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What is an SBA Loan and Would I Want One?

What is an SBA Loan and Would I Want One?

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What is an SBA Loan and Would I Want One?

Question – What is an SBA loan and would I want one?  I hear that term a lot when looking for small business financing but not sure why I would want the government more involved in my business than it already is.

Our Response – In some cases you don’t want or need an SBA loan.

First off, let’s dispel a common myth about SBA loans. The SBA does not directly provide financing with the exception for their Disaster Loan. What the SBA does is provide assurance to the bank that if the business owner defaults, the bank is guaranteed to recover a portion of the money. That guarantee portion varies depending on the program but is typically between 50% – 85% of the loan.

We have worked with several entrepreneurs that start off wanting an SBA loan and that isn’t always the best solution for a business. The bank is going to look at a loan application and decide whether they can fund the business. If they can do it without a guarantee that may be great and be much less in interest and paperwork for the entrepreneur. The bank may decide though, that there isn’t enough collateral or equity or has identified some other risk they are not comfortable in covering alone. This is not to say the bank is going to take an application with severe deficiencies to the SBA as the bank has to make a good case that the business is viable before the SBA will give their blessing.

Should the SBA provide a guarantee for the business, the bank is still loaning their money to the business, while the SBA provides the guarantee that a portion of the loan will be paid back. This guarantee is going to cost the entrepreneur more. Think of the SBA guarantee as insurance. Should a business get the guarantee, the SBA is going to charge the bank for that insurance, which will of course be passed on to the entrepreneur. There is one upside in that the bank will typically stretch the term of the loan longer than without the guarantee which may make the monthly costs lower.

What is an SBA Loan and Would I Want One?

What is an SBA Loan and Would I Want One?

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