The Top Pros and Cons of SBA Export Loans
SBA loans can be a beneficial source of small business financing. Particularly, export loans, offer favorable terms and benefits. However, there are some important drawbacks you should consider.
In this blog post, we’ll review the most notable pros and cons of SBA Export Loans so you can determine if it is the right financing option for your export business.
The Pros of SBA Export Loans
1. There Are Different Options for Various Business Needs
The SBA offers three export loan programs that provide varying amounts of funding, and target different industries. In addition, SBA loans can be established as a term loan or a line of credit, providing flexibility. Let’s examine the three export loan programs offered by the SBA:
– SBA International Trade Loan (ITL)
The SBA International Trade Loan program provides support to businesses that have been adversely affected by imports by helping them position themselves for activities in the export market.
- Terms up to 7 years for lines of credit
- Terms up to 25 years for real estate, 10 years for working capital.
- Maximum $5 million in lending
– SBA Export Express Loan Program
This fast-track loan program provides up to $500,000 in funding to businesses that need access to capital quickly.
Export Express Terms
- Terms up to 7 years for lines of credit
- Terms up to 25 years for real estate, 10 years for working capital
- Maximum $500,000 in funding
– SBA Export Working Capital Program (EWCP)
The Export Working Capital loan program can be used to afford suppliers, inventory, and the production of goods linked to export sales.
- Usually 12 months repayment terms for lines of credit.
- Terms up to three years repayment for loans.
- Maximum $5 million in funding
2. Affordable Interest Rates
All three of these loan programs provide favorable interest rates, because the SBA will guarantee up to 90 percent of these loans. In exchange, the SBA requires participating lenders to offer affordable interest rates, which is certainly beneficial for small businesses.
Let’s review the interest rate guidelines for each loan program:
- SBA International Trade Loan (ITL): 75 to 9.25 percent (2.25 to 4.75 percent above the Prime Rate).
- SBA Export Express Loan Program: 00 percent to 11.00 percent (4.50 to 6.50 percent above the Prime Rate).
- SBA Export Working Capital Program (EWCP): There’s no maximum interest rate, however, rates must be “reasonable.”
3. Likely to Be Approved by the Lender
The SBA’s loan guarantee comes with another benefit. Quite simply, lenders are much more likely to provide this product because the risks are lowered substantially. Many traditional financiers would hesitate to provide financing for export transactions, contributing to the high-risks. The 90 percent guarantee, however, allows lenders to fund high-risk ventures.
Of course, there are some drawbacks to the SBA’s export financing, so let’s examine those.
The Cons of SBA Export Loan
While SBA Export Loans are a great option, there are also some negative aspects to consider. Before applying for an SBA Export Loan, or any loan product for that matter, it’s important to understand these downsides.
1. Eligibility Requirements Are Strict
Borrowers must meet specific eligibility requirements to secure funding. First, the borrower will have to prove that the funding will be used to support export activity.
Second, the SBA generally loans businesses money that have been operational for at least 12 months. However, the SBA may waive this requirement for EWCP and Express Loans if you can demonstrate expertise and previous successful business experience.
2. You’ll Probably Need Collateral
Collateral is often another eligibility requirement. The SBA usually requires borrowers to offer collateral to guarantee export loans. Collateral requirements depend on the specific type of SBA Export Loan that you’re applying for. The requirements for each SBA Export Loan are:
EWCP: You can use the inventory and receivables financed by the loan as collateral.
Export Express: Collateral is required for loans larger than $25,000.
ITL: Collateral is generally required; U.S. based business assets, including equipment and property, can be used.
Further, for all export loans, any individual who owns 20 percent or more of the company will have to provide a personal guarantee.
3. The Loan Application Process
Even if you qualify and have the necessary collateral, applying for SBA Export Loans can be a tedious process. If you’re in need of fast financing, you may benefit from applying for an Export Express Loan, as it’s dispersed faster than the other options. In fact, the SBA could approve your loan in as little as 24 hours.
In addition, when applying for export loans, you’ll have to apply to individual lenders. These lenders will have their own applications and requirements, which could take several weeks to complete. Most will ask for detailed income sheets, financial projections, and other information about your business. Compiling these materials can be time-consuming, so make sure you’re prepared when you’re ready to apply.
4. Fees Can Add Up
While SBA loans offer good interest rates and flexible repayment terms, there are also several fees to be aware of. For example, the SBA sets “guarantee fees” of 0.25 percent on the guaranteed portion for loans, with terms of 12 months or less, and 2.00 to 3.50 percent for longer-term loans. Other fees include:
- Late payment fees of up to 5 percent
- Assumption fees of up to 1 percent
- Early repayment fees between 1 and 5 percent
Conclusion: SBA Export Loans Are a Great Albeit Not Perfect Funding Option
While there are some drawbacks to SBA Export Loans, they’re still among the best financing options for businesses looking to increase export activities. Affordable interest rates and flexible repayment terms can provide your business with vital access to capital on your own terms. However, you should determine if you’re eligible for this type of small business loan and make sure that you have time to go through the application and approval process.
Editor’s Note: This post was updated for accuracy and comprehensiveness in September 2021.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.