Is an SBA Loan Right for You?

Are you looking to acquire a business, purchase a building, or secure working capital for your small business? If so, an SBA loan might be the right financing option for you.

The U.S. Small Business Administration is a federal agency committed to helping Americans start, grow and build resilient businesses. As part of that mission, the agency partners with lenders like First Independent Bank to increase small businesses’ access to funding through SBA-backed loans.

Because they are enhanced with a guarantee from the Small Business Administration, SBA loans can have lower down payments and longer, more flexible terms, making them a compelling option for many small business owners. Here’s how to determine if an SBA loan or another type of small business loan is right for your business.

Understanding SBA Loans

Many different types of loans fall under the SBA umbrella, including SBA 7(a) loans, SBA 504 loans, SBA Express loans, SBA microloans, SBA disaster loans and more — each with its own terms and conditions. The right SBA loan for your small business will depend on what you plan to use the funding for. For example, SBA 7(a) loans support working capital, business expansion and equipment purchases, whereas SBA 504 loans are used to purchase long-term, fixed assets such as land, machinery and facilities.

What Businesses Are Eligible for SBA Loans?

The criteria for SBA loans are more flexible than conventional financing. In general, to be eligible for an SBA loan, businesses must have a net worth below $20 million and an average net profit of less than $6.5 million over the past two years. Businesses with past bankruptcies, short sales or foreclosures may be considered on a case-by-case basis.

One non-negotiable is that businesses and owners must be in good standing with the government. Individuals or companies that have defaulted on a loan (such as a student loan or other SBA loan) or owe back taxes are not eligible.

Advantages of SBA Loans

• Flexible Terms: SBA loans offer more flexibility than traditional bank loans, with options like projection-based deals and relaxed collateral requirements. Borrowers don’t necessarily need collateral to secure the loan.
• Lower Down Payments: Thanks to the SBA's credit enhancement program, small businesses can obtain financing with lower down payments, even if they may not meet the traditional lending criteria.
• Highly Competitive Interest Rates: SBA loans can have more favorable interest rates than other types of small business loans.
• Minimal Loan Covenants: SBA loans typically have fewer financial covenants compared to traditional bank loans.

What to Know Before Choosing an SBA Loan

The trade-off for favorable terms and more flexible criteria is that SBA loans do require more documentation than conventional business loans. Borrowers typically need to provide a business plan, financial statements and personal financial data. Given the increased documentation, SBA approval typically requires longer processing time. For this reason, among others, some small business may want to consider alternatives.

Alternatives to SBA Loans

Other financing options for small businesses include term loans, lines of credit and merchant cash advancing. These conventional loan options can offer small businesses a broader menu of loan structure choices. For example, they may incorporate seller financing or other creative solutions, such as using 401(k) or IRA funds on a tax- and penalty-free basis to raise capital for the next acquisition opportunity. These options may have stricter terms but can provide quicker access to funds for more established businesses or those that don't meet SBA eligibility requirements.

Get an Individual Assessment for Your Business

First Independent Bank is a preferred SBA lender, which may result in faster approvals than with other lenders. With decades of experience in SBA lending, our team can help you determine the best financing option for your small business. To learn more, connect with First Independent Bank’s Business Banking team today.