Key takeaways:
- If your client doesn’t qualify for a 7(a) loan from a traditional bank, there’s good news. Not all 7(a) loans are created equal, and they might be a good fit for other 7(a) programs.
- Grow America specializes in “but for” scenarios where businesses would qualify for traditional bank financing except for one or two extenuating circumstances like damaged credit, limited collateral, or acquisition deals.
- A rejection from one SBA 7(a) lender doesn’t mean a business is unqualified—it may simply mean they need to find a lender whose credit box better matches their situation.
A promising business with solid historical cash flow gets declined for a 7(a) loan at their local bank. Their expansion plans are based on projections, and there’s not enough collateral to cover the new loan, so the bank won’t approve financing. Sound familiar?
This is a familiar scenario in small business lending. While banks offer SBA 7(a) loans, many businesses are turned away if they don’t fit neatly into a standard lending box. Grow America takes a different approach. As a mission-driven CDFI (Community Development Financial Institution), we have the flexibility—and the determination—to dig deeper and truly understand each business.
We offer SBA 7(a) loans to small business owners who are often turned down in “but for” scenarios, meaning they would qualify for a bank’s 7(a) loan “but for” one or two extenuating circumstances. We take time to understand the nuances of the business and financial situation, so what was once a “no” has the potential to turn into much greater possibilities.
The 7(a) landscape reality check
A common misconception is that SBA 7(a) loans are a standardized product. But in reality, SBA 7(a) lenders aren’t all the same. While the SBA does set baseline requirements, individual lenders are able to layer on additional rules, regulations, and restrictions.
These are a few ways that lenders can customize the SBA requirements to fit their lending practices:
- Setting credit score minimums: The SBA doesn’t have a credit score limit, but a lender can set one.
- Determining debt-service coverage ratios (DSCR): The SBA has a required DSCR, but a lender can choose to require a higher DSCR.
- Establishing collateral requirements: SBA loans must be secured by available collateral. However, insufficient collateral does not automatically disqualify a borrower— lenders may still proceed based on the business’s overall creditworthiness.
- Defining acceptable industries and business models: On the SBA side, there are some businesses that are ineligible and that lenders aren’t able to work with. For eligible businesses, however, lenders have the freedom to choose which industries and business models fit their lending structure.
- Setting loan size preferences: While the SBA 7(a) program allows loans up to $5 million, not all lenders participate across the full range. Some steer clear of larger loans, while others overlook smaller ones—leaving many qualified businesses without the right financing fit.
Grow America’s difference: Common sense lending
For SBA 7(a) loans, Grow America doesn’t layer on many additional requirements beyond what the SBA has established. We tend to stick with the SBA standards and then use a common sense approach to evaluate clients and their businesses. We make SBA loans of all sizes—supporting businesses at every stage of growth.
Our ability to get to know our clients has led to some amazing deals and success stories. As just one example, our clients Casey White and Jason Klein experienced this first-hand when they sought financing to pivot their sports-branding agency into The Clink Room during the pandemic. Despite their successful track record and the potential for a new branch of their business to take off, they were turned down for financing. We were able to secure their funding, and now their specialty baseball cap design company is thriving.
Specific scenarios where Grow America’s 7(a) product works well
In a world of rules and regulations, we look for ways to help support your growth. Our approach works well in certain scenarios where a traditional approach may not.
Damaged credit with a story
For us, context matters more than numbers. We understand that life happens and the business suffers as a result. We look for the connection between circumstances and character. We’ll look at the credit reports and get to know the story behind the numbers on the page. For example, unknown medical debt or a small balance on a long-closed cell phone account can negatively impact credit but doesn’t indicate an unwillingness to pay back debt.
Limited collateral situations
When a potential client comes to us with limited collateral, we’ll look at their fundamentals even if they lack the hard assets that a bank looks for. We’ll look at the cash flow and business projections to see where the business is headed rather than solely focus on what it has at this exact moment in time.
Business acquisitions
Many Baby Boomers are retiring and selling their businesses, creating acquisition opportunities. Prospective business owners may lack strong collateral, yet they’re acquiring a business with strong cash flow. We can work with prospective owners to secure funding for an established business.
When in doubt, always reach out
Whether you’re a small business owner or a referral partner with a promising client, remember that a “no” from a traditional lender could be a resounding “yes” at Grow America. This is especially true in a situation where the deal is viable “but for” one or two things that fall outside of the bank’s credit box.
Our lending structure lets us evaluate businesses more broadly than traditional banks. Remember, the next time you have a borrower with potential but imperfect metrics, that doesn’t mean it’s a dead end. It might just mean that you need to adjust the route, take a detour, and send them our way. A referral to Grow America means that you can keep the relationship with the client while we partner with you to help them grow.