The SBA or Small Business Administration is a government sponsored funding program for business operations, commercial real estate and construction projects. Whether you are looking for an SBA loan right here in our hometown of Huntington Beach or anywhere in the USA, an SBA loan may be of value to you.
What is an SBA Loan?
SBA loans are generally described as funds available for working capital or equipment purchases that will contribute to the growth of a company’s operations. Working capital is a broad term covering everything from marketing and advertising to hiring and other capital investments.
The SBA does not lend money directly to business owners. Participating banks originate, underwrite and lend money under the program to qualified applicants. SBA loans made by banks are partially guaranteed by the US government.
Who Qualifies for an SBA Loan?
A business that would qualify for an SBA loan would have the following general characteristics:
a minimum of two years in business
at least two tax returns showing a business profit (more on this later)
adequate financial strength of the business relative to the loan amount being requested
personal credit scores above 690 for each owner in the business
outside collateral in the form of equity in a personal residence (sometimes required)
This is by no means an all inclusive list, but some of the main pre-requisites in qualifying for an SBA loan.
Is an SBA Loan Right for My Business?
SBA Loans are a great source of low cost capital for many businesses. If you can check all the boxes required for an SBA Loan, it is a great way to responsibly leverage your company for growth.
Whether or not an SBA Loan is right for your business has many variables. For example, a popular SBA Loan is the SBA 7(a) Loan. This SBA Loan variety is more commonly offered by banks for companies looking for term debt (lump some of cash – think mortgage) versus revolving credit. While the SBA offers revolving lines of credit under the SBA 7(a) Program, our experience is that banks do not offer the revolving loan as widely as the term debt.
If you are looking for a revolving line of credit for your business, there are more flexible and user-friendly loans available.
What Else Should I Know When applying for an SBA Loan?
Here is where the tax return profits come to play. It is natural for business owners to want to minimize the profit they show on their tax returns for tax purposes. This is an effective way to reduce your tax obligations, but not good when searching for an SBA Loan.
This is because the banks that underwrite the SBA Loan request will look to the tax returns to determine whether or not your business can afford to take on the payments of the new SBA Loan. If you are showing very little profit or losses on your tax returns, you are declined before the process even starts.
Advantages of SBA Loans
The advantages of SBA Loans are simple – low cost source of funds to grow your business. Business owners like the program due to the low cost involved with these loans. In addition, there are seldom pre-payment penalties attached to them.
The banks like the SBA Loan Program because the government is guaranteeing a portion of their exposure which makes the program attractive to those participating banks that are lending the money.
Disadvantages of SBA Loans
The disadvantage of SBA Loans is that they are hard to qualify for. Only the financially strong qualify for SBA Loans. They are accompanied by a fair amount of paperwork and hurdles to clear for underwriting. We have found that roughly half of our SBA Loan submissions make it through the finish line and that is because most are dis-qualified prior to submission.
Closing Thoughts on SBA Loans
We are big fans of SBA Loans and always use them as a starting point when consulting with our clients. If we can get you qualified for an SBA Loan, the rates and terms will be hard to beat. Further, the good news is that there are other forms of financing available should we need to use an alternative source to bridge to a future point where the company may qualify.
If you would like to see if your business would qualify, please call me directly at 714-719-8966.