Five Tips When Considering an SBA Loan

SBA loans

Business loans

Written by: Walter McLaughlin, SVP and SBA Manager

Shop owners giving high fives in front of we are open sign

Since its inception in 1953, the U.S. Small Business Administration (SBA) has been helping businesses obtain financing at reasonable rates and fees when traditional financing hasn’t been a fit. Here are five things to know about SBA financing.

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 and efficiently as possible.

2. Features of an SBA Loan

The most popular types of SBA loans fall under the 7(a) program, including a multitude of term loans and lines of credit. Over the 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: 7-10 years
Inventory: 7-10 years
Equipment: 7-10 years
Business acquisition: 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 and can range from very little to as much as 2.75 percent of the loan amount, not including things like appraisals, title reports, credit reports and other standard loan costs. Typically 50 to 75 percent of the loan amount is guaranteed, which helps incentivize the lender to make the loan.

To learn more about popular SBA programs, read What to Know Before Applying for an SBA (7(a) or 504 Loan.

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 almost always 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, financing the purchase of a business, overcoming one or two credit factors, or financing a type of business they might not normally consider. If you're interested in purchasing a business with the help of an SBA loan, read Five Things to Know About SBA Financing When Buying or Selling a Business.

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 for SBA Lending. 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.

Whether your business is new or established, the lender will want tax returns, personal financial statements and other information to complete the application. Be sure to have your financial information ready, along with your plans for the coming year. As for the loan request, keep a ‘plan B’ in your back pocket in case the lender doesn’t want to do the loan the way you initially want it. They may consider it if you change the equation—more collateral, a smaller loan request or something else altogether.

5. The SBA: A Great Resource for America's Small Businesses

The SBA is a great alternative when you need lower payments, have less cash to put down, 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 most of the heavy lifting.

Banner Bank is proud to be designated as an SBA Preferred Lender.