A loan from the U.S. Small Business Administration could be a very useful option for your company, no matter if you are just getting started or if you have been around for years.
SBA loans often allow business owners who may not normally qualify for conventional commercial loans to obtain financing. This includes those who have less available cash flow, are more leveraged or have little to no history in operating their business.
However, it is important that one has a good understanding of how an SBA loan differs from other loans, what types of SBA loans are available and what to consider when deciding to apply.
How Do SBA Loans Work?
The SBA actually does not make direct loans to small businesses. Rather, when someone applies for an SBA loan, he or she is actually applying for a commercial loan from a bank or another partner lender, structured according to SBA requirements and backed by an SBA guarantee. (The SBA agrees to pay a certain percentage of the loan if the borrower defaults.)
There are several ways an SBA loan differs from a traditional loan in our experience. Often with SBA loans, we see a lower down payment requirement, but higher fees. We also see different collateral requirements. This could include accessing equity on a person’s home for collateral. This is a different requirement from most traditional loans. We also see longer amortization periods and terms with SBA loans. This can lead to a lower payment for the borrower.
What Types of Loans Are Available?
There are many different loan products available from the SBA, and they can help companies in a variety of situations, such as purchasing real estate and equipment, acquiring another business or financing startup costs.
Primarily, we see 7(a) loans and 504 loans. The 7(a) loan program is the most common offered by the SBA. There are a variety of loan programs that fall under the 7(a) loan umbrella including SBA Express and CAPLines, just to name a few. The 504 loans are used primarily for real estate and equipment purchasing.
For a complete listing of current SBA loan programs, visit sba.gov.
Considering an SBA Loan
What we have seen over the years is that many aspiring business owners are concerned about the SBA loan process and thus are hesitant to apply. Those concerns center on the application process and associated costs. We recommend visiting an SBA Small Business Development Center or SBA.gov to learn more about loan options available and qualifications. The SBA Small Business Development Centers are a great option as they can work with applicants not only on loan options, but also can provide resources for business planning.
If an SBA loan seems to be a fit, we recommend working with a banker that is experienced in SBA lending and can help expedite the application process, as well as evaluate all other loan options.
