Pitfalls of the SBA loan—a Headache for the Modern Entrepreneur

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Entrepreneurs trying to fund, expand, or float their business will have without a doubt encountered Small Business Administration (SBA) loans. In short, an SBA loan is a standard bank issued loan given to small businesses who need more working capital. Taking out an SBA is a great option if the small business falls into the strict qualification guidelines and isn’t crunched for time, as loans from the bank have the lowest interest rates but can take months to approve. Acquiring approval for an SBA loan requires the requestor to present both a high percentage of collateral and great credit.

75% Collateral:

When taking out a loan from the bank, entrepreneurs will have to provide at least 75% of the SBA loan amount in collateral; this can be equipment, buildings, vehicles, or cash savings. Before collateral is approved by the bank, an appraisal is needed as means to ensure that the loan will get paid back if the business goes under—keep in mind that the bank is still held liable for 25% of the loaned amount.

600+ Credit:

The requesting entrepreneur is next required to have at least a 600-point credit score before even being considered for the loan. Because the bank is taking on a lot of risk when lending out money, a good credit score is used for a sense of security; used to fully understand both the businesses payback history and usage of loans (and credit). Since small businesses tend to need more money than the average Joe, a higher credit score is needed.

2+ Years of Business Life:

When going through the bank for a loan, banks require the business to have been under the same management for at least 2 years before even being considered for an SBA loan. This 2-year requirement makes it impossible right off the bat for entrepreneurs looking for capital to start up their business vision with; banks do this because new businesses lack a recognizable industry brand and the entrepreneur may lack the industry expertise.

Strict cap on loan amount:

Though not necessarily a requirement, it is important to take note of standardized SBA loan sizes and uses; this amount could be either a life saver or serious problem when considering an SBA loan. Small firms trying to expand need a high amount of capital and face the problem of not having required collateral, credit, or business income for a significant sized loan. Depending on how much the entrepreneur needs, banks loan out a standardized amount of money for each:
• SBA Express—Microloan used for small sums of working capital; cannot be used to refinance debt or buy property—$10,000-$50,000;
• SBA (7a)—General Small Business loan used to expand the business, purchase equipment or inventory, increase working capital, or refinance debt. —$350,000-$3.5million;
• SBA 504—Real Estate and Equipment loan used for purchase, construction, or renovation of owner occupied commercial real-estate—$305,000 with no maximum.

The Pitfall

The strict requirements listed above hinder the efficiency in which a small business can receive their money, and when new and expanding, they can’t afford the long waiting period. With banks looking into both the small business and owner’s history to ensure as little risk as possible is being taken on, the process of taking out an SBA loan drags out for 30,60, or even 90 days. This long turn around can be avoided through alternative lending: invoice financing, online lending, and temporary cash flow loans. Invoice factoring with Transfac Capital, for example, provides small businesses the option to get their invoices paid off the same day without a long and cumbersome process.

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