Throughout this recent interview, Schwanda provided some great advice about SBA lending and how this impacts linehaul service providers. Her insight sheds light on why so few banks lend in this market and what service providers can do to set themselves up for financing success.
SBA Loans: The Government Guarantee Advantage
SBA loans are not wholly government funded, but they come with a substantial government guarantee that makes them appealing.
Flowers says, “They don’t guarantee all of it. Depending on the size of the loan, they guarantee 75% – 85% of the loan. So, we are not free as a lender from all of those duties of trying to recoup our money for the loan initially. If that can’t happen, then SBA steps in and will make good on that guarantee.” For most linehaul loans the guaranteed amount will be 75%.”
This partial guarantee arrangement leaves banks with skin in the game but provides some cushion against the risk. For example, let’s say a bank has a $2 million loan that goes into default and the bank liquidates and gets $1 million back, in which case the SBA pays up (to its guaranteed portion) of 75% of the initial loan amount of $1.5 million, which reduces overall lending risks.
The government’s backing does not eliminate the need for due diligence, but it does make lenders a little more confident about dealing with businesses that have substantial intangible assets, and this is exactly the position in which most linehaul service providers find themselves.
Why Linehaul Service Providers Are a Perfect Fit for SBA Loans
Conventional lending is very asset reliant, primarily on assets that can be easily turned into cash. For linehaul service providers, that’s a different story: your real value is in routes and operational “know-how” which can’t be sold if things aren’t working out.
“SBA loans are typically great loan products when a lot of the collateral is intangible. In the case of a linehaul service provider, if they’re either acquiring routes or expanding on their current business, those routes are intangible. They need to liquidate that, right? We have some tangible assets in the vehicles, but that’s usually a very small portion of the loan. So that’s why SBA is a good fit, because there’s not a lot to liquidate,” Flowers says.
This contrast between historical lending standards and actual transportation industry conditions is the reason why SBA loans are an option. The structure of the SBA recognizes that most companies are valuable for their relationships, contracts, and operational insight, just as much or more than their physical assets.
Personal Guarantees and Collateral Requirements
There is a misunderstanding about SBA loans that they won’t have personal guarantees. Many service providers are conditioned to think that SBA loans require a lot of personal collateral, but the truth is more complicated.
Flowers continues, “Let’s say you live in Texas with a homestead law, so we can’t take your personal home. You can still get an SBA loan, 10% down, no additional collateral. And typically, what we do to finish collateralizing a loan with an SBA loan is require life insurance, which is required with most conventional loans as well. So, with SBA, if you have personal collateral, we’re going to use it. But it does not automatically disqualify you from being approved for that loan if you don’t.
This comprehensive FAQ guide explains the crucial difference between secured and unsecured lending options, so service providers can find out more on these personal guarantees and collateral requirements.
The Power of Relationships: Why Banks Don’t Always Serve this Market
When you have around 4,500 banks in the United States, it is a relatively small number that know enough about the linehaul contracting business to lend against this industry with confidence.
Flowers states, “We enjoy the space. The cash flow is good when it’s done well. And so, we really focus on lending to good service providers who have good experience and a good team around them, who have also done their research and have educated themselves about how to own, operate, and be successful in this space. We spend a lot of time looking at the borrower and how they can be a successful service provider. It’s about having a conversation with each applicant to see where they are, who they are, look at their resume, and it’s just a different approach.
Specialty lenders such as the First Financial Bank spend a lot of time and relationship-building to learn about how all that fits together in the transportation industry. They know what solid linehaul financials should be.
Making Connections
The best financing proposals arise when service providers create relationships with specialty lenders as soon as possible.
Flowers continues, “Typically, the process is not long if you’re working with a preferred SBA lender, because underwriting is done in-house. You have underwriters who understand this space. It goes much faster. It should not be a very long process if you’ve already started those conversations and have that relationship.”
The Pre-Approval Reality
Some service providers request pre-approval letters, but this financing is not the same as consumer lending. Flowers states, “We don’t do pre-approvals, because the approval is based on the business. So the borrower is important, but there’s not an approval if there’s not a business to look at, so we have to focus on the cash flow of the business. That’s the critical piece of the approval.”
Common Mistakes That Derail Applications
Flowers was asked, “What are some of the misconceptions or mistakes you see people who approach you looking for loans that disqualify them. What are some of the patterns you see that people should be aware of? There are a few patterns that keep tripping up service provider loan applications.”
Flowers’ responses can be summarized:
Financial Issues:
- Recent bankruptcies
- Excessive credit card debt
- Poor credit management
- Not enough cash for the down payments
Preparation Problems:
- Applying without established lender relationships
- Inadequate financial documentation
- Unrealistic expectations about financing terms
Life Insurance: The Hidden Requirement
One often overlooked part of SBA lending deals with the life insurance regulations. Most SBA loans require borrowers to maintain a life insurance policy.
The life insurance application and underwriting can take a significant amount of time, and the service provider should have it started as soon as the loan is approved. Some requirements and fees have changed with new SBA policy updates, which further underscores the importance for service providers to work with lenders that keep apprised of regulatory changes.
Getting a life insurance policy can be a long process. “It is required on all our loans, and if you don’t have that done before closing, closing will get delayed, and that’s very disappointing for everyone involved. We always encourage people immediately, when you get that approval, you’ve got to have your insurance agent ready on speed dial and know what you’re doing, what you need, and get that ball rolling,” Flowers states.
The Path Forward for Linehaul Service Providers
The right financing partner has the power to change what business expansion looks like for many small businesses in different verticals. For linehaul independent service providers, this would involve pursuing niche lenders who see transportation knowledge as an opportunity, not a liability.
Specialized financial resources and knowledge are becoming key resources for linehaul businesses. For businesses with high intangible value, SBA lending is critical to access to the capital they need but requires successful partnering with lenders who get it, such as the lenders at First Financial Bank.
