The term “SBA loans” is so common, many people think the Small Business Administration is a lender. Not so. The SBA is a federal government agency. Their job is to help small businesses across the country. One of the ways they help is by providing back-up support for small business loan applications. That backing, sometimes called a guarantee, can boost your company’s chances for approval.
That said, SBA loans are more complicated than that. There are a lot of misunderstandings about this financing option. And there are pitfalls you definitely want to avoid. The truth is, an SBA small business loan may not be the best choice for you. At least right now. Here are some things to think about:
1. SBA LOANS WORK BEST FOR CERTAIN PURPOSES
The most common SBA loan, the 7(a), provides working capital. Theoretically you could use that money for almost any business need. Sounds great, doesn’t it? Here’s the problem – the SBA is not the lender, you still have to go through a bank. Banks are in business to make money, and small loans are not cost-efficient. Most banks don’t like to lend less than $200,000. So in reality, most SBA loans are intended to provide large sums of money for large needs.
2. YOU’LL HAVE TO PRODUCE A LOT OF PAPERWORK
Look at it this way: you’re applying for a bank loan and applying to the SBA for backing. Banks always require lots of documentation for a conventional business loan. On top of that, the SBA has its own requirements. An article in IBmag, a northeast Ohio business publication, summed it up. They noted that “before approaching a bank, the best way for the business owner or startup to find money is to work long and hard on the business plan.”
Every small business owner should have a well-thought-out plan for their business. But that’s just the beginning when it comes to SBA loans.
3. YOU’LL NEED GOOD CREDIT
Conventional bank loans require excellent business credit. SBA backing can give your application a lift, but it doesn’t replace your iffy or bad credit. And you still have to meet all of the other bank and SBA requirements.
4. YOU’LL NEED COLLATERAL
And a personal guarantee – for anyone who has 20% or greater ownership in your firm. Pepperdine University conducted a small business lending study in 2014. In that, 23% of small business owners said they were denied a loan because they didn’t have enough collateral.
5. IT TAKES FOREVER TO GET APPROVAL
It can take as long as 120 days to be approved and get funded. That’s four months. For many small businesses, this timeframe simply does not work. On the flip side, SBA loans often give you only a short time to repay – up to 18 months or so. This means your monthly payments are likely to be higher than you can comfortably pay.
6. FIXED PAYMENTS
And speaking of payments, you have no choice with SBA loans. You will have a set monthly payment. But most small businesses suffer from fluctuating cash flow. Your business might be seasonal, with distinct peaks and dips in income. Even without seasonality, you can’t perfectly predict revenue. When income is lower, you could have trouble making your payments.
7. YOU PROBABLY DON’T QUALIFY ANYWAY
One of the biggest mistakes small business owners make is believing that everyone qualifies for SBA loans. Repayment is guaranteed by the government, right? Wrong. In late 2014, RMPI Consulting published a whitepaper called, “Pitfalls and Windfalls of SBA Lending.” The document was written for banks, not small business owners. Here’s what they had to say.
“CEOs and credit administrators tend to fall into one of three categories when it comes to SBA lending:
- They believe it has great potential and want to get started.
- They have “been there, done that” and wouldn’t do it again.
- They are aware that it is a specialized lending area requiring specialized knowledge to mitigate the risks.”
The whitepaper explains that bankers “have learned the hard way that there is more to the guaranty than the title at the top of the page. Unless they have been through a liquidation in the past, most lenders don’t realize that the SBA covers a percentage of the remaining balance after the lender has liquidated collateral and called on the guarantors.”
In other words, the SBA “guarantee” only cover part of your loan if you default. No wonder some banks won’t even offer SBA loans. This also explains why SBA backing does not replace your need to prove ability to repay. In the Pepperdine study, 29% of small businesses said they were denied due to lack of cash flow.
8. THE “OPPORTUNITY” VARIES FROM STATE TO STATE
SBA loans are a federal program. So you’d think details would be the same everywhere. But that’s not the case at all. Your experience will depend on where you’re located.
THE SBA IS NOT YOUR ONLY CHOICE
Here at UCS we know that most small businesses need to borrow smaller amounts. Yes, some day you may want to purchase a building. Or build one. You may need to invest in expensive new heavy equipment for your fleet. Or your production facility. Most of the time, though, your problem is cash flow. You need money right now. Not two or three months for now. You need to:
- Get through a slump
- Make repairs or upgrades
- Replenish inventory
- Hire more people
- Increase marketing
We can help you get a small business loan from $2,000 up to $2 million. And we’ll give you five ways to pay:
- Via credit card transactions
We can even help you get an SBA loan – faster, with better terms. We call that our SBA Marketplace option. You can borrow from $30,000 to $350,000. You can get approved quickly and get your money within a week. One week, not four months. Not every small business qualifies, but it’s easier than for standard SBA loans. The interest rates are even lower. So call us, and let’s talk.