• April 11, 2022
  • Posted by Paula Pfaehler

Why SBA Financing Is a Great Tool for Business

The United States Small Business Administration (SBA) can be a very valuable tool for commercial loans. The program was created in 1954 to assist businesses in getting approved for loans from financial institutions. Though many people mistakenly believe the government funds these loans, it is the financial institutions themselves who front the money. 

The SBA issues a guarantee to the financial institution that if the loan defaults, the SBA will fund back a percentage of what the financial institution writes off after selling any collateral that was attached to the project. The SBA program is not the lender of last resort program but a way to reduce the risk allowing the financial institution to make the loan.

Types of programs

Over the last 67 years the program has undergone numerous changes. Today there are two basic programs:

  • The SBA 7a program which is administered by financial institutions.
  • The SBA 504 program which is a joint loan between financial institutions and a Certified Development company. 

The SBA 7a program can be used for lines of credit, purchasing, equipment, buying owner-occupied business real estate, buying a business, starting a business, buying out a partner in a business, and refinancing existing business debt. A financial institution may suggest an SBA loan to a borrower if the loan may be missing some key components needed for approval. 

Some of these components could be collateral or lack thereof, industry risk (e.g. the restaurant industry), industry experience of the borrower/guarantor, need for longer amortization of the loan, or lack of a traditional down payment. The SBA 504 program has down payment options as low as 10%, as compared to a traditional loan with 20% to 30% down. The strength of the project and guarantors will determine the down payment requirements.

What you need to apply 

There are two fundamental components you need for SBA loans. Good business cash flow (ability to repay) and good personal credit of the guarantor(s). If the business does not generate enough cash to cover its expenses and debts or the guarantor has poor credit, it is very difficult to approve a project with the SBA. In addition, the type of business, amount of the request, and the overall business plan will be reviewed to determine eligibility.
Getting a commercial loan or an SBA loan is a process. The best way to make the process flow smoothly is to be prepared. The financial institution will provide a list of what you need. Generally you will need your last three years of personal and business tax returns, a personal financial statement listing all your assets and liabilities, projections on the business for the next three years, and year-end financial statements on your business. If you don’t have a tax return for the previous year, then you must have financial statements. 

You should also complete a list of needed expenses. This includes equipment needed, renovations/buildout costs, and any line of credit you are requesting. The financial institution cannot underwrite the project until you have all the costs associated with it. General Electric Credit Union (GECU) also recommends you bring in a copy of your personal credit report when you begin the process. This will allow you to discuss any current or previous credit issues with your lender to determine the viability of the project and if additional documentation will be needed. 

GECU is excited to sit down and talk with you about your commercial loan needs. Schedule an appointment online in advance to skip the lines at your local branch. On the day of your appointment, you can share what the project is and what you’re trying to accomplish. We’ll help you understand your options both with or without the SBA. Not a Credit Union member yet? No problem. Confirm your eligibility here then get started online in minutes. 

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