Is An SBA Loan the Answer for Your Small Business?
In the first few years of a small business, the right financing can mean the difference between success and failure. Yet this is the time when obtaining financing can be most difficult. Because of the high risk of failure in early stages, conventional bank loans typically require the business owner to show a track record of up to three years of good operating profit and debt service.
For less established enterprises, loans guaranteed through the Small Business Administration may be an option. SBA loans also require lower down payments and offer longer payback times. Technically known as the 7(a) Loan Guaranty Program, these loans are made through banks, but the SBA carries some of the risk, guaranteeing repayment of up to 75 percent of the loan. But not every business loan meets the SBA's guidelines. In trying to determine what kind of loan is right for your small business, you should consider the following questions:
What will the funds be used for? SBA loans can be used for real estate (assuming it will be occupied by the business), business expansion, equipment, inventory or working capital. There are some purposes for which SBA funds are ineligible, such as paying taxes or reimbursing an owner's equity.
What size loan do I need? Currently, SBA loans are limited to $2 million, with the SBA guaranteeing up to 75 percent or $1.5 million, whichever is smaller. On the flip side, SBA loans may be a good answer for a business needing a loan smaller than $150,000 or even less than $50,000. These "microloans" may not meet a bank's conventional requirements.
How large a down payment can I manage? Typical conventional loans require a 20 percent down payment. An SBA loan requires a 10 percent down payment. (Note that SBA loans carry interest rates that may be 1 to 1 ½ percentage points above conventional loan rates, and they have guaranty fees that typically are 3 to 3 ½ percent of the SBA-guaranteed amount. These fees go to the SBA to fund the loan program and are wrapped into the loan package.)
Is my business profitable? Even an SBA loan requires a track record that indicates the borrower will be able to repay the loan. Typically, a one-year history that shows the business is profitable and capable of making the debt payments is sufficient.
What is my credit record? Your track record should demonstrate that you have maintained good credit and paid bills promptly. Because of this, it is better to apply for a loan as soon as you foresee a need for capital, rather than waiting until your business is in a crisis.
How well capitalized is my business? Most SBA borrowers have less financial strength than those who qualify for conventional loans. You may be eligible for an SBA loan if you were turned down for a conventional loan due to high debt-to-asset ratio or low net worth. On the other hand, if your personal resources are too high and you are not investing them in your own business, you may be ineligible for SBA funding.
How long a payoff do I need? One of the advantages of an SBA loan is that it can have a payoff of as long as 20 to 25 years, with no early call provision. Conventional loans are typically for 15 years or less, and may have a provision that the lender can call the debt at an earlier date, such as 10 years.
The loan officer at your bank can help you determine what type of loan is appropriate for you. Look for a bank that participates in the SBA loan program as a "preferred" SBA lender. Preferred lenders' applications receive priority review in the SBA approval process, which can mean faster turnaround.
Because an SBA loan is a major step for a business, also look for a banker who is willing to walk you through the process and provide advice and counsel on your financing needs so that you end up with the best overall package for your business and a relationship that will support you as your business grows.
