Business Financing Articles
6 Things to Know About Getting an SBA Loan
If you're thinking about starting or expanding a small business, a loan guarantee from the U.S. Small Business Administration can be the difference between forging forward and putting your dreams on hold.
The first thing to know, if you don't already, is that SBA loan guarantees are not loans in and of themselves. Banks and other lending institutions make the loan; the SBA guarantees it. With the government providing the guarantee in case of default, banks and other lenders will make loans they otherwise wouldn't.
But SBA loan guarantees come with strings attached. Here are six more things for entrepreneurs and business owners to know when looking for help from the government to start or expand a business.
1. It's going to take some time and paperwork. Getting a loan guaranteed by the SBA means getting involved with the government, and that means spending some extra time on the paperwork and the overall loan process. "An SBA-guaranteed loan will almost certainly be more paper-intensive and take longer than other loans," says Mike Cafasso, president and chief executive officer at Pueblo Bank & Trust in Pueblo, Colo. "If I have all the information on my desk that I require for approving a loan, I could do the loan the next day. With the SBA and its role in reviewing and guaranteeing the deal, that loan is likely to take a month or longer to be approved.
2. You probably won't get the money all at once. Just because you've been approved for the loan doesn't mean your lender is going to cut you a check for the full amount immediately. Lenders may require that you send in purchase orders or invoices before releasing part of the funds. "The lender may release amounts after invoices are supplied or may also draft two-party checks to the borrower and the vendor," says James Hammersley, director of the SBA's Office of Loan Programs. "The borrower can then take the check to the vendor and obtain the materials he or she desires to purchase." In some cases, lenders may require that actual canceled checks be provided before loan funds are released. Practically speaking, that means the business would have to use money it already has on hand and then get reimbursed.
3. Your spouse may have to sign on to the loan. If your spouse is a minority partner in your venture, you both may have to sign guarantees to get the loan. "Personal guarantees are required on all SBA loans," says Kurt Chilcott, president and chief executive of CDC Small Business Finance in San Diego. His not-for-profit organization participates in an SBA program aimed at helping businesses get long-term, fixed-rate financing for major fixed assets, such as land and buildings. Chilcott says that SBA will require personal guarantees from anyone owning 20% or more of a business. The SBA also can look to your personal assets, including any jointly owned assets, if the business assets are not adequate to back the loan. So, if you and your spouse are co-owners of your home or other assets, your spouse may have to sign on to the loan as well.
4. Your SBA-guaranteed loan may have a higher interest rate than a conventional loan. "Business owners think that their interest rates will automatically be lower with SBA-guaranteed loans, but that is not the case," says Jody Keenan, director of the Virginia Small Business Development Center Network in Fairfax, Va. "In fact, the rate could be higher than what you would pay without going through the SBA guarantee process." The more typical benefit of an SBA guarantee is that the lender may extend the term of the loan beyond what it would otherwise permit. For example, a bank that would ordinarily make a working capital loan with a term of five years or less might make the loan for seven years with the SBA guarantee attached.
5. You're going to have to pay some fees. The SBA charges lenders a guaranty fee of anywhere from 1% to 3.5% of the amounts it guarantees, and also charges an annual servicing fee of 0.25% of the outstanding balance of any loans. Both fees can be passed on to the borrower by the lending institution. There is some good news, however. The SBA prohibits lenders from charging processing, origination, application, brokerage and other fees when you apply for an SBA guarantee.
6. Minority-owned businesses don't receive special treatment in applying for SBA loan guarantees. People hear that the SBA wants to encourage minority-owned small businesses, and think there's money set aside just for those enterprises. That's not quite how it works. As Keenan explains, the SBA makes special efforts to make women and minorities aware of SBA programs. "People think that there is a separate pot of money available if they are a woman-owned or minority-owned or veteran-owned business," Keenan says. "What does exist are efforts to promote the SBA programs more aggressively to those businesses."
For more information on the SBA and its loan guarantee programs, go to the agency's Web site (www.sba.gov) and click "Financing."