Is My Business the Right Fit for SBA?

Recovery, evolution, or growth—no matter what stage your business is in right now, an SBA loan might be the right fit. So how do you know? I’ll help you answer the question “Is my business the right fit for an SBA loan?”

Why would an SBA loan make sense?

An SBA loan can make sense for a business in any stage from startup to growth and anywhere in between. For startup businesses, few banks or lending institutions are willing to take on the risk of startups with traditional financing because there is no proven history of profitability. However, maybe you want to retain complete ownership of the business and don’t want to seek investor funding. SBA financing exists to allow banks to more confidently take that risk and allow you to maintain ownership of your dream.

If you’re not in the startup stage, but you have other goals that require additional funding, SBA financing makes sense as well. These goals could include:

• Acquiring a business
• Buying out a partner
• Buying the building that your business is operating in
• Purchasing land for a new facility
• Expanding your business
• Purchasing new equipment
• Changing your business model to invest in technology or additional equipment
• Refinancing existing debt
• Short-term operational expenses

Do I qualify?

To apply for an SBA loan, there are some qualifications or requirements that your business must meet. The basic eligibility requirements include:

• For-profit business
• Physically located and operating in the US
• Business owner must have equity invested in the business
• Average net income after taxes less than $5 million for the two years preceding loan application
• Tangible net worth less than $15 million
• Real estate must be owner-occupied

The banker that you work with should be able to explain each of those requirements to make a determination whether you qualify.

What loan options are available?

The two loan options that Village Bank frequently uses are the SBA 7a loan program and the SBA 504 loan program.

The 7a program can be used for most any financing including working capital, equipment, leasehold improvements, startup financing, and real estate. This could be for expansion, debt refinance, new operating space, business acquisition, and partner buyouts. It can be used for many of the needs that conventional financing is used for and has a similar turnaround time as conventional loans. As an SBA Preferred Lender, Village Bank can approve our own 7a loans, which makes the loan application and approval process more streamlined. The 7a program is considered a guaranteed loan program, which means that Village Bank is the sole lender in the process. The benefits of this program for small businesses include, but are not limited to:

• Flexible equity requirements: Equity contributions on a 7a loan are often lower than conventional loans, which is good for businesses that are light on equity.
• Longer amortization helps with cash flow: In most cases with a 7a loan, we can go out longer than traditional financing methods. The longer the amortization the lower monthly loan payments are, which helps from a cash flow perspective to not have to put out as much cash monthly.
• Limited collateral requirements: With the SBA guarantee, the bank can look at collateral options that aren’t typically used for conventional financing. For situations in which the business is under-collateralized, we are more comfortable taking that risk because we have support from the SBA.

The 504 program is a fixed asset financing program for real estate, buildings, and equipment. This program is a partnership between the borrower (business), a bank, and a Certified Development Company (CDC). The benefits of this program for small businesses include, but are not limited to:

• Higher leverage than a conventional loan: Rather than putting 20-30 percent equity into the loan, the program requires 10 percent equity from the business and the bank and CDC come in with the remaining portion of project costs. Keeping equity in the business, rather than putting that down on the building or equipment, preserves liquidity in the working capital to fund growth.
• Long-term fixed interest rate: When the SBA’s portion of the project is funded, the rate is set for the life of the loan, so borrowers don’t have to worry about rate increases or repricing. The rates for the bank’s portion of the project are competitive market rates.
• Interest rate below market: Typically interest rates on 504 loans are below market rates. Right now, the rates we’re seeing are at an all-time historical low. Being able to lock in a low rate now will be advantageous with the unknown economic conditions of the future.

What's next?

If your answer is now “Yes” to “Is my business the right fit for an SBA loan,” you’re probably wondering what to do next. Our “Village” is excited to help your business at whatever stage you’re in. Contact our SBA team of experts to start the conversation with you.

Learn more: SBA Financing