Articles in the Series:
- Pros and Cons of Using Own Money
- Pros and Cons of Credit Cards
- Pros and Cons of Borrowing from Family and Friends
- Pros and Cons of Bank Loans
- Pros and Cons of SBA Loans
- Pros and Cons of Angel Investors
- Pros and Cons of Venture Capital
- Pros and Cons of Crowdfunding
- Pros and Cons of Business Plan Competitions
- Pros and Cons of Supplier Credit
Pros and Cons of SBA Loans
Advantages of SBA Loans
- The SBA does not lend money. It guarantees loans for small business acquisitions that are then underwritten by traditional banks.
- SBA loans are backed by the Small Business Administration and offered by SBA partner lenders. The guarantee reduces the risks of lenders, enticing lenders to provide loans to small businesses, which are often considered riskier.
- The maximum loan amounts vary depending on the loan product. As of this writing, 7(a) loans have a maximum loan amount of $5 million, SBAExpress loans have a maximum loan amount of $350,000; while SBA Export Express Loans have a maximum loan amount of $500,000.upon budgets.
- SBA will lend up to 75% of your requested amount. They’ll also finance real estate loans for a very favorable term.
- Fees of SBA loans are high.
- Maximum loan maturities vary depending on how the proceeds will be used: 25 years for real estate, 10 years for equipment (or demonstrated useful life), and terms for a working capital or inventory loan should be appropriate to the borrower’s ability to repay, up to 10 years.
- Use a “preferred SBA lender” bank. They can process and pre-qualify the loan in house.
- The business itself must qualify based upon 2-3 years of tax returns. The lender will generally take the worst year and calculate the total cash flow. Then, they will deduct a reasonable salary for you the owner. The remainder is subject to a formula (usually divided by 1.2) to determine the remaining cash flow to see if it can service the debt load.
- You will need to pass the loan qualification requirements, including demonstrated experience in running a business and work in the industry.
- You WILL have to guarantee the loan. SBA lenders are required to go after all available personal assets from the buyer as collateral however; you can get away with about 40%. Yes, they will require your house if you have more than 25% equity.
Disadvantages of SBA Loans
- SBA loan requires more information than a commercial alternative and more time. Required paperwork during loan application — and even during the course of the loan — is much more involved and complex than traditional bank loans. After all, government processes is usually paper-intensive.
- SBA loan guarantees are not automatic.
- SBA loans can require guarantee fees that do not apply to conventional commercial loans. Depending on the amount borrowed, these fees can be significant
- The use of these loan proceeds is more strictly regulated. Everything from which loan you take out to how the loan proceeds can be spent is regulated by the federal government, giving business owners somewhat less freedom.
- You will not receive 100% of the funds that you requested.There is often a cap on how much money can be lent, leaving the possibility that the funds will not be sufficient to cover the need.
- Government fiscal budgets end September 30th every year and programs get shut down as the date approaches. Sometimes they’ll alter the program (or even shut it down temporarily) during the year, so get your paperwork in quickly.
- The SBA will require yearly financials from the business owner.
- In most cases the SBA will secure the loan with any and all property owned by the business owner. This will make it difficult to refinance or sell these properties
- If the loan is for real estate you will be required to occupy 51% of the building. Should you down size and lease out more than 50% of the property the SBA will call the loan due.
- SBA loans are expensive. Typically 2.75% cost (points) of the loan amount. On a $1,000,000 loan that would be $27,500.00 in points + all other fees included in financing.
- How to Find an Angel Investor for Your Business
- How to Start a Business with Bad Credit
- How Angel Investors Can Benefit a Small Business
- 5 Strategies to Raise Capital for a Small Business
- Why You Can’t Get a Bank Loan for Your Small Business