While conventional business financing typically offers the lowest interest rates, there are times when an SBA loan is the best option or maybe the only option for a small business. Conventional loans typically require a down payment of at least 20%. Traditional loans are often the best financing option for established businesses as they are cost effective.
SBA loans are business loans guaranteed by the Small Business Administration. The Small Business Administration partners with several banks and lending institutions across the country. The SBA makes it easier for small businesses and start-ups to get loans through the bank because they help reduce the bank’s risk. The SBA uses money provided by the government to guarantee up to 85% of the loan amount.
The two most common types of SBA loans are 7(a) loans and 504 loans. In this blog, we will explain the two main SBA loan programs as well as the advantages and disadvantages of funding your business via an SBA loan.
The advantages of SBA loans include lower down payments, extended repayment terms, and competitive interest rates. SBA loans allow for underwriting based on financial projections which may benefit individuals that are looking to fund a franchise purchase. SBA lenders allow you to put a minimum of 10% down and loan proceeds can be used for a variety of costs including soft costs, operating cash, franchise fees, etc. For more information regarding the terms, conditions and benefits of SBA lending, please visit the SBA.gov website. It is a great resource to find out how an SBA loan can help you fund your growing business.
The disadvantages of SBA loans include higher costs and a longer application process. Interest rates are often higher than rates offered in traditional financing. SBA and closing fees can add up although SBA fees may be rolled into the loan. The loan application process typically takes longer than a traditional bank loan application. The SBA will require personal guarantees of the owners with 20% or more ownership in the business. Although a fully collateralized loan isn’t always required, SBA loans often require that collateral shortfalls be covered by a lien on personal assets. For loans in excess of $350,000, the lender may take enough collateral to fully secure the loan such as a mortgage on the available equity in your personal real estate. If your business fails and you are unable to pay back your SBA loan, they have the right to take personal assets such as your home. The benefits of an SBA loan often outweigh the disadvantages and costs.
The SBA 7(a) loan is the most common loan. According to the Congressional Research Service, the U.S. Small Business Association backed over $22 billion in SBA 7a loans in 2020. 7(a) loans can be used for working capital, equipment, real estate and other asset purchases. They are also used for the establishment of a new business. 7(a) loans are great for franchise owners. The maximum amount for a 7(a) loan is $5 million. Eligibility requirements include gross annual revenue of at least $100,000 and a credit score of at least 650. Businesses with tax liens, foreclosures or recent bankruptcies will likely be denied. A 10% down payment is typically required. If your real estate purchase represents more than 50% of the debt, then you can finance all of the debt over longer repayment periods.
SBA 504 loans are a great option for a business that is looking to finance the purchase of fixed assets. Fixed assets include equipment, buildings and land as well as improvements to an existing building or the funding of construction of a new building. 504 loans cannot be used for working capital, rental real estate or to refinance existing debt. 504 loans are available through Certified Development Companies (CDCs) like Growth Capital in Cleveland Ohio. The major benefits of 504 loans include lower down payments with a minimum of 10% down, longer amortization periods, no balloon payments, and a fixed rate for the life of the portion of the loan with CDC/SBA. The CDC in your area works with a bank loan officer to fund your loan using a 50/40/10 split. The bank covers 50% of the loan, the CDC covers 40%, and the owner covers 10%.
The sba.gov website has several resources and guides for small businesses. They cover topics such as planning your business, launching your business, managing your business and growing your business. They also have a Learning Center on their website that is worth a look. When a small business doesn’t meet the minimum requirements such as minimum debt service coverage of 1.15x, the SBA team will gladly coach you.
We hope that you have found this information helpful. We recognize that there are many ways for a business to raise capital. SBA loans are great for small businesses as they allow for minimal down payments and extended terms. If you are looking to purchase a franchise, SBA financing may be the best alternative for you.
Now that you have a better understanding of SBA loans, you are probably wondering how to find an SBA lender. Some banks are more SBA friendly than others. The most active SBA Lenders include: Live Oak Banking Company, Huntington National Bank, Newtek Small Business Finance, Celtic Bank, Byline Bank, U.S. Bank and Wells Fargo. There are also smaller banks throughout the country that are SBA friendly. Feel free to reach out to us for more guidance.
To learn more about LonaRock, LLC and our business finance consulting services, please visit our website at www.lonarock.com or contact us directly at 234-217-9033. We look forward to helping you become an ideal business client and helping you obtain the best possible financing for your company!