Is an SBA loan right for my business?

An SBA loan is right for you if your business is profitable, can wait for a fuller underwriting process and can produce tax returns and financial statements, because it is priced as bank lending rather than as short-term money. It's the wrong fit if you need money in days, can't document your finances, or are in an industry the program excludes. One thing to know up front: Ask Sterling's funding partner doesn't arrange SBA loans. If this is your route, go to an SBA lender directly.

How SBA loans actually work

The SBA doesn't lend directly to businesses. Banks and other approved lenders make the loan and SBA guarantees part of it, which lets lenders offer rates and terms they otherwise might not. The main programs are 7(a) loans for general purposes, 504 loans for long-term fixed assets, and microloans of $50,000 or less.

The 7(a) rules that matter most

• Size. "The maximum loan amount for a 7(a) loan is $5 million."
• Eligibility. The business must operate for profit, be located in the U.S., meet SBA size standards and not be in an ineligible category.
• Credit elsewhere. You must not be able to "obtain the desired credit on reasonable terms from non-federal, non-state, and non-local government sources".
• Repayment. The business must "be creditworthy and demonstrate a reasonable ability to repay the loan".
• Term. Generally 10 years or less, and up to 25 years for real estate.
• Personal guarantee. Holders of at least a 20% ownership interest generally must sign one.
• Collateral. Not required by SBA for loans up to $50,000; above that, lenders apply their own policies, though a loan isn't to be declined solely for inadequate collateral.

Who an SBA loan suits

• Profitable businesses with tax returns that show it
• Owners buying a business, property or major equipment
• Businesses refinancing expensive short-term debt into a long term
• Anyone whose need is planned weeks or months ahead

Who it doesn't suit

• A cash gap that has to close in days
• Businesses that can't produce clean financial statements
• Owners unwilling to sign a personal guarantee
• Industries on the SBA's ineligible list

The worked number

Term changes everything. $100,000 at 18% APR over 24 months is $4,992.41 a month. The same amount through a cash advance at a 1.35 factor over 6 months would be $135,000 back, or about $22,500 a month at 21 business days. Spread $100,000 over 10 years and the monthly payment falls sharply even before any difference in rate. Run your own numbers through the loan payment calculator once a lender quotes you a rate and term.

Sterling's take: if you can wait for an SBA loan, wait. The months you spend on paperwork are usually cheaper than the short-term money you'd take instead.

What to do next

1. Ask your own bank whether it makes SBA 7(a) loans, and what it needs from you.
2. Gather tax returns, year-to-date financials and a debt schedule.
3. If your bank says no, ask why. Why did my bank say no explains your right to the reasons.
4. If you need money before an SBA loan could close, compare short-term term loans and advances on APR, and treat them as a bridge, not a habit.