Over the past few years, the U.S. Small Business Administration (SBA) rose to the challenge of rebuilding the American economy, helping facilitate $19.2 billion in loans to small businesses during the last fiscal year alone. If your business is in need of cash to start or grow, here are a few tips when considering an SBA loan.
1. The SBA Doesn’t Make the Loans — Commercial Lenders Do
Ironically, one of the keys to the success of the SBA’s business model is that the SBA does not make the loans themselves. Instead, they make the rules and commercial lenders (banks, credit unions, non-bank lenders) provide the funds to the small business borrowers. Why is that important? Unlike government offices, banks have stockholders to whom they must answer, so they develop systems and procedures to get the loans out the door as quickly as possible.
2. Features of an SBA Loan
The most popular types of SBA loans fall under the 7(a) program, including a myriad of term loans and lines of credit. Over the past several years, the SBA has made a concerted effort to add flexibility to their programs and products so that lenders and borrowers not only have more choices, but also simpler delivery mechanisms. Standard SBA loan terms are as follows:
- Working capital: 7 years
- Inventory: 7 years
- Equipment: 7-10 years
- Business acquisition: up to 10 years
- Debt refinance: 7-25 years
- Owner-occupied commercial real estate: 25 years
Interest rates are usually variable and tied to the Prime rate. Fees depend on the size of the loans but average between 2-2.7% of the loan amount, not including things like appraisals, title reports, credit reports and other standard loan costs. If the loan amount is $150,000 or less, it’s even better: the SBA currently waives their fee for loans of that size, which can save you thousands of dollars.
3. Benefits of an SBA Loan
For the borrower, SBA loans typically have longer amortizations (pay-back periods). Down payments are often lower than what a bank would require for a standard commercial loan. Collateral requirements are often less stringent.
On the lender’s side, the SBA guaranty can help the bank get comfortable with things they might otherwise not be willing to do, such as financing a newer business, overcoming one or two credit factors, or financing a type of business they might not normally consider.
As for lines of credit, although they are priced and administered similarly to a standard commercial product, the SBA guaranty can make the difference between approval and denial.
4. How to Apply for an SBA Loan
First, try your bank. They may be willing to provide financing based on your relationship with them, perhaps even without utilizing the SBA. If that doesn’t work, contact your local SBA office and ask for an SBA Preferred Lender in your area.
If yours is a new business, bring your business plan with you to your first meeting with the lender and be prepared to discuss it in great detail. If yours is an existing business, have your financial statements ready, along with your plan for the coming year.
Whether your business is new or established, the lender will want tax returns, personal financial statements and other information to complete the application. Keep a ‘plan B’ in your back pocket, as the lender might not want to do the loan the way you want it, but might be willing if you add something else to the equation — more collateral, a smaller loan or something else altogether.
5. The SBA: A Great Resource for America's Small Business
In the wake of the Great Recession and with businesses looking to grow again, the SBA is a great alternative when you need lower payments, or if something about the request doesn’t make it a good fit for a standard commercial loan.
There’s a bit more paperwork and the timetable may take a little longer with an SBA loan, but fear not: it’s your friendly local banker doing the work.
Banner Bank is a designated SBA Preferred Lender. For the past three SBA fiscal years, Banner Bank has been the top community bank lender to small businesses in the Seattle district, which serves Washington State and Northern Idaho. Learn more about SBA loans.