What is an SBA Loan? And What are the Pros and Cons of SBA Funding?
SBA Loans are perhaps one of the most known forms of funding for businesses. In this post we are going to discover the pros and cons of SBA Loans, and what other options a Business Owner has in addition to SBA Loans.
So, what is an SBA Loan? An SBA Loan is a a form of funding backed by the Government. It works similar to a VA Home Loan, where the Government will guarantee a portion of the Loan in the case the borrower ever goes into default. While the Government guarantees a portion, if a business owner defaults the Lender will 1st liquidate all personal and business assets, then the government steps into cover the difference that is left over. Many lenders like funding SBA loans due to the backing and ability to pursue both the personal and business assets.
Many times people think SBA is a lender or the writer of the loan. Both are untrue. The SBA and our Government do not write or fund loans. It is simply a title for a specific type of term loan that is backed by the United States Government. The program was started as a way to provide capital infusion into small businesses to stimulate the economy.
So what are some of the Pros and Cons?
- We Only work with Preferred SBA Lenders. The SBA Loan Programs and the Partners we work with are the top 7 Preferred SBA Lenders in the country, guaranteeing you will receive the best terms, process and dollar amount. Preferred SBA Lenders mean they have met qualifications that only a handful of SBA Lenders have met, placing your deal at the highest priority for approval as well as a faster funding time by 3-4 weeks compared to other SBA lenders. You wouldn’t be able to find these top lenders even if you tried. They work only with Certified Commercial Capital Consultants to process these SBA Deals. Together, over $4 billion SBA Loans have been written and funded to small businesses in the United States.
- Low Capital Infusion. When we submit SBA Loan Requests, we typically see a small capital infusion of 10%, compared to the normal 30%.
- Startup Capital. For less experienced franchise operators or business owners, SBA loan programs remain one of there best sources of capital to open a start-up franchise unit or for the acquisition of an existing business.
- Working Capital. SBA Loans are a phenomenal funding solution for startups and new busses, as they fund on working capital, leasehold improvements and other forms of goodwill. Given the support of the SBA loan guarantee, SBA lenders are able to finance projects that lack collateral and are willing to finance soft costs, including franchise fees, leasehold improvements, working capital and goodwill for business acquisitions.
- Longer Term Payback schedule and amortization. With us, borrowers are typically able to obtain much longer loan terms and amortization schedules with SBA loans in comparison with conventional commercial loans.
- Close to Bank Rates and Terms. Borrowers typically can get competitive rates and terms through an SBA Loan program.
- SBA loans are structured with no balloon payments. The longer terms and amortization schedules, which may be as long as 10 years for a new lease location and 25 year terms for real estate-based projects, enable business operators to improve their cash flows.
- Startup Capital. SBA Programs can fund some startups with strong enough Personal Guarantors and Personal Assets. It can be a great option for businesses in the startup phase.
- High $ Limit. The SBA limits have risen to $5 million for qualifying businesses.
- Express SBA Program. They have a Fast Track program that can fund in under 30 days for qualified businesses, as long as the loan is under $350k.
- Commercial Real Estate Acquisition. SBA Loans can fund on Real Estate acquisitions as long as you, the business owner occupies at least 51% of the building for work purposes.
- Personal Guarantors + Pledging of all Personal and Business Assets. Because the SBA Loans require Personal guarantees from ALL parties who own 20% or more, in the case there is a default all personal assets and accounts pledged in addition to all business assets, bank accounts etc will be liquidated 1st before the government steps in. What does this mean? This means that int he case un unforeseen circumstance happens and default on the loan occurs both the business and personal assets and individuals will be names int he lawsuit and liens will be attached to all business and personal assets. So while it is backed, they only step in to cover whatever is left over after the Business and Guarantors assets and accounts have been liquidated.
- A lot of Documentation and Underwriting. There is more documentation required for SBA loans because they are backed by the U.S. government. Anytime the Government is involved, expect far more documentation, underwriting and a longer process to get funded. Our SBA department are specialists to help franchisees and business owners through the loan process.
- SBA Loans are Full Recourse (personal and business). All SBA loans require the personal guarantees of owners with an interest of 20 percent or more in the business entity. Unlike other Small Business Loans, conventional lenders offer non-recourse or limited guarantees to businesses that are well capitalized and have a solid performance history. However, non-recourse financing is rarely available to franchisees and business owners with fewer than 3.5 units.
- Higher thresholds to meet. The SBA has established size-standard guidelines to define the maximum size at which specific business types would qualify for SBA loans. The size-standard guidelines vary between industries. For example, most retail businesses with revenues greater than $6.5 million, most wholesalers with more than 100 employees and most manufactures with more than 500 employees would not be eligible for SBA financing. If one is a multi-unit operator, the SBA will base eligibility on an aggregate of all affiliated businesses and determine it based on a three year average. The SBA estimated that with these size standards, approximately 98 percent of all businesses in the U.S. are eligible for SBA financing
- Maximum Guarantee. The SBA has a $5 million maximum guarantee to any individual borrowers or related entity that controls more than 20 percent of a business interest with an outstanding SBA loan. The $5 million maximum guarantee is also aggregated on all outstanding SBA loans to that particular borrower or other business investments. For concepts with relatively low initial investments, borrowers may finance multiple units before exceeding the maximum guarantee. However, for larger real estate-based concepts, the $5 million guarantee may limit the borrower to one SBA loan outstanding at any given time.
- Longer process to get approval. The process to get full approval and receive funding is longer than some of our other Small Business Funding options we have. Though they are starting to become more expedited with the process.
These are just a few of the many variables that come into play when looking at SBA funding. We are Certified Commercial Consultants who know the ins and outs of SBA Funding as well as other Alternative Funding solutions for you business. While we have successfully written and funded on a large number of SBA loans, if and when we are able to help a business owner acquire a faster form of financing with less documentation we always guide them down that path 1st, with the SBA as a secondary option. Working with us, we are not restricted to one form of funding as we have departments and partners in about 30 different areas of Business Funding and Real Estate Loans, guaranteeing that you will be matched with the best form of Capital for your needs and business growth.
In conclusion, if you have a strong business and strong guarantors you will almost certainly be approved for an SBA loan. And working with us, the direct consultants and correspondents to the SBA decision makers you can know without a doubt that the process is being facilitated by experienced and educated real people. you won’t be thrown into a pile of SBA Loan requests from some bank with no training in underwriting that will result in 83% of declines for FUNDABLE BUSINESSES.
Trying to navigate the world of funding on your own is like flying a jet liner without practice or experience. Sure, you’ve probably flown as a passenger dozens of times, but driving that plane is a totally different experience with an infinite number of variables you couldn’t possibly be prepared for.
If you have been researching SBA loans or seeking out business funding, reach out! We offer free consultations and even after you receive an LOI or term sheet you are under no obligation to accept it. We have phenomenal SBA Partners as well as additional funding solutions that are competitively matched with our SBA Loan Programs with less documentation and faster funding time.
We leave you with this promise, we will always match you with the best form of funding for your business or deal. The most important thing when acquiring real estate, a new business or working capital for growth is receiving the best match for capital and funding for your particular needs. Curious to learn about your options? Reach out! Unlock the best form of funding for your business today with Blessing Capital.