SBA Loans Advantages and Disadvantages
May 1st, 2022
What is the Smoothest Path to an SBA Loan?
Small businesses are among the most important driving forces behind the United States economy and they anchor communities across the country. Among their financial tools for success is funding from the Small Business Administration (SBA). Despite their popularity, many business owners or potential founders don’t know enough about the advantages of and potential roadblocks to getting an SBA loan.
Luckily, we’ve created a road map to help you get the SBA loan you need for your business. We’ll cover:
- What is an SBA Loan?
- How does an SBA Loan Work?
- What are the Advantages of an SBA Loan?
- What are the Potential Pitfalls of an SBA Loan?
Use this information to give yourself the best chance at getting the small business support you need to get to the finish line.
What is an SBA Loan?
An SBA loan is a small-business loan made by a participating bank that is “guaranteed” by the United States Small Business Administration. The loans typically have more generous terms than conventional bank loans for the same purpose. For example, conventional lending usually spreads payments out over 5 years for the purchase of equipment. An SBA loan can spread them out over 10 and even longer if the useful life of the equipment allows it.
The “guaranty” from the government does not mean that the business is guaranteed to succeed but having a longer term to pay off a loan will improve the odds.
How does an SBA Loan Work?
An SBA Loan is only issued by SBA approved lenders to qualified small businesses that meet certain standards. An SBA loan can be a bumpy ride but having an experienced lender to work with should make it smoother. SBA lenders will focus on the following:
- Repayment Ability: Ideally a business should have the ability to repay the requested debt from existing or “historical” operations. If not, you will need to provide a business plan that clearly maps the business’ direction. It should include detailed projections that cover expenses, owner draws, and loan payments. These numerical projections should be accompanied by clear, well researched assumptions.
- Management: A major component of any loan decision is assessing the team that is leading the business, the management. Ideally the management team has several years of experience in the industry and has been able to weather the storms along their journey. Lenders will also look at education and other management experience.
- Equity: Small business owners applying for an SBA loan must have a monetary stake in the business. Start-ups and business acquisitions have very specific injection requirements and some lenders may have more stringent requirements than others.
- Credit History: Small business owners and partners must allow their company and individual credit histories to be reviewed. Losses to the Federal Government makes an applicant ineligible but any and all credit problems should be cleaned up if possible, prior to application.
There are some other issues including eligibility that can derail an application but that is not as common as not meeting one of the above criteria.
What are the Advantages of an SBA Loan?
SBA loans are designed to give applicants that don’t measure up to conventional loan standards a needed “boost”. As a matter of fact, SBA Lenders need to prove that applicants do not qualify under conventional loan standards to even be considered for SBA financing. There are other advantages for small business borrowers including:
- Flexible terms for required borrower equity,
- Inclusion of funds for working capital,
- Longer length of time for repayment,
- Refinance existing debt to improve overall cash flow, and
- It is the likely the only way to obtain a bank loan for a start-up.
You also need to consider what roadblocks may impede your progress.
What are the Potential Pitfalls of an SBA Loan?
- SBA Loans Require Additional Paperwork: In addition to traditional financial statements, tax returns, projections, and business financials, SBA loan applicants may find themselves completing or providing additional documentation. In some cases, SBA requires its participating lenders to verify information beyond what is traditionally seen in standard commercial lending.
- SBA Lenders May Require Collateral: Lenders frequently need to take a lien on personal real estate of the business’ owners. SBA is reluctant to release value in any collateral so that may make selling, refinancing, or moving tricky.
- SBA Lending Can Take Time: Getting the proper paperwork for your business can be unwieldy if you have not gone through the financing process before. Even more importantly, working with a non-preferred SBA lender can result in delays – meaning it is important to get connected with an SBA preferred lender.
Successful lending benefits from a good relationship between your business and the bank you work with. This is why it is so important to find an SBA-preferred lender that will help get you set up properly.
Community West Bank is the Central Coast’s Preferred SBA Lender
At Community West Bank, our goal is to empower our clients through our banking services. Community West Bank has provided more than $700 million in SBA financing to businesses. By offering a variety of loan programs, we are able to tailor financing specific to the needs of your business.
SBA loans are great for equipment purchases, working capital, debt refinance, business acquisition and commercial real estate. Community West Bank has earned the designation of “Preferred Lender” by the U.S. Small Business Administration, which allows us to expedite the processing of your SBA loan application with in-house approval.
If you are interested in learning more about how you can apply for an SBA loan with us or would just like to learn more about the process, please reach out to us today. We’d love to help.