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So you’re looking for a loan, and your friend/colleague/advisor, says “hey, you should consider and SBA loan”. If you’re like many small business owners, you’ve heard of the SBA, but have no idea what SBA loans are, who qualifies, where to get them, and how they work.
I can help with that. Let’s do it in Q&A Format:
What does the SBA do?
In a nutshell, the SBA’s mission to help small business owners get loans from banks that they could not otherwise get.
How does the SBA help small businesses obtain loans?
Do you remember being a kid, and your mom gave you an extra cookie if you would just let your little brother play too? The SBA is kinda like that. When a bank doesn’t want to make a loan to a small business because it’s deemed too risky, the SBA offers to guarantee the loan (usually for 75%). This means that if you take and SBA loan and don’t pay it back, the SBA will reimburse the bank for about 75% of the money they lost.
The SBA has a bunch of different programs, with 7a being the main type of loan that most business owners end up with. In case you’ve never applied for a commercial loan, the best way to describe traditional banks is “conservative”. They don’t take big risks. Do loans go bad? Sure, but most banks cover themselves by taking enough collateral to ensure that even if a business closes, they can sell your stuff and get their money back. Outside of the SBA lending system, it’s very hard to get a business loan if you have insufficient operating history or collateral. This is the vaccum that the SBA fills. They get loans for borrowers who would not otherwise qualify for financing.
So if I default, the SBA just pays off 75% of my loan balance and I don’t have to pay it back? Awesome!
NO! Let me say that again. NO! The SBA guarantee ONLY applies to the lender. You, as the borrower/guarantor will still be responsible for repaying the loan balance even if the SBA reimburses the bank. SBA loans are NOT free money!
Where can I get an SBA loan?
Good question. It’s important to understand that the SBA is not a direct lender for most SBA loans (exception being a disaster loan, which I would never advise a client to take). To obtain an SBA loan, you generally want to go to a preferred lender. Preferred lenders have more autonomy when it comes to making SBA loans, and the process is generally a bit easier. If a lender is not a preferred lender, they don’t have much experience, and that can make the process more difficult than it needs to be. Most lenders state right on their website what their status is as an SBA lender.
Why would I want to take an SBA loan as compared to a regular bank loan?
In most cases, borrowers go for SBA loans not because they want to, but because they have to. The most attractive feature of SBA loans is that they do not disqualify borrowers due to insufficient collateral. This means that is you are buying a business and the sale price is well in excess of the value of the physical assets, it may still be possible to obtain an SBA loan to finance the purchase. Most conventional lenders won’t touch that type of situation.
Are SBA loans more expensive than conventional loans?
In terms of the interest rate, that’s actually hard to answer because commercial loan rates vary wildly depending on the bank and the strength of the borrower.
However, you should be aware that the SBA charges a “guarantee fee” which is different that “points” or other fees charged by your lender. The guarantee fee varies depending on how much you borrow. There are a bunch of different scenarios, but here are the guarantee fees that will cover the vast majority of cases for 7a loans:
Loan Less Than $150K: 2% of the guaranteed portion*
Loans $150K to $700K: 3% of the guaranteed portion
Loans $700K to $5 Million: 3.5% of guaranteed portion up to $1,000,000 PLUS 3.75% of the guaranteed portion over $1,000,000
*Guaranteed portion means only the part the SBA is guaranteeing. So if you borrow $100,000 and the SBA guarantees it 75%, you pay 2% of $75,000 as a guarantee fee.
Jason Milleisen can answer your questions about applying and being approved for an SBA loan. Feel free to call (toll free 1-877-436-4533) or email me (firstname.lastname@example.org). If you retain me to help you with your financing needs, I’ll give you a rebate after your loan closes equal to 10% of my commission, up to $500.