Financing Your Business: SBA Loans Explained by a CPA

Every small business owner should expect financial challenges at various points of the business’ life cycle. It may come at the beginning while trying to get the idea off the ground, or sometime later when the operation is ripe for expansion.

Fortunately, there are business loans that can bridge these fiscal gaps, with programs from the U.S. Small Business Administration (SBA) among those that warrant serious consideration. Below is our CPA overview of SBA loans, which you can use to determine whether they are the right options for you.

SBA loans work like conventional business loans, except that part of the loan is guaranteed by the federal government. These loans were designed to support local enterprises, especially in areas like Nashville where small businesses are a significant part of the economy.

Some of the most common loan types from the SBA include:

• SBA 7(a) Loan. This is the flagship loan product of the SBA, with a maximum loan amount of $5 million and a guarantee of up to 90% of the principal. Loan proceeds can be used for a variety of business purposes, including working capital, payroll, operational expansion, and other purchases.
• SBA 504 Loans. This type of SBA loan can be used to fund expansions or upgrades in land, real estate, equipment, and other major fixed assets. The loan comes from three sources: an approved lender, a Certified Development Company (CDC), and the borrower’s down payment. The SBA guarantees 100% of the CDC portion of the loan.
• SBA Microloans. These are smaller loans of up to $50,000 that are typically reserved for underserved segments of the business community.
• SBA Disaster Loans. A business impacted by physical or economic damage due to a declared disaster may apply for this loan to aid in recovery.

The Pros of SBA Loans

• Wider eligibility. Businesses that do not qualify for traditional loans may still be approved for SBA loans, provided that they exhaust other funding means prior to their application and meet other eligibility requirements.

• Competitive rates. Lenders must follow the maximum business loan interest rate based on the prime rate that is set by the SBA.

• Long payment terms. Loan maturities range from 10 to 25 years, depending on how the money is used.

The Cons of SBA Loans

• Down payment requirement. Borrowers must put down anywhere from 10 to 30% of the loan amount to get the funds.

• Collateral and personal liability. Lenders commonly require those who own 20% or more of the business to put up assets as collateral. Borrowers also become personally liable if the business defaults.

• Long approval period. SBA loans are not ideal for quick capital, as the process is extensive and may take one to three months.

Under the right circumstances, an SBA loan may just be the answer to your financial needs. To gain loan insights that are more specific to your business, chat with your trusted CPA!