What is an SBA loan?
An SBA loan is a loan which is guaranteed by the Small Business Administration, an organization which supports small businesses in the US. The SBA does not lend funds itself but provides the financial guarantee to lenders, which allows them to offer more favorable terms to small businesses.
What are the advantages of an SBA loan?
People looking to finance a startup, purchase a business or fuel the growth of their existing one can often do so with lower down payments and longer repayment schedules. Depending on the SBA loan product, interest rates charged the lender may also be lower. More manageable monthly payments can give you greater flexibility in managing cash flow.
As well as letting lenders offer more favorable terms on loans to small businesses, SBA loans have many other advantages. They are often available to people who would not be able to access a regular loan due to short credit history or limited collateral. That means startups or businesses which are asset-light but valued highly, such as tech companies, might be more eligible to borrow.
Small businesses which make use of an SBA loan will also gain access to resources and counselling offered by the SBA. These include small business development centers (SBDCs) and SCORE, the largest network of small business mentors in the US.
Tom Lyons, Senior Vice President of SBA Lending at Byline Bank, says: “Pound for pound, the down payment on an SBA product will be lower and the amortization will be longer. The loan can’t balloon, as the term must match the amortization, and loan covenants tend to be lighter than with traditional loans.”
Loan covenants place restrictions on what you can and can’t do with the funds you receive, and are sometimes used by lenders as a form of security. While SBA lenders are still at liberty to impose loan covenants, they tend to be lighter than in traditional loans. This gives you extra flexibility to choose how to spend your funds – whether for purchasing a business, refinancing debt, purchasing equipment, or as working capital.
What are the disadvantages of an SBA loan?
As the name implies, SBA loans are intended to give a boost to small businesses in the US. That means borrowing for buyers is capped at $5 million, and so larger businesses looking to borrow sums above that will need to opt for a traditional loan.
There are a few more forms that applicants for an SBA loan will need to complete, meaning the process of acquiring finance can sometimes take longer to complete. Applicants will need to disclose whether they’ve ever defaulted on an obligation to the US government, and whether they have any ties to a person who works within the US government, among other things.
There is also a 3% fee associated with SBA loans, which is paid to the SBA. This fee is waived for small requests, and in most cases will be rolled into the loan, as opposed to a separate cash call. Borrowers should make sure they fully understand the terms of repayment on any loan they take out, and assess all the available financing options available to them.
Am I eligible for an SBA loan?
If you are looking to borrow less than $5m to finance a startup or existing business which is based in the US, you may be eligible for an SBA loan. You will need to complete credit checks with a lender, including providing evidence of a sufficient amount of cashflow to repay the loan, or strong financial projections.
Insufficient collateral cannot be the sole cause of denial for lenders when choosing whether to finance an application for an SBA loan. That means you may be eligible even if you would not be for a traditional loan.
There are some industries which are ineligible for SBA loans, including casinos, financing companies and a handful of others. But by and large the sector of your chosen business will not affect your eligibility.
How do I apply?
If you’re interested in finding out more about SBA loans, fill out the form below. We’ll put you in touch with an expert who can walk you through whether you’re eligible and how the application process works.