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For Your Small Business February 2, 2023

Capital Short? SBA Loans Offer a Bridge For Your Business

When growing your business, you may need to inject capital that you don't have on hand. In this situation, you might wonder what financial solutions work best for your small business.  Consider an SBA loan. An SBA loan is a loan backed by the Small Business Administration and is an attractive option because they provide maximum stretching room. Compared to typical business loans, which have terms of 3 to 10 years, and microloans have terms that usually need to be repaid within seven years, SBA loans can have terms of up to 25 years.

SBA 7a loans can also be used for everything from start-up costs to ongoing operations expenses, investments, debt restructuring, expansion and as a way to weather inflation. Jeff Kleinschmidt, Senior Vice President and SBA Group Sales Manager for Old National Bank, explains just how the long prepayment term can work in your favor.

SBA Loans Offer Capital Flexibility 

The SBA’s Standard Operating Procedures dictate the maximum maturities (terms) for SBA loans. When the loan is for equipment, working capital or inventory, the term is 10 years. If the loan is for real estate, the term is 25 years. 

Lenders also have discretion to modify the loan’s term if you are taking it out for combined purposes. 

“Speaking for Old National, we can come in and blend that loan term,” says Kleinschmidt, "Therefore, if you are buying a business that includes real estate and you will be also using the funds to purchase equipment, they may finance the loan over 15 or 17 years" 

As soon as you identify your company’s financing needs, Kleinschmidt says it’s in your best interest to weigh any and all options. SBA loans are worth considering because they work for the majority of business owners. After all, not only do these loans have long repayment terms but there are typically more interest rate options when compared to other types of business loans. 

Long Repayment Term Plus No Prepayment Penalty Equals Options

Even with a low interest rate, financing costs can be significant when the loan term is long. Therefore, when you are in a positive position, you may choose to pay down your principal balance when you can. 

Early payoff can result in substantial savings. For example, a $50,000 SBA loan with an 7.5% interest rate deleted in ten years would have a monthly payment of about $593. The estimated total interest would be $21,221. Repay the loan over five years (with payments of $1,002), however, and the interest costs fall to roughly $10,114. 

If the SBA loan term is less than 15 years, there will be no prepayment penalty, so if you want to wipe your debt slate clean in that time frame, you won’t be penalized. 

For SBA 7(a) loans with terms exceeding 15 years, a prepayment penalty is triggered when you voluntarily prepay 25 percent or more of the outstanding balance, and you do it within the first three years of receiving the loan proceeds. In the first year, it would be 5 percent of the total prepayment amount; in the second year, it would be 3 percent; and in the third year, it would be 1 percent. After three years, there are no prepayment penalties whatsoever. 

“The ability to prepay a long-term loan after three years without penalty is fantastic, and is unique to SBA loans,” says Kleinschmidt. “Most customers appreciate it because it gives them peace of mind. A lot of people are very optimistic and debt adverse. Most wish they could accelerate payments. It’s comforting.”

Other SBA Loan Benefits

When comparing SBA loans to other business loans, the advantages stack up at Old National Bank:

  • Low down payment. In most cases, the minimum will be just 10 percent down, which broadens such opportunities as purchasing property, buying equipment, and increasing salaries.
  • Lending on collateral shortfall. For most business loans, banks typically require enough collateral to support the full amount of the loan. That can be a major challenge. Yet with an SBA loan, lending on a collateral shortfall is authorized due to the SBA Guaranty.
  • Long-term fixed rate options. The ability to lock in a low rate for a loan with a 10 to 25 year lifespan eliminates uncertainty and becomes a fixed cost, making long-term projections easier.
  • No balloon payment. You won’t have to worry about a big debt coming due, then having to refinance it at a potentially much higher rate. 

Apply for an SBA Loan With the Right Lender

Because SBA loans are more complicated to apply for than other business loans, you will want to work with a lender who can walk you seamlessly through the process. 

“The SBA’s Lender Match program can connect you to the right lender,” says Kleinschmidt. “It’s a fabulous way to help facilitate a decision.”

Also, talk to other small business owners to find out who they used or ask a trusted intermediary, such as your CPA or attorney. If you’re buying a building and a broker is involved, ask if they can make a recommendation.

"It is critical to connect with an experienced lender who has developed a positive relationship and rapport with the client," says Kleinschmidt. After all, this will likely be one of the largest and most important transactions you will make in your lifetime. You should always feel comfortable and in good hands with an SBA industry expert.  

Want to know more about SBA loans? Contact Old National Bank today. Recognized as a Top Preferred Lender by the SBA, Old National Bank can work with you to find solutions to help your business grow.

 

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