Learn the benefits of an SBA loan for small businesses.
Small Business Administration (SBA) loans provide financing for businesses that are seeking more favorable loan terms or in some cases for businesses that may not qualify for a traditional small business loan. As compared to conventional financing, SBA loans offer greater flexibility in terms such as:
• Lower down payment investment,
• Can include working capital in the project,
• Longer repayment terms that are fully amortized
• Other factors designed to enhance the opportunity for success of the small business,
• Fixed One- Monthly payment- not weekly or daily,
• One Time origination fee. No Hidden fees,
The SBA guarantees repayment of a percentage of the loan, which allows banks to make loans to businesses that wouldn’t typically qualify for commercial financing using normal underwriting criteria. (Think of this as an insurance policy) There are a number of opportunities and obstacles to consider before pursuing an SBA loan. Below are some of these to help you determine whether an SBA loan is the right financing solution for your business.
Click below to learn more about the main SBA programs available:
Opportunities for an SBA loan
They usually have relaxed requirements as compared to conventional bank loans.
The SBA guarantee enables banks to extend more favorable loan terms and to lend to businesses that sometimes wouldn’t be able to borrow money conventionally. Businesses can use these funds for many different purposes, including:
- Purchasing commercial real estate
- Purchasing fixed assets such as equipment and machinery
- Refinancing existing debt
- Buying another business (financing goodwill)
- Working capital
SBA loans usually have lower down payment requirements than traditional bank loans.
Coming up with enough cash to make a 20-30% or higher equity contribution on a traditional loan is a big challenge for many small businesses. Many SBA loans (including the popular SBA 7(a) loan) require an equity contribution as low as 10%. This enables businesses to keep more cash in their business.
SBA loans have longer repayment terms than conventional bank loans.
The benefits here are similar to the benefits derived from lower down payment requirements. By stretching out payment terms over a longer period of time, businesses are able to conserve cash. If the loan has a term of 10 years or less, there is no prepayment penalty, so SBA loans can be repaid sooner if without penalty. If you loan term is over 10 years there is only a 3 year pre-payment penalty.
SBA FAQ
Where can I get an SBA Loan?
Click here to contact Paul if you are in Washington, Oregon, or Idaho
Click here if you are out of these three states for a national lender
Do SBA lenders care more about collateral or cashflow?
Cashflow. That said, many SBA lenders also want some level of collateral. Most lenders have their own risk tolerance when it comes to lending without collateral.
Do I need to provide a Personal Guarantee?
Yes–anyone who owns 20%+ of the business will provide a personal guarantee
Will I need to pledge my house as collateral?
If you own real estate with 25%+ equity, you will need to pledge that equity toward the loan until the loan is fully secured, or all available collateral has been pledged–whichever comes first.
What are the SBA’s debt service coverage requirements?
The SBA requires a minimum debt service coverage of 1.15x, however that’s just the minimum. Most lenders would like to see over 1.25x.
How much cash does the SBA require me to put down?
The SBA has a 10% minimum equity injection requirement for 3 types of projects: business acquisitions, start-ups, and some partner buyouts. Outside of these, it’s the lender´s responsibility to determine if an equity injection is needed, and how much.
Do seller notes need to be on full standby?
Only if it’s being used as part of your required equity injection. If you are using seller financing as part of your 10% equity injection to buy a business, it will need to be placed on full standby for 2 full years or the first 2 years need to have no payments or interest only.
Are there any types of businesses SBA doesn’t lend to?
Yes: passive businesses, businesses that promote religion, businesses engaged in gambling, strip clubs, businesses involved with anything illegal on the federal level, etc.
How long does the process take?
It depends on the project. A transaction such as a real estate purchase or business acquisition will typically take 45-65 days from the time you first connect with your lender. Make sure to get the lender what they need as soon as possible for a faster experience.
Can I acquire part of a business?
Yes, but keep in mind, any remaining owners with 20%+ ownership must personally guarantee the loan.
Are “earn outs” allowed in a change of ownership transaction?
No – the purchase price must be fixed. That said, some buyers will utilize a “forgivable seller note” in their structure to protect against downside risk.
