In our view, the primary advantage of an SBA loan over a conventional bank loan is the longer repayment period.
For working capital loans, if you opt for a non-SBA loan, the maximum repayment period is usually around five years. In contrast, SBA loans offer terms of up to ten years, providing greater flexibility and ease on cash flow.
And if you wanted to purchase real estate for your business typical payment periods for commercial loans are 5-20 years vs. SBA 7(a) of 25 years.
In many traditional bank loans, there are many restrictions on how the loan can be used. SBA loans have much more flexibility, in that the loan proceeds can be used for virtually any legitimate business purpose.
If you are interested in both purchasing real estate and working capital for your business, there are ways under the SBA 7(a) program to structure a loan that combines both, as long as 51% of the loan amount goes to the purchase price, over a 25-year term.
10-year SBA 7(a) loans for working capital have 0 prepayment penalties.
The 25-year real estate (or combination with working capital) have a 3 year prepayment penalty, 5% in the first year, then 3% and in the third year only 1%.
Traditional commercial real estate loans usually require a downpayment of between 20-30% whereas SBA only require 10%.
Through our relationships with our lenders, we are able to secure real estate loans with 0 downpayment, as long as you cashflow.
When it comes to business acquisitions, traditional bank loans can require a downpayment of anything from 20-50%, while SBA only requires 10%.
Most traditional bank loans have so many conditions and covenants that it is extremely difficult to always be in compliance, risking that the loan can be called early. SBA loans do have some covenants, but essentially the loan can only be defaulted for nonpayment.
The collateral and equity requirements are often much lower than traditional lenders. Collateral is any kind of property a company puts up in exchange for the loan. If they default, the lender can take possession of the collateral and sell it. Often, the item purchased is used for these purposes. Lower equity requirements also make it easier to buy a new business.
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