When most startups think loans, most startups think SBA.
And rightfully so, it’s become the “norm”….but does that mean it’s the best for you?
It might be, but it also might not be – just like everything else, there’s never a perfect solution for every company…
And that’s why I wanted to show you if an SBA loan is what you should be looking for.
What is an SBA Loan?
I think the biggest confusion with SBA lending is the mystique of it. When we hear SBA loan, we instantly think of some specialized loan that’s creatively structured to make sure all Small Businesses can get loans.
And that’s halfway true, because SBA loans do have a few extra features that allow for MORE startups to get funding – but it’s still not a magic bullet.
I’ll explain that more in a bit, but before we get there – we need to understand the 3 different types of SBA lending (related to Startups):
Please take a second to view each type of lending if you’d like to know in more detail, but here’s everything we need to know right now:
SBA Advantage Loans 7 (a)
This is arguably the most common type of SBA loan. It’s simply a guarantee from the SBA and helps mitigate some risks associated with a new business.
Businesses still need to go through traditional bank underwriting, but the lender (must be an SBA approved lender) can use SBA if the loan falls outside their normal guidelines.
504 Loan Program
Also known as a Certified Development Company (CDC) loan, this type of SBA program is designed to improve economic conditions (in a town or city) by helping borrowers purchase long-term fixed assets (i.e. buildings)
This type of loan is issued through your local CDC, likely with the assistance of a traditional lender (bank).
The category that captures all other types of lending, a microloan covers all SBA loans under $50,000.
This type of loan is also issued by a bank intermediary, or in laymen’s terms – an SBA preferred lender.
Who Needs SBA?
Again, if you’d like to understand each SBA loan in further detail – please follow the hyperlinks above. The SBA site does a great job of providing detail on their loans, but here’s a condensed version of that.
As I heard a Regional Credit Manager say best, SBA loans are there to take care of collateral deficiencies – and that’s it.
These loans aren’t designed to perform some sort of creative underwriting that puts an automatic stamp of approval on a loan, it merely just makes sure the bank has enough collateral to cover their loans.
So, who would really need SBA then?
Many different companies could fit the mold, but it really boils down to new companies that need working capital – or existing companies that are purchasing “blue sky” (a.k.a – Goodwill)
And blue sky is described many different ways, but it’s the intangible part of a business that you’re buying. Something that can’t be physically seen or accurately measured, but something that’s worth paying extra for…
Like a customer list. If you bought a company with existing business, you’re going to pay above asset value for that company.
Because they have more to offer than the (tangible) assets on their balance sheet.
And that’s great, but banks can’t put their collateral on a customer list – so they like SBA to fill the void in-between.
In other words, if you buy a company for $100,000 but they only have $80,000 of assets – then there’s a $20,000 shortfall…likely for existing revenue.
In this case, the bank would like an SBA guarantee – at least enough to cover the $20,000 shortfall.
So, Who Doesn’t Need SBA?
I hate to oversimplify this, but it’s really anybody that doesn’t have a collateral shortfall.
For example, let’s say you’re purchasing the same business ($100,000 purchase price/ $80,000 in assets) but you have $20,000 to put down (down payment).
That means you need $80,000 for $80,000 in assets – eliminating any need for extra collateral (assuming the $80,000 figure is the bank’s “discounted value” – a.k.a, their extremely conservative asset valuation).
And when you don’t need extra collateral, you don’t need an SBA loan – so you might as well save yourself from the extra work and fees.
Pros and Cons of an SBA Loan
The pros of an SBA loan are pretty simple – they help new and expanding companies get the funds to build their future.
And that’s great, that’s something many companies will need…
But at the same time, there are some cons – if it’s not used properly…
SBA is providing a service, and SBA is a governmental agency – so fees and complications are part of the process.
This means that fees (might) increase, paperwork will increase, and processing times will get slower…
All things that you should try and avoid, but at the end of the day – it’s better than not getting a loan at all.
Is an SBA Loan for You?
As we just went over, SBA Loans are great – but they’re not for everybody.
If the right fit is found, they’re extremely helpful…
But if it’s the wrong fit, they’re something you want to avoid…
Just remember, it’s all about the collateral.
But also remember, if you need help deciding on what loan you should choose – that’s what we’re here for.
The process is simple and the results are quick, just shoot me a message and I’ll take care of the rest.