Tag: sba loan

Video Spotlight: SBA Lending- Advantages and Disadvantages of Financing with SBA Loans


Transcript – Provided and/or Formatted by BorrowStar

Welcome back! Today, we’re talking about business financing. Specifically, using a U.S. Small Business Administration loan, or an “SBA Loan” through a local bank to obtain financing for your business. My name is Thomas Rockwood, and if you have any questions whatsoever about SBA financing or would like more information about getting access to capital for your business, please feel free to reach out to me directly at any time at Thomas@LifeForth.com. Specifically, today, what I wanted to talk about was some advantages and disadvantages of using an SBA Loan for the solution of funding your business. Whether it’s a business acquisition, you’re trying to get capital for an existing business, Or there’s a specific transaction you’re trying to pull off such as purchasing real estate, or expanding your location buying equipment, buying inventory, any of those things. Ultimately, I think that there are three reasons why businesses choose an SBA Loan over conventional lending or alternative finance. And I think that comes down to Cash injection or the equity requirements that involved, the term of the loan (how long you have to repay back that loan), and then the types of transactions you are trying to pull off.

Whether it’s buying a business, starting a new business, purchasing real estate buying equipment or inventory or just needing working capital. All of those things will have different appetites at different banks. One of the first things I think it’s important to look at is is the loan request that you’re trying to do for your business, is it eligible at the SBA? And then, after you get to a “Yes, okay. This is SBA eligible,” then it comes down to: “Is this is something that the bank wants to do?” Do they have the appetite to actually fund that type of transaction or that industry? Or given the factors of your cash injection or the term you are looking for, is that something they are interested in doing? Once you’re in that space and you are saying, “Okay. I have an eligible request.” Now, it comes down to appetite, then I really think you are looking at different banks as a solution, as opposed to eligibility and looking at it from the SBA side.

Advantages, specifically. Why would you want to look at an SBA Loan? There are advantages and disadvantages to every type of financing. So, we’ll start with what would really benefit your business. And I think that typically comes into the amount of cash you have to put the transaction. For example, If you are trying to buy or start a business, Typically, a bank’s gonna want to see cash injection There might not be specific regulation or direction from the SBA, in the SOP that says, that says you must have this specific cash injection amount. And in that case, you really dealing with bank appetite. I don’t see a lot of 100% financing anymore.

So, you know, a good rule of thumb is if you start with 20% or so of the project to inject, then I think you’re heading in the right direction. If you have less than that, , 10%, you might lose a few banks’ appetite but I still think it’s an eligible request depending on the type of business and what you are trying to do. You know, cash injection requirements are really going to be bank by bank. And that’s going to be something that you’re going to want to look at and assess as you’re looking at your lender. The other thing to really consider is the term of the loan. In a business acquisition scenario, the SBA will allow for a 10-year term. If you are trying to buy real estate, You can extend up to 25 years. Those are typically beyond what I would say the normal conventional loan would allow or what an alternative financing would allow.

The term of the loan is really a key component because that’s gonna spread your payments out over that much period of time and allow for the lowest possible payment on a month-by-month basis for your business. Whether you’re starting up or expanding that direction. So, the terms of the loan, I think, are a key advantage. And depending on what you’re trying to do, if you’re involving real estate or heavy equipment that has a long life, a useful life, you can get 20 to 25-year financing options, and there’s different loan programs that you can participate in. The third main advantage of using an SBA Loan is really going to be the types of transactions you’re able to do. A lot of conventional lending? They want to have tangible assets. If you can’t touch it, it’s probably not going to be financeable.

So, a lot of conventional lending is around equipment, around real estate, and they might do some lines of credit around your receivables. But in the case of a business acquisition, if you are buying a business and you are a new owner in that business? That might be a very tough transaction to find a lender to do conventionally. Alternative financing might not be an option because you don’t have a historical track record. So, the SBA Loan is a great tool to make that business acquisition, and it really provides the bank the incentive to say, “yes.” Say, yes to this transaction. Help this buyer make this acquisition and get this ball going for this company. Franchise start-ups Start-ups are also a tough one to pull off simply because you don’t have historical revenues. So, a franchise that’s eligible with the SBA, it’s a good option to use an SBA Loan to fund that start-up cost.

There’s a lot of start-ups that don’t have franchises. There’s specific regulation you’re going to want to talk to someone about your specific business you’re trying to start-up But I think that’s a great example of also a type of transaction that falls outside of the conventional financing option and outside of the alternative financing and falls well within the SBA. So, again, when you’re looking at SBA Loans, some advantages are always gonna be the amount of cash you can put in is gonna be probably lower than that of alternative or conventional financing. You can probably get longer terms which is gonna get you a lower monthly payment. And the types of deals you’re trying to put together…. If you are trying to do a lot of different things, such as, you’re starting a business that’s gonna need a lot of equipment, real estate, and working capital, plus you’re gonna need inventory. All of those things are eligible to be financed with the SBA Loans. So, depending on what you’re trying to do or how broad you need your financing to cover, SBA Loans have a good reach.

