The 7a and 504 Small Business Administration (SBA) loan programs are an excellent funding source for entrepreneurs, especially for businesses that lenders deem risky (startups, gas stations, etc.)
Advantages of SBA financing:
- Terms: For non-real estate business acquisition deals, SBA terms are around 10 years compared to a 5-year term on most non-SBA loan products. And for real estate business acquisition deals, SBA terms range around 20 to 25 years compared to a 15 to 20 year term on most non-SBA loans.
- Seller notes: For acquisitions, seller notes can contribute up to 10 percent towards the buyer’s equity. Non-SBA loans do not offer seller notes.
- Working capital: Besides business acquisition financing, SBA loans offer additional working capital lines.
- Diversity: The SBA highly encourages borrowing among the women and minority owned business owner community.
Disadvantages of SBA financing:
- Fees: Guarantee fees can range from 2 to 3 percent.
- Prepayment penalties: Prepayment penalties on SBA loan products can range anywhere from 3 to 5 years on a sliding scale (depending on the borrowers propensity to repay the debt.)
- Time Consumption: SBA loans require more documentation than a conventional line of credit.
- Interest Rates: Interest rates on SBA loan products can range 100 to 200 basis points higher than traditional loans.