Insufficient funding is the leading reason why many startup businesses never really get off the ground. It doesn’t have to be like that, though, as there are loan programs available to help startups succeed.
In this article, the Pursuit Business Advisory Services team presents a specific type of startup loan—the U.S. Small Business Administration (SBA) Community Advantage program—and what it takes to obtain one. Learn more about this loan program and how having sufficient funding in-hand makes every aspect of starting and running a business much easier.
What are SBA Community Advantage loans?
The SBA’s Community Advantage loan program is a specific partnership between the SBA and mission-driven lenders that was created to meet the financial needs of underserved small business markets throughout the U.S. With competitive interest rates and longer repayment terms (up to 10 years for working capital, rather than the typical 3-5 years), these loans help reduce monthly payments, leaving businesses with more money on-hand to invest in growth.
Depending on the lender, borrowers can borrow from $25,000 to $250,000, usually with a variable interest rate of prime + 4% to6%, and no prepayment penalty. In addition, the SBA and its partners offer mentoring, workshops and more to help business owners in underserved communities succeed. It’s important to note that all terms and conditions for Community Advantage loans are case-specific, and will depend on your individual case and the lender you work with.
Who is eligible for SBA Community Advantage loans?
There are some eligibility requirements across the board: Businesses must be for-profit and based in the United States. Business owners must be U.S. citizens or green card holders, and may not have caused the government a loss on any prior lending relationship (for example, student loans, federally-back mortgages, and other SBA loans). There are also size limits (generally, under 500 employees and $15 million in annual revenue) and some restrictions based on the type of business or industry.
Though the Community Advantage program isn’t meant just for startups, it’s a great resource for new businesses that might not yet qualify for traditional financing. For example, many restaurants have used Community Advantage loans to fund a second location or open a new venture. Jose and Nilda Pinargote used a Community Advantage to open their new restaurant, Adobo Latin Kitchen, in Easton, PA, creating jobs and bringing authentic Puerto Rican cuisine to the community. When Arun Nanda was opening the second location of his popular Brewshot Café in Jersey City, NJ, and Community Advantage loan provided additional working capital to make his opening months a success.
As an example of how beneficial these loans can be for startups and growing small ventures, Pursuit offers these terms and eligibility requirements:
- Loans must be between $50,000 and $250,000
- Potential borrowers must demonstrate a good payment history for business financial obligations, like other debts and taxes
- Also, borrowers must have three years of business and personal tax returns (if you’re a startup business, three years of personal tax returns are acceptable); information on existing business debts, if any (including how much is owed, what the payments are and how often they’re made); how you intend to use the funds (such as working capital and equipment purchases); and past or projected business financials
If you meet these requirements and are interested in a Community Advantage loan, you can apply online here.
How can you increase your odds of qualifying for a Community Advantage loan?
While lenders set their specific criteria, there are some criteria that essentially all use to determine borrower creditworthiness. The following criteria are especially important for startup businesses that are seeking financing:
- Business-plan financial projections. Review your financial projections to ensure that they’re realistic for your business, your industry and your business plan. Demonstrate to your lenders that you’ve completed research to determine projected revenue and expenses, and have accounted for all related costs to meet your goals. Lenders won’t expect your business to be profitable right away, so be sure to factor in a ramp-up period, as well as cyclical ups-and-downs.
- Management experience. Lenders will consider your management and industry experience as factors in loan approvals, too. Be sure that your business plan details your experience (and, if you have partners, their experiences as well), and how that relates to your venture. If you fall short in key areas, explain your plans for overcoming this. In areas where you lack specific important experience, lenders will want to see that you have “key employees” that you’ll hire (or work that you’ll outsource), and that you’ve included those potential costs in your financial projections.
For example, when Robert Schaefer leveraged 35 years as a professional chef into Divine Brine Foods—a specialty pickled-foods business—his food-industry experience strengthened his application for a Community Advantage loan. In addition, with his lender’s help, he was able to learn many of the business-management skills he needed to help his business grow.
- Outside income. Show your lender how you currently make your living and how will that change as you transition to business ownership. Include outside income that will continue as you launch your business. Do you have outside income that will continue as you launch your business? Importantly, have an estimate of when you’ll realistically start taking a salary from the business. Living expenses and financial obligations don’t stop when you start a business, so discuss your plans for staying afloat while your business gets underway.
While most of the evaluation criteria for Community Advantage loans are similar to other business loans, the following are particularly important for this loan program:
- Owner equity contributions and post-closing liquidity.
Most lenders will require a 20%-30% equity contribution from the business owner. In this case, equity represents the money you’ve already invested into your business rather than a down payment on the loan itself. Be prepared to provide documentation to substantiate the source of your equity contribution, including:
- Free cash: This is how much you’ve contributed from savings and liquidation of investments.
- Standby debt: These are loans that won’t be paid back until after your SBA-backed loan is paid in full. For example, when a family member loans money with no repayment required until after the Community Advantage loan is paid off, that’s considered standby debt. Both you (as the borrower) and your family member (as the lender) will be required to sign a Standby Agreement.
- Gifted funds:When a friend or family member gives you money for your business with absolutely no strings attached, these are considered gifted funds. Be prepared to document the gift with letters and bank statements from the gift provider.
Be ready to discuss what capital is available now and what’s available to cover any potential cost overruns, such as unanticipated equipment needs, and how a Community Advantage loan factors into your plan.
- Collateral. From a lender’s perspective, if you potentially have something to lose, you’re more likely to plan effectively and manage your finances well. Community Advantage loans require that any and all available collateral be pledged (up to the loan amount), and this point isn’t negotiable.
Acceptable collateral includes personal holdings like homes and cars, as well as items acquired for the business, like real estate and equipment, which can cover the value of the loan. While lenders can’t decline a Community Advantage loan due to the lack of collateral, if it’s available, it must be pledged. A lender will need to know whether those items are liquid (cash or items easily converted to cash) or illiquid (something that can’t easily be converted or that will likely lose substantial value if sold quickly).
Community Advantage loans are great options for entrepreneurs who are serious about success
For people who put the time and effort into researching and planning their startups and demonstrate commitment and experience, Community Advantage loans are a great option. For more information on Community Advantage loans and other potential funding options, contact Pursuit today—we can help.
