA loans.
SBA 7(a) LOAN
This is the agency’s primary loan program.
Best for: Buying land or equipment, working capital, buying out a partner, expanding the business, refinancing business debt
Maximum loan amount: $5 million
Loan term: Up to 25 years for real estate; less for working capital
Interest rate: Varies, but up to about 8 percent currently
Eligibility requirements include: SBA size standards, ability to repay, owner equity and good character
SBA 504 LOAN
This loan program is for local economic development and is made in partnership with a third party — a community-based certified development company.
Best for: Buying a building or land, constructing new facilities or renovating existing facilities or the purchase of long-term machinery
Maximum loan amount: $5 million; up to $5.5 million for small manufacturers
Loan term: Up to 20 years
Interest rate: Varies, but around 5 percent
Eligibility requirements include: Same as a 7(a) loan plus job creation
To find an SBA lender, visit the SBA Lender Match page or individual lender websites, including banks and non-bank lenders.