The ABCs of SBA Loans
Small Business Loans explained
A loan from the U.S. Small Business Administration (SBA)‡ could be a very useful option for your company, no matter if you are just getting started or if you have been around for years.
SBA loans often allow business owners who may not normally qualify for conventional commercial loans to obtain financing. This includes those who:
- have less available cash flow,
- are more leveraged, or
- have little to no history in operating their business.
However, it is important to know exactly how an SBA loan differs from other loans, what types of SBA loans are available and what to consider when deciding to apply.
How do SBA loans work?
The SBA actually does not make direct loans to small businesses. Rather, when you apply for an SBA loan, you are actually applying for a commercial loan from a bank or another partner lender, structured according to SBA requirements and backed by an SBA guarantee. (The SBA agrees to pay a certain percentage of the loan if the borrower defaults.)
SBA loan vs. a traditional loan:
- SBA loans usually have a lower down payment requirement, but higher fees
- collateral requirements: SBA loans might access equity on a person’s home for collateral, which most traditional loans would not do.
- SBA loans have longer amortization periods and terms. This can lead to a lower payment for the borrower.
What Types of Loans Are Available?
- 7(a) loans‡ – the most common offered by the SBA and include a variety of loan programs such as SBA Express and CAPLines
- 504 loans‡ – used primarily for real estate and equipment purchasing
Considering an SBA Loan
Many aspiring business owners are hesitant to go through the SBA loan process. The application process and associated costs seem too daunting. We recommend visiting an SBA Small Business Development Center‡ or SBA’s website to learn more about loan options available and qualifications. These centers can work with applicants not only on loan options, but also can provide resources for business planning.
If an SBA loan seems to be a fit, we recommend working with a banker that is experienced in SBA lending and can help expedite the application process, as well as evaluate all other loan options.
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Mr. Karaba is a Executive Vice President for UMB Business Banking. He is responsible for Leadership of the Business Banking Business Line at UMB. He joined UMB in 2013 and has 19 years of experience in the financial services industry.