Business Financing: Is SBA Funding the Best Solution for Growth?
January 27, 2021 •Oak Street Funding
Business owners who want to grow or expand their companies may assume the best choice for business financing is a Small Business Administration (SBA) loan. However, SBA loans aren’t necessarily the best option for business financing. It may make more sense for company owners to turn to other sources for the capital they need.
SBA loans are bank loans
One of the biggest misconceptions about SBA loans is that they are made directly by the U.S. government. In reality, SBA loans are made directly by banks and other financial institutions. The SBA helps protect the lender if the borrower defaults on the loan, and the agency sets rules for interest rates, lending limits, and other key terms.
SBA loans have comparatively small lending limits
Several SBA loan programs can provide working capital or finance the purchase of inventory and commercial equipment. Each SBA loan program has limits. For example, some programs go up to $350,000 while others provide a maximum loan of just $1.5 million per owner. These limits may not be high enough for a business owner’s objectives.
Advantages of SBA loans
Because the SBA guarantees a portion of SBA loans, lenders may be willing to approve borrowers who might not qualify for other types of loans. In addition, interest rates on SBA loans tend to be lower than comparable bank loans because of limits set by the SBA, and the repayment terms allow borrowers to get longer terms with lower monthly payments.
SBA loans have many disadvantages
While the government established SBA loans to make funding available to smaller businesses, SBA loans come with many disadvantages for borrowers.
- Credit qualifications. Borrowers with lower personal credit scores may not qualify.
- Personal pledges. In addition to a pledge of business assets, the SBA typically requires a pledge of personal assets- such as your home- as collateral, as well as a spousal guarantee.
- Cost. There may be a hefty down payment.
- Slow process. The SBA approval process can take longer than other types of loans, and there may be delays in getting funds once the loan has been approved. Depending upon the lender's relationship with SBA, business owners may need to go through separate approval processes with the bank and SBA.
- Physical collateral. Bankers typically base their lending decisions on physical collateral such as real estate and inventory. Many traditional bankers are uncomfortable making loans against intangible assets such as future fees. They don’t want to assume the risk associated with quantifying such an asset.
Alternatives to SBA funding
Some business owners decide to obtain what’s known as unsecured funding, which includes using credit cards to obtain the capital they need. Unsecured funding may be easier to obtain but generally carries higher interest rates. Another approach is using crowdfunding, in which the owner posts the need on a special website and interested individuals can contribute funds.
A better alternative
A better alternative for many owners in your field is turning to a specialty lender that offers cash-flow-based loans funded on future fees. Lenders such as Oak Street Funding, who use the cash-flow method, have a deep understanding of how businesses like yours operate.
As an example of a specialty lender, Oak Street Funding has the flexibility to customize lending packages based on a company’s specific needs, from acquisition funding to business debt consolidation. They can make loans of up to $30 million without requiring a lien on personal assets or a spousal guarantee. Loans can be structured to accommodate phased successions or acquisitions that can involve multiple transactions within a single financing. In addition, Oak Street Funding will own and service the loan throughout its term and will not sell it to another organization.*
Investigate before applying
As with any significant business decision, business owners should carefully study all the available choices before deciding on a specific lender or type of loan. It's also wise to consult with your CPA and other trusted advisors to ensure you have considered all aspects pertaining to the decision to obtain a loan. That way, you'll be more likely to choose the best financing option that are right for your needs and your situation.
Whether you are looking for a loan for an acquisition, debt consolidation or working capital, it is important to consider which option is best for you and your firm. If you don’t know exactly where to begin, please feel free to contact us. At Oak Street Funding, we have experts in-house who have helped thousands of clients make the best lending decision for their particular needs.
*Subject to terms of loan documents.
Disclaimer: Please note, Oak Street Funding does not provide legal or tax advice. This blog is for informational purposes only. It is not a statement of fact or recommendation, does not constitute an offer for a loan, professional or legal or tax advice or legal opinion and should not be used as a substitute for obtaining valuation services or professional, legal or tax advice.