Often overlooked, SBA loans can fill critical funding gaps
Businesses tend not to have a great understanding of the Small Business Administration loan programs available to them. Homeowner information is often second hand leading to misinterpretations such as SBA loans are expensive, take months to obtain, have a tedious application process, and are not flexible. But an SBA loan can be a lifeline for a business that might otherwise be abandoned for a traditional bank loan.
âCommercial borrowers usually have two options,â says Kurt Kappa, director of loans at First Federal Lakewood. âSome may meet conventional underwriting standards to get a loan. Other business owners may not qualify for a variety of reasons, and for these, an SBA loan program may be the answer. A lender can help business owners understand why this may be a good option and how to take advantage of an SBA loan program. “
Smart business spoke with Kappa about SBA loans and how they can help businesses unable to access conventional debt.
What are the advantages of an SBA loan?
SBA loans require a lower equity injection by the borrower; repayment terms are longer than a conventional loan, which can lead to lower monthly payments; and insufficient collateral is usually not a reason why a loan application is refused.
It can be important that a banker works with the business owner throughout the SBA process. An SBA specialist, found at many community banks, can personally ease the loan cycle. They have the specialized expertise and SBA relationships to anticipate and resolve issues. They will work with the business owner to find the best solution for their loan needs.
Which Companies Make the Best SBA Loan Applicants?
At least a third of SBA loans are made to startups or for an acquisition. One of the main reasons a business chooses an SBA loan is that the borrowing company is at a very early stage in its life cycle. Start-ups and start-ups have little or no payment history, and their often optimistic projections and other forecasts can be unreliable – criteria traditional lenders rely on to approve loans. There has been a recent surge in acquisitions as some business owners plan to retire after a tough 2020, and SBA loans can be a good choice when sufficient collateral is not available to complete the deal.
SBA loans can also help a fast-growing business, typically over 10% per year. SBA loans can ease financial stress by providing funds for working capital, inventory, hiring, or capital expenditures.
How could SBA programs help businesses struggling to gain a foothold after COVID?
There are several underutilized SBA programs related to export loans. This is a specialized type of loan for companies wishing to expand their export business and can cover loans for equipment, plant, short-term working capital, and standby letters of credit. Besides its use for export purposes, a business affected by import competition can benefit from this type of SBA loan. Additionally, a business may be eligible if it is involved in indirect exports and the borrower sells to a customer who is in the United States, but that customer will export the items or services to a foreign buyer who qualifies. .
The SBA was created to help entrepreneurs obtain financing that they would not otherwise be entitled to. Lenders base their lending criteria on 2020 activity, and in some cases, due to business disruptions in 2020, will not see the profitability or cash flow they need to approve traditional loans. The SBA program offers loans that can be used as bridge financing to help a business get back on its feet for a stronger 2021.
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