Are SBA Loans Right for Me?

They make financing available to small, growing companies.

If you need financing for your small business, you may look into SBA loans at some point. Over the years, these versatile lending products have allowed a wide range of companies—companies just like yours—to acquire the capital they need to pursue their goals.

While they’re called “SBA loans,” the U.S. Small Business Administration doesn’t lend money directly to the small business. Rather, the SBA guarantees the loan that a lender, such as a bank, makes to a qualifying company.

If that business defaults on the loan, the SBA promises to step in and cover a certain percentage of the outstanding loan balance. This helps make financing more widely available to small businesses that might not qualify for conventional loans.

Here are some other important facts you should know about SBA loans.

Who are SBA loans for?

SBA loans are good for entrepreneurs who are relatively new, fast-growing businesses, service industries, business acquisitions and real estate purchases.

They’re a terrific option when the business owner is looking for a longer-term loan or has limited collateral to put down.

SBA loans are not for investors, landlords or cases where someone is trying to buy a partial interest in a company.

What are the benefits of SBA loans?

There are several upsides to securing an SBA-backed loan:

» Business owners can typically make a smaller cash injection into their business.

» SBA loans may have a longer amortization period, which means a lower monthly payment.

» No prepayment penalties for short-term loans. (There is a penalty for prepayment on loans with terms of 15 years or longer.)

» SBA loans are often approved during a company’s first three years, when it can be harder to secure a conventional loan.

What are the most common misconceptions about SBA loans?

Many people mistakenly think SBA loans come with more paperwork than conventional loans; the paperwork for both is very similar.

Other popular myths? The government will be “running” their business. Not true. The SBA values the independence of each small business.

What are 7(a) loans?

The SBA has a few different loan products, and 7(a) is the most commonly used. It can be used for a range of projects: purchase of equipment or commercial real estate, working capital, the acquisition of an existing business or even the refinancing of current business loans.

Typically, a small business will first apply for a conventional loan, which the bank will then review. The loan officers may determine that an SBA loan is a better option for that company. If so, the bank will let the owner know and request additional information and paperwork.

Your lender should be able to explain the process to you, and the official website has a great deal of information about the agency’s loan programs. It also helps to seek out banks that are part of the SBA’s Preferred Lender Program. Preferred lenders have greater expertise in processing SBA loan requests and can offer streamlined service.

What kinds of things will a lender want to see?

Banks will want to view your business plan and financial projections covering three years, with the first year broken down month by month. You’ll need to fill out an SBA Borrower Information 1919 Form, as well as the paperwork for a conventional loan application package.

Any other advice?

Work with an SBA preferred lender whenever possible. Also, when choosing a lending partner, consider all the value that lender can offer, such as an extensive branch network, industry expertise or specific services. Are loan requests considered by a local office, or is the decision made by out-of-state personnel you’ll never meet?