When it comes to financing your business, Small Business Administration (SBA) loans often come to the forefront as a feasible option. SBA loans are long-term, low-interest rate loans partially guaranteed by the government, designed to support small businesses that might not otherwise meet conventional lending criteria.
Understanding SBA Loans and Their Role in Small Business Financing
SBA loans present a valuable opportunity for businesses, but it's crucial to approach this route with a clear understanding of its intricacies. There is an enormous amount of information available on the internet about SBA loan and acceptance criteria: this blog post offers practical knowledge that will be beneficial in finding the right SBA lender for your business. From understanding the preferences of different banks to realizing the implications of personal guarantees, we shed light on six critical aspects to consider before taking out an SBA loan.
Find the Right SBA Lender
While SBA loans can cover as much as $5 million in financing and from the government’s perspective is a one-size fits all program that’s not the case when you bump into a particular bank for an SBA loan. Why? Some banks tend to gravitate to doing large numbers of smaller, under $50,000, SBA loans. It’s their style and they want to display a high level of activity particularly in underserved credit markets. Other banks look at SBA loans as another product in their business banking toolkit. Finding out the SBA lending preferences for banks in your area will save a lot of time.
How Much Time Do I Need to Close on an SBA Loan?
Whatever the banker says will be the time to close an SBA loan, double it. Even if it’s a very active SBA lender that has in-house credit approval ability. If that time does not work for your situation, move on or run the down the SBA path in parallel with other funding options.
Debunking Personal Guarantee Concerns
Business owners are often put off with required SBA personal guarantees and even pledging a residence as collateral. First, unlike almost any other banking product, SBA loans have no covenants, so a default is virtually impossible so long as payments are made. Second, in practical terms the SBA and the sponsoring bank are loath to initiate default actions. Even if the borrower runs into difficulty making payments it is rare that the bank and the SBA don’t cooperate and restructure. Even in a bankruptcy, so long as the borrower is cooperative, it is unlikely that the relationship will turn nasty.
Addressing Misconceptions About SBA Personal Guarantees: Air-Ball
The SBA will finance an ‘air-ball’, that being a less than fully collateralized loan. This is very useful when acquiring, say a service business that has few tangible assets. The SBA will ask for all the personal collateral it can get its hand on, but that would happen with or without an SBA facility.
Personal Guarantee Threshhold
Maximizing SBA Loan Opportunities with Less Conventional Collateral
Owners with less than a 20% equity interest do not have to provide personal guarantees. If the business has multiple owners, the ownership structure can often be re-organized to minimize the personal guarantee requirements.
Utilizing Home Equity for an SBA Loan
The SBA will not put a lien on your residence if the outstanding debt is 75% or more of fair market value. This little-known fact is often overlooked. Therefore, taking out a home equity loan to leverage a personal residence can insulate the borrower from having a lien on their home. This typically applies to investment real estate as well.
Is an SBA Loan Right for You?
SBA loans present a valuable opportunity for businesses, but it's crucial to approach this route with a clear understanding of its intricacies. From selecting the right bank to understanding the implications of personal guarantees, each aspect plays a vital role in your loan experience and can significantly impact your business's financial trajectory.
Navigating the SBA loan process doesn't have to be a solo journey. Our team of Fractional CFOs is equipped to help you forecast growth requirements and strategically maneuver through the complexities of SBA loans. Reach out to us today for a complimentary consultation. Let's work together to optimize your business financing, ensuring you have the capital you need to achieve your business goals.
Mark Vernallis is a FocusCFO Area President in Greater Pittsburgh. He joined FocusCFO in 2018 to develop and support Western Pennsylvania.