SBA loans can be a valuable tool for companies struggling to get funding

When a small business needs to borrow, it should consider all options of financing. One alternative worth reviewing is a U.S. Small Business Administration (SBA) loan.

“An SBA loan can be a valuable financing choice in situations where a bank considers the request to carry additional risk,” says Gary Miles, Business Banking Officer at Northwest Bank.

The SBA shares the risk along with the bank to extend loans to borrowers who otherwise might find it difficult to obtain financing.

“Situations could include a collateral shortfall, an expansion or acquisition, a need for a working capital line and startups,” Miles says. “Benefits of an SBA loan may include longer financing terms and more flexible structures that conventional financing does not always offer. Often, the benefit to a company’s cash flow outweighs the cost of SBA financing.”

Smart Business spoke with Miles about how businesses can leverage SBA loans to meet their needs.

How does your current status or the nature of your plan impact whether an SBA loan is right for your company?
Several factors can determine whether an SBA loan is the right fit for your unique needs. For example, an SBA loan tends to be a good solution for a business looking to purchase an existing business with minimal collateral because it can help offset this lack of required collateral. Businesses less than three years old are considered new and therefore a higher risk, which may require an SBA enhancement.

SBA loans can offer flexibility regarding the term of the loan, as well as how the loan is structured. There are instances when an SBA loan will allow a business to provide a lower down payment, leaving the borrower with more working capital.

What are some valuable points to consider when reviewing the SBA loan option?
It’s important to have a comprehensive business plan that includes projections, along with a history of your business. The more details you have about your business, your business plan and your industry experience, the easier the process will go. Although it can be a little extra work during the loan process, it’s a good habit to keep your business information up to date, no matter what stage your company is in.

How can you boost your likelihood of securing the loan?
Preparation is critical to maximizing the value of your loan request. The more time you dedicate to preparing for questions that may come up, the better chance you have to obtain financing. Other important aspects of the preparation process include addressing your ideal target market, trade area, location and any local competition.

You should also reference the number of existing employees or any new employees who could be hired as a result of the loan. The SBA’s website, www.sba.gov, provides a solid understanding of what is expected during the process. This resource is particularly valuable to startups because it explains some of the requirements, terminology and options to find local assistance that can get a business off to a healthy start.

What are some misconceptions people have about SBA funding?
Many people believe that the process is very time consuming and involves a lot of additional paperwork. There are a few more documents and some additional underwriting, but the expected effort by the borrower is minimal.

Some borrowers also feel that an SBA loan is expensive. Although there are fees paid to the SBA, they can be spread over the life of the loan, and the benefits may outweigh the additional cost of an SBA loan. An SBA loan can be a valuable financing alternative for startups, businesses undergoing significant acquisition or expansion or for businesses with a lack of collateral.

The time and cost of SBA financing can be easily outweighed by the benefits of longer terms and more flexible structures than conventional financing. When it comes to getting an SBA loan, preparation is key and working with experienced SBA lenders will make the process much easier.

Northwest Bank is Member Federal Deposit Insurance Corp. (FDIC), Equal Housing Lender

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