Is a Small Business Administration Loan Right for Your Business?

By Wendy Ross

When launching or expanding a business, one of the earliest decisions to be made is how to finance the venture. A traditional option has been to secure a conventional bank loan in order to meet capital needs. For those businesses early in their journey, a Small Business Association (SBA) loan provided by a bank or other financial institution could be a better option.

A significant portion of SBA 7(a) loans are guaranteed by the U.S. government, which helps financial institutions mitigate risk in situations where the collateral or individual guarantor support needs to be supplemented. SBA loans are also ideal for “higher risk” ventures, such as construction companies and restaurants, as many financial institutions have conservative policies in regard to lending to these industries.

The SBA 7(a) loan offers as much as an 85 percent guarantee from the U.S. government on loan amounts below or equal to $150,000, and a 75 percent guarantee on loan amounts exceeding $150,000, up to $5 million, which is the current maximum loan amount for SBA 7(a) loans. This guarantee incites lenders to support the small business community.

Though many financial institutions offer this program, the SBA 7(a) application and credit process is different from conventional loans and can require longer lead times to complete. For this reason and others, SBA loans approved by the SBA Preferred Lender Program (PLP) are a great option. PLP lenders’ knowledge of the SBA 7(a) program allows them to accelerate the process and approve a loan within their authority on behalf of the SBA, which quickens the process and improves a borrower’s ability to obtain financing.

An SBA PLP status indicates that the institution possesses a familiarity of the SBA loan program and expertise necessary to make the process as efficient as possible. Extensive understanding of available lending options is crucial, as it allows the financial institution to structure loans through other types of programs based on the borrower’s credit needs and qualifications.

Additionally, the PLP designation requires successful execution of at least five SBA loans through the SBA’s Loan Guarantee Processing Center. Once the SBA has delegated PLP authority to the financial institution, the government permits the lender to authorize on its behalf, which significantly reduces loan processing time. It can also give a borrower peace-of-mind knowing their lender can provide guidance and products best suited for their specific situation.

When thinking about whether a conventional or an SBA loan is the best option for a business project, there are many terms to consider. Some of the most critical terms are listed below:

1. How important is it for my business to have low monthly payments?

SBA loan maturities are typically longer than conventional loans, which reduce loan payments and can provide a business with more debt capacity based on its cash flow. A conventional non-real-estate loan might mature in three to five years, while a non-real-estate SBA 7(a) loan could have a maturity of up to 10 years.

2. How much do I have for an equity injection?

SBA loans typically require a smaller equity injection than conventional loans, giving a business more flexibility and options based on its liquidity and equity position.

3. What assets does my business have to offer as collateral?

SBA lenders can finance a project even if there is a collateral shortfall. This can be ideal for a start-up business trying to begin a new venture, or for businesses that are less asset intensive and are primarily cash flow driven (for example, professional service firms)

4. Which SBA loan is right for me?

SBA PLP lenders will help an applicant determine which type of SBA loan is right for them. The most common SBA loan types are 7(a), Express Lines, 504 Loans (real estate only), and Export Loan Programs. However, the SBA also manages a lesser-known program called CAPLines, which is specifically designed for revolving needs. This would be beneficial if a business’ financing needs were seasonal, contract based, related to construction, or for short-term working capital.

Whether you are an entrepreneur starting out or an experienced business owner, it is important to understand the pros and cons of lending options when seeking growth financing. As an SBA PLP lender, Bank of San Francisco is here to answer any questions you may have regarding the SBA loan programs.

Wendy Ross is the President of Bank of San Francisco. She has more than 35 years of international, commercial, and private banking experience. Ross is a 2002 graduate of Leadership San Francisco and is a board member for numerous Bay Area organizations.