Q: As a small business that needs financing, should I apply for a Small Business Administration loan rather than a regular loan from my bank? I don’t need a huge amount.
A: What you are referring to as an SBA loan more properly should be called an SBA-guaranteed loan. Except in the case of a disaster loan, the Small Business Administration does not lend money; rather, the agency adds a guaranty to a conventional business loan from a bank or other lender. That means the SBA will repay the guaranteed portion of the loan if for some reason you are unable to make your loan payments and the loan goes into default. A lender who is reluctant to give you a loan may be more willing to do so when the loan is backed up by the SBA guaranty, so it’s frequently easier for a small business to obtain an SBA loan than a conventional one.
That does not mean, however, that you can get an SBA loan even if you have bad credit or are otherwise a poor risk. You still have to show that you need the money for a valid reason and that you have a plan to pay the money back. The lender will want you to contribute some equity and ask you to put up collateral. And if you do default on the loan, the lender will first take whatever you put up as collateral before asking the SBA to make good on its guaranty.
If you go for an SBA-guaranteed loan, you would also have to use the SBA’s format and paperwork, and there may be fees that are over and above the lender’s usual fee. On the plus side, the SBA just announced a waiver of the upfront 2 percent loan guarantee fee on loans up to $150,000. Additionally, the monthly guarantee fee that’s paid by the lender has been reduced by .3 percent, making the deal even more palatable to the lenders.
The borrower and lender negotiate the interest rate on an SBA-guaranteed loan based on the amount of the loan and the repayment period, with maximum rates set by the SBA.
Many banks in the Houston area work with the agency to provide SBA-guaranteed loans. Your local Small Business Development Center can help you find an SBA lender, determine your financing needs, decide whether a conventional or SBA-guaranteed loan is best, and even help you put together your loan application, all at no cost to you.
Call 713-752-8444 or go to www.sbdcnetwork.uh.edu to find the Small Business Development Center nearest you.
