About SBA loans

When you have a great idea but no money to fund your start-up, a loan guaranteed by the U.S. Small Business Administration (SBA) can make the difference between going ahead or not. Since the government is providing the guarantee in case of default, banks and other lenders will make loans they otherwise wouldn’t.

Getting a loan guaranteed by the SBA means spending lots of time on the paperwork and the loan process. A loan from a bank may take 1 to 7 days to get approved while a loan guaranteed by the SBA may take one or more months. The lender may release amounts after invoices are supplied or may also draft two-party checks to the borrower and the vendor. The borrower can then take the check to the vendor and obtain the materials he or she desires to purchase. In other words, you do not necessarily get the entire loan in one payment.

The SBA will require personal guarantees from anyone owning 20% or more of a business. Such as personal assets, including jointly owned assets, if the business assets are not adequate to back the loan. So, if you and your spouse are co-owners of your home, your spouse may have to sign on to the loan as well.

You may think that your interest rates will be lower with a SBA guaranteed loans, but the rate could be higher than what you would pay without it. A lender may extend the term of the loan beyond what it would otherwise permit. A bank that would make a working capital loan with a term of 3 years might make the loan for 5 years with the SBA guarantee.

The SBA charges lenders a fee of 1% to 3.5% of the amount it guarantees and charges an annual service fee of 0.25% of the outstanding balance. These fees may be passed on to the borrower by the lender. The SBA prohibits lenders from charging any application, processing or other fees when you apply for an SBA guarantee.

Contributed by JD at 7:50 am under Business financing.