A loan from the U.S. Small Business Administration can be a very useful option for those seeking financing options to start a business or to access capital for an existing business.
SBA loans often allow business owners that may not normally qualify for conventional commercial loans to obtain financing. This includes those who have less available cash flow, are more leveraged, or have little to no history in operating their business.
However, it is important to have a good understanding of how an SBA loan differs from other loans, what types of SBA loans are available and what to consider when applying.
How do SBA loans work? The SBA actually does not make direct loans to small businesses. Rather, the SBA sets the loan guidelines, which are then made by partner lenders, including banks. The SBA then guarantees the loan repayment.
This means when individuals apply for an SBA loan, they actually are applying for a commercial loan, structured according to SBA requirements and backed by an SBA guarantee.
There are several ways an SBA loan differs from a traditional loan experience.
Often with SBA loans, we see a lower down payment requirement, but higher fees. We also see different collateral requirements. This could include accessing equity on a person’s home for collateral. This is a different requirement than most traditional loans. There are longer amortization periods and terms with SBA loans. This can lead to a lower payment for the borrower.
What types of loans are available? There are many loan products available from the SBA that are truly dependent on what the business owner is looking to finance, whether that be to purchase real estate or equipment or to finance business acquisition or startup costs.
Primarily, 7(a) loans and 504 loans. The 7(a) loan program is the most common offered by the SBA.
There are a variety of loan programs that fall under the 7a loan umbrella, such as SBA Express and CapLines, which includes the contract loan program, seasonal line of credit program, builders line program and working capital line of credit program. The 504 loans are used primarily for real estate and equipment purchases.
Considering an SBA loanOver the years, I’ve seen many aspiring business owners concerned about the SBA loan process and, thus, are hesitant to apply. Those concerns center on the application process and associated costs. I recommend visiting an SBA development center or SBA.gov to learn more about loan options available and qualifications. The SBA development centers are a great option as they can work with applicants not only on loan options, but also to provide resources for business planning.
If an SBA loan seems to be a fit, work with a banker who is experienced in SBA lending and can help expedite the application process, as well as evaluate all other loan options. For many who can’t qualify for a conventional loan, SBA loans are an excellent option. For those who have not been able to secure conventional financing, explore the many loan programs from the SBA and talk with an experience small-business banker.
Dominic Karaba is an executive vice president and business banking director at UMB Bank. He can be reached at dominic.karaba@umb.com.
