The Pros and Cons of SBA Lending
Marie Allely of TS Bank Provides Insights
Whether a person is just starting a business or has been established for years, a Small Business Administration (SBA) loan can help turn business owners' dreams into reality. The U.S. SBA 7(a) loan is the program of focus today.
The 7(a) is the SBA's primary, most flexible program and partners with commercial lending institutions. To be considered for an SBA loan, a business must demonstrate that it has less than $15 million in tangible net worth and two year's net income after taxes of less than $5 million. It is perhaps the most widely used, but before diving in, here are some pros and cons of this specific program.
1. Offers longer maturities of up to ten years for working capital and up to 25 years for real estate and fixed assets, which can free up more cash flow because the payments are lower.
2. Rates are capped at the Prime Rate published in the Wall Street Journal plus spread.
- Loans with maturities of seven years or less - spread is maximum of 2.25% over Wall Street Journal Prime Rate.
- Loans with maturities of more than seven years - spread is maximum of 2.75% over Wall Street Journal Prime Rate.
- Have access to capital where traditional commercial loans may not be available.
3. Businesses that lack sufficient collateral for a traditional commercial loan may find SBA loans useful.
1. Generally, an SBA loan requires more information than a traditional commercial loan and all available collateral, including personal assets and personal guarantees from the principal owners.
2. SBA loans can take more time to approve and fund.
3. Some businesses are ineligible, such as nonprofit organizations, lenders, passive businesses, life insurance companies, and limited-membership private clubs.
4. SBA loans may require guarantee fees that do not apply to conventional commercial loans.
- Loans under $150,000 have a fee of 0% of the guaranteed portion of the loan.
- Loans over $150,000 but shorter than a one-year term have a fee of 0.25% of the guaranteed portion.
- Loans $150,000 to $700,000 and over with a one-year term have a fee of 3.0% of the guarantee portion.
- Loans $700,000 or greater have a fee of 3.5% of the guaranteed portion, additionally 0.25% of any guaranteed portion over $1 million.
Community banking institutions, like TS Bank, recognize how important small businesses are, and specialize in local decision-making, so clients work directly with the people approving their loan. Small business owners should pursue community banking institutions who meet their unique needs of seeking capital, whether it is to expand or provide the working capital to grow, and want to be their financial partner.