SBA Loan Hinges on Business Plan

Having bad credit is one thing, but having a bad business plan is an even bigger problem.

“It’s harder to overcome a bad business plan than it is to overcome some challenges to your credit,” said Lance Sexton, vice president/commercial loan officer at Simmons First Bank in Springdale. “Ideally, you would like for both things to be in place.”

If an entrepreneur walked into Sexton’s office with the best business idea in the world, Sexton said he would direct that person to the Small Business Development Center at the University of Arkansas in Fayetteville to get help writing a business plan.

“As a banker, I want to see a good, written business plan and a set of financial statements,” Sexton said. “Quite often, an applicant will bring that in, but usually they won’t come in with everything they need.

“Most entrepreneurs are people with good ideas, but sometimes they have difficulty putting those ideas into writing. At some point, they have to sit down and turn those ideas into words and numbers, and that’s where the Small Business Development Center comes in. Here at the bank, we need to see those financial statements and a business plan that tells the story.”

Sexton has only been a banker since Jan. 1. For the six years before that, he was director of the SBDC in Fayetteville, where, among other things, he became somewhat of an expert at helping businesses apply for loans guaranteed by the federal Small Business Administration.

The SBA guarantees loans to small businesses that qualify.

“Ninety-eight percent of all businesses are small businesses by our standards,” said Jim Coffey, a loan officer and spokesman for the SBA in Little Rock.

About 24 percent of startup businesses are still operating five years later, Sexton said, referring to a 2001 study. That’s up from 20 percent in 1995.

“I think in Northwest Arkansas the business failures are less but not incredibly,” Sexton said.

“Historically, businesses that are started with SBA loans have a better success rate than businesses that are started without SBA loans,” Coffey said.

The SBA guaranteed 199 loans totaling $30 million in Northwest Arkansas last year. The SBA guarantee usually covers 75 percent to 80 percent of the loan amount. The business must pay an SBA guarantee fee that usually runs about 2 percent of the loan amount.

Banks actually make the loans, but the risk is split between the bank and the SBA, with the SBA taking the majority of the risk. Interest rates on SBA-backed loans are currently 6.75 percent at Simmons First. The business receiving the loan is usually expected to invest at least 20 percent of its own money.

“Banks like to see a small-business person sharing the risk,” Sexton said. “I think it’s unreasonable for a person to come up with the idea and expect the bank to take all the risk. By sharing the risk, the financial institution knows that person is going to work harder to make that business succeed. A business where the owner is the manager has a better chance to succeed.”

Getting Started

Before working for the SBDC in Fayetteville, Sexton spent nine years with the state SBDC office at the University of Arkansas at Little Rock and operated his own business, Sexton Electronics in Clarksville, for six years. There are five other SBDC offices at universities across the state.

“I’ve spent 15 years of my life helping small businesses get SBA loans and USDA loans and other types of small-business financing,” Sexton said. “Over that 15-year period, I’ve helped clients get over $300 million of financing through those programs.”

Sexton’s clients at the UA included Beta Rubicon, a technology consulting firm owned by Ron Goforth of Fayetteville; Acambaro restaurants, now a chain of 14 area eateries owned by the Reyes family; and Luxe, a salon in Rogers owned by Juliet Ballinger.

“She understands the importance of selling products in a salon because that’s where most of the profit comes from,” Sexton said.

It’s beaten into business students from day one, but Sexton said it’s true: Location is “critical.”

“You can take a good business and put it in a bad location, and it’ll fail,” Sexton said. “You can take a bad business and put it in a good location, and it’ll do well.”

Businesses shouldn’t try to locate where several others have failed.

“Any time there have been multiple tenants, you need to turn around and run the other direction,” Sexton said.

Sexton, who teaches courses on entrepreneurship at the UA’s Walton College of Business, said many people tell him they want to start their own business so they can free up their time. That’s the wrong reason to start a business, he said. With new businesses, the owner often has to put in long hours to make the venture succeed.

“Those are things you don’t get in a small business until later,” Sexton said of the free-time folly.

But, small-business owners do get control over their destiny.

“There are parts of it I miss,” Sexton said. “Being able to control your destiny through working harder … Those profits belong to you. The main thing is knowing that the decisions you make will have an impact on your financial well-being, good or bad.”

Sexton said Simmons First is working “to provide an exceptional level of service to small-business owners.”

“My sole purpose in life is not just to do SBA loans,” Sexton said, “but those people needing SBA loans — I want them to come to me.”

Sexton said there’s stability with an SBA loan because the recipient can stay with the same bank throughout the term of the loan, even if the bank merges with another institution.

“With the SBA, once you do the loan, it’s done,” Sexton said. “You still have to monitor financial information, but you don’t have to go in once a year and redo the paperwork.”

504 Loan Program

The SBA’s 504 Loan Program provides long-term loans for fixed assets such as land, buildings and equipment. Startups as well as expanding businesses can qualify for 504 loans.

Arkansas Capital Corporation Group, the largest SBA and non-bank lender in the state, does 504 loans through its affiliate Arkansas Certified Development Corp.

ACCG was founded in 1957 as First Arkansas Development Finance Corp. to help the state transform from an agricultural to an industrial economy. The ACCG has made hundreds of loans representing projects worth more than $500 million.

Benefits of a 504 loan include up to 90 percent financing for fixed assets, including associated soft costs; 10- or 20-year terms, fully amortized, no balloons or call features; fixed, below-market interest rates; minimized down-payment requirements; and increased cash flow through extended repayment terms.

The 504 Loan Program is explained in more depth on the ACDC’s Web site at http://acdc.arcapital.com.