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Lending

SBA Financing

To some, the SBA is a dirty word but reality is there is a value in what the SBA can provide when it comes to business financing.  As you consider your financing options and talking to your advisors, if they are not exploring the SBA for you they should be.

SBA Features and Advantages

The primary option used by the SBA for many financing requests is the 7(a).  The 7(a) is a great multi-tool option when it comes to financing.  Through the 7(a) program the SBA can provide equipment financing, business acquisition, buy outs, franchise financing and commercial real estate and more.  The SBA also offers the 504 program, for real estate financing but that I will not be addressing that here.  Some advantages of SBA financing, are the following:

  • Time in Business: Depending on the request and the lender, needing 2-3 years in business may not be necessary
  • Balance Sheet Strength: Conventional lending requests usually require a strong balance sheet, SBA is more concerned about the profitability and cash flow
  • Underwriting: This may vary by lender but in many cases, you will likely have a conversation with the underwriter, an opportunity to sell yourself and the business to a key decision maker. Whereas in conventional lending that would rarely occur
  • Collateral: Depending on the type of request, the SBA is willing to go under-collateralized.  Again, a rarity in conventional lending.
  • Terms: There will be variation by request and lender, but you are likely to see longer terms that will not be as restrictive on your cash flow, when compared to conventional requests

These are just the some of the advantages of going with SBA over conventional.  Rates are competitive when you factor in the longer terms you are getting.  Having covered some of the features and advantages let’s tackle some of the disadvantages as well.

Disadvantages of SBA

So as with anything there are going to be some downsides.  Let’s not ignore them but look at them head on so when its decision time, you know what you are dealing with. 

Here are some of the prominent disadvantages:

  • Fees: Regardless of the lender or type of request SBA charges a fee that could be as high as 3.75%
  • Time from application to closing: While not as restrictive as most believe, reality is it does take a little longer to get to closing.
  • Information Required: Regardless of the type of request SBA will ask for a lot of information, personal and business although it is only marginally more than a conventional credit request, if at all.
  • Collateral: If you have more than 20% equity in your home, SBA will ask for a second lien on the house, if the business cannot provide the required collateral.

Summary

These are some of the advantages and disadvantages of SBA financing requests.  No request is standard so it is possible that one request will magnify the advantages while another the disadvantages. And of course there are always the surprises.  When I can, I will always look to provide two options to my clients, a conventional and an SBA.  It is not always possible and at times there was only an SBA option.  It is rare there is only ever a conventional and not an SBA option.   Do not let the SBA name scare you away, its not always the best way to go but if you are not considering it you are taking a possibly viable option off the table. 

About David and Still Water Solutions

David Coletta has 15 years in the banking industry and most recently has worked with businesses earning between $5-$50M a year in revenue.   If you are looking to learn more about how David can assist you and your business please reach out via the contact section.

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