So, there’s a lot of talk about the disadvantages of an SBA Loan. We’ve gone through some of the advantages. You know, I think, commonly what I hear is: that either there’s too much paperwork or it takes too long or it’s too heavy on the fees. And I guess to address some of those, I think a lot of it has to do with you know, as you start your process with an SBA lender at a bank, I think your experience is going to be heavily dictated by who you are working with. The experience of that lender and of that bank doing SBA lending. Working with the right lender up front is going to help you set your expectations, it’s gonna map out the timeline it’s gonna take to pull of your specific transaction. And I think that’s gonna be the probably the most satisfying piece for your experience going through the SBA Loan process. There are checks and balances, and there’s a process to an SBA Loan.

It doesn’t matter which bank you go through. We all have to go through the exact same regulation and the exact same process for the most part. So, talking with your banker up front, and understanding what that is going to be– having that expectation set and laid out for you– is gonna make your experience much more pleasurable. The fees? The fees are the fees. I don’t think it varies too much bank-to-bank. In most cases, most lenders come in at about the same cost. The main advantage I see is going with an SBA Loan to cover those fees.

A lot of conventional loans, they don’t cover the closing costs. They don’t cover the environmental, the appraisal, the closing attorney, any of those other pieces. So, SBA Loan proceeds can cover that. The SBA also has programs– so, if you are a business and you are a 51% veteran-owned business or more so, if you are a service veteran, there’s fee reductions currently in place. And at the time of your loan application, you’re gonna want to talk to your lender about what those are. But on some loans, they waive the fee entirely. So, for the service you’ve put into our country, the SBA tries to at least reduce those fees where we can and help you get your business up and running and off the ground. I appreciate your taking the time to watch the video.

Take a look at the rest of the videos when you get a chance. If there’s a specific topic you’d like me to cover, please let me know. Again, my name is Thomas Rockwood and you can reach me directly at Thomas@LifeForth.com. Next time, we’ll be talking about some of these topics more in depth. So, check out some of those videos. Look at the other videos on the website, and hopefully, this helps get you in the right direction in terms of getting your business financed.


SBA Loans for Businesses

SBA Loans for Businesses

The Small Business Administration is a federal government agency which facilitates loans for American small businesses by providing a loan guaranty to the banks that ultimately provide SBA loans.

According to statistics, more than 99 percent of all business entities in the United States are small businesses. These businesses employ more than 50 percent of the private work force, over 40 percent of all private sales, and in excess of 52 percent of the private-sector output.

About the SBA

According to “The SBA Loan Book”,

“SBA” is the acronym for the U.S. Small Business Administration, an agency of the federal government established in 1953 to assist small business enterprises. Arguably the most important programs implemented by the agency are the loan assistance programs, which provide incentive to private sector commercial lenders (banks and certain licensed nonbank lenders) to extend longterm capital financing to qualified, eligible small businesses.

The SBA loan guaranty program has grown steadily over the years as a popular tool for small businesses to obtain capital financing. In 2009, with fluctuating economic conditions, difficult regulatory trends, and a collapse of the secondary market for guaranteed loans, the nation encountered a perfect storm. The agency experienced a rare but notable 37 percent reduction in the number of SBA loans funded (reduction of 30,811 loans), which translated into a 27 percent decline of loan volume ($5,175,000,000 decline).  But even in this disastrous year, the agency assisted with the creation of hundreds of thousands of jobs across thousands of communities in the United States.

The SBA 7a Loan Program

The SBA’s most significant program is the 7a loan program.  Often when SBA loans are referred to, the author is likely referring to the 7a program even if he or she doesn’t reference it specifically.  On the 7a program, the SBA Loan Book states:

The 7(a) loan program is SBA’s primary loan program for helping startup and existing businesses, providing funds for a variety of general business purposes. SBA does not make direct loans. Instead, it provides a credit enhancement to participating lending institutions in the form of a long-term loan guaranty. The costs of reimbursing banks for loan defaults is paid for from fees collected from participating small businesses getting loans and the lenders that fund them. While the guaranty reduces the risk to the lender, if you, the borrower, default, you must repay the entire debt. Small businesses can obtain financing through the program for acquisition or improvement of assets (real estate, equipment, operating business concerns, etc.), refinancing existing debt, or working capital.

Terms of Loans

A common question is: what is the duration of the loans that I can get from the SBA?  How many years do they go out?  From the SBA Loan Book:

Repayment terms are determined by the actual use of the loan proceeds according to limitations imposed on each purpose:

  • Loans used to purchase, construct improvements on, or refinance real estate can be extended for up to a maximum of twenty-five years.
  • Loans used to purchase equipment can be extended for up to a maximum of fifteen years (though usually limited to ten) or to the expected useful life of the equipment, whichever is shorter.
  • Loans used to acquire an operating business concern can be extended for up to a maximum of ten years.
  • Loans used to fund business working capital can be extended for up to a maximum of ten years.

Currently participating lenders are guaranteed repayment by the SBA for 75 percent of the total loan amount up to $2 million (80 percent for loans under $250,000) for a maximum loan guaranty of $1.5 million.

As you can see, the range of loans goes from 10 to 25 years.  This is considerably longer than the term for loans issued by both bank lenders (outside the SBA program) and non-bank lenders, when it comes to small business borrowers.