Thinking about firing up your entrepreneurial skills and starting your own business? If so, you may be thinking about getting a 7a business loan and like many, you might be considering the Small Business Administration (SBA).
Here’s why you might want to reconsider using the SBA and look elsewhere for your start-up funds.
The SBA Doesn’t Loan Money
One of the biggest misconceptions about the SBA is that it’s some kind of banking institution that loans money and of the greatest benefit to those pursuing the path of starting their own business.
The SBA is a government guarantee program. If you get approved for a loan by the SBA, the money comes from a bank. The SBA simply guarantees the loan – and the guaranty is provided to the bank, ensuring them that they’ll get their money back.
While the SBA technically can lend money, their lending program hasn’t seen funding since the early eighties and it’s not likely this will change any time soon.
Some people seek out SBA loans because they believe they won’t have to put up collateral. Rarely does the SBA approve a loan without collateral. If you own a house, you can expect that it will be used as collateral for your loan. If you have no equity in your home, you’re just as likely to be denied a loan as when applying to your local bank.
Again.. since the SBA isn’t actually loaning the money, you have to go through an internal process of being approved by both the SBA and the lending company.
If you’re looking to get out of an SBA loan in the future, you’ll also find the process more difficult than a conventional loan. SBA lenders usually put a blanket lien on all assets – making refinancing all the harder, even with good cash flow.
The upside of SBA loans are that they often require a smaller down payment, less collateral and allow for longer terms – very important factors when launching a business and facing a repayment period for years to come. The SBA will also typically get involved in the business venture and offer advice to mitigate its losses. A conventional loan is usually issued with the assumption that you know what you’re doing and you already have an understanding the best way to spend your money.
If you’re seeking out a small business loan, the best practice is to simply seek out the best rate. Your local bank might well have an SBA department and there’s certainly nothing wrong with seeing what they can offer you. Be sure to fully understand the SBA lenders’ credit criteria. Do your homework and compare loan offers. Don’t just assume that an SBA loan is in your best interest.