1. Why would a borrower use the SBA program instead of a local bank to obtain a small business loan?
While local banks offer many loan programs, they usually are very conservative in their lending requirements. This means that they will lend only to certain types of businesses. They also will require that the borrower show an excellent financial track record over several years. Many business borrowers do not fit within these strict guidelines. For instance, the borrower may be a “start-up” or may have been operating for less than three years. Or, the borrower may have had a recent year with poor financial performance despite a history of profitability. Or, the loan may involve a “special use” property such as a day care facility, gas station, motel or restaurant. For these types of businesses, an SBA guaranteed loan may provide a perfect financing solution. An added benefit is that SBA loan terms are often longer than the bank's and will never contain a balloon payment.
2. Are SBA loan repayments made directly to the SBA?
No. The SBA does not process loan payments. The SBA program offers commercial lenders a government guarantee. The lender makes the loan and the borrower will make repayment directly to the lender. The borrower will not have any dealings with the SBA unless the borrower has a serious default in repaying the loan.
3. How will the interest rate on an SBA loan compare to other types of commercial financing?
Most SBA guaranteed loans have an interest rate based on Prime Rate plus 1.5 points to 2.75 points. Depending upon market conditions, this rate may be somewhat higher than the interest rate offered on a conventional commercial loan--for borrowers who qualify for the lower rate. But the SBA loan interest rate is generally much lower than that charged by “hard-equity” lenders, equipment leasing companies, or credit cards.
4. Is there a lot of paperwork involved with an SBA loan because it is a government loan?
No. The paperwork requirements are similar to any commercial mortgage loan. The lender will require complete financial information on the business and the individuals who own the business. The lender also will require information on the management experience of the owners. Appraisals and environmental reports generally will be required.
5. What if the small business owner has had some personal credit problems in the past?
The personal credit history of the business owner is an important factor in any SBA loan. However, the lender will look at all of the circumstances and will not automatically turn down a loan for this reason. Many loans are approved where the credit problems are not recent or were a result of factors outside the individual’s control, such as uninsured medical expenses. This is true even where a business owner has had a personal bankruptcy.
6. Does it take longer to get an SBA loan approved than a regular commercial loan?
No. A written loan commitment usually can be obtained within 10 days from receipt of the application. The loan closing can occur in as little as 3 weeks from approval.
Interested in more information on an SBA loan for your small business? Contact us for more details.
