Previously I discussed the different SBA loan types, focusing on the 7a, Express and 504 programs. Here I will give a few examples of loan purposes where SBA can be helpful.
It is difficult for most traditional lending institutions to get comfortable with a start-up business. There are many unknowns involved with a start-up. These include relying on projections versus historical financials, qualifying the prospective owner and their ability to run a business successfully, existing competition in the industry, industry type and many others. However, with an SBA guarantee supporting the loan a lender may be able to overcome concerns and get comfortable making a loan.
A change in ownership of a company can have many of the same concerns as a start-up. Is the new prospective owner qualified to run the target business? What about competition and the industry? The good news here is there are historical financials to review so there is not reliance on projections to qualify the business itself. Often these loans will have a collateral shortfall since the existing owner’s business value may exceed its collateral asset value. A primary use of an SBA guarantee is to overcome a collateral shortfall and help the lender make the loan.
For purchases of commercial owner-occupied real estate, SBA can be an ideal solution. The lower down payment requirements are a primary attraction for the borrower. It allows them to purchase the property that otherwise might significantly reduce necessary working capital in their business. The 504 program offers the opportunity to obtain a long-term fixed rate on a portion of the debt that is typically below market.
There are times when a business accumulates debt that no longer meets its needs. It may have higher rates, be on a demand note or balloon payment at the end of the term or simply not be on a reasonable term for the purpose. SBA loans can help restructure a borrower’s debt and provide a better structure for them to meet their goals.
Many lenders will have the ability to do equipment financing in a traditional loan format, but there are times when SBA makes sense. One way SBA can help is with financing up to 100% of the asset value. Longer terms are generally available than traditional financing when the asset being purchased has a longer useful life. SBA can also be helpful when the equipment will expand production or create new market opportunities where financial projections are necessary versus historical performance.
There are other purposes than listed above where SBA financing can assist a business, including working capital. Lenders with SBA experience can help you review the options and navigate the process so you can accomplish your business goals.
