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April 13, 2018

SBA 7(a) Loans vs. Loans from Alternative Lenders

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FF

Fora Financial

Staff

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If you’re trying to decide between an SBA 7(a) loan (one of the SBA’s most popular loan options) and a business loan from an alternative lender, it’s important to understand why they’re different. Let’s review both options so you can make the right decision for your business.

What are SBA 7(A) loans?

SBA 7(a) loans are offered by the SBA. However, the SBA doesn’t directly lend money to businesses. Instead, the loans are distributed by banks that partner with the SBA. Thus, the SBA guarantees a portion of the loan, thus reducing risks for the lender. SBA 7(A) loans are one of the most popular loans offered by the SBA, since applicants can obtain up to $5 million in financing through the program. However, the average loan size is currently about $417,000.

SBA 7(A) Loans Can Be Used To:

  • Expand or purchase an existing business.
  • Refinance debt.
  • Purchase equipment, including machinery, fixtures, supplies, and furniture.
  • Pay for construction or purchase land.

What are Alternative Business Loans?

Banks are shrewd, and will generally only provide loans to large, stable, and fiscally healthy businesses. As a result, many small and new businesses don’t qualify for “traditional” financing. Luckily, alternative lenders have stepped in to fill the gap. Typically, they have less-stringent requirements compared to banks, and can provide your business with the financing needed to grow. Alternative business loans usually range from $5,000 to $200,000. In addition, most lenders don’t stipulate on how the money must be spent.

What Makes SBA Loans and Alternative Loans Different?

SBA loans Can Be Difficult to Qualify For

Most SBA loan programs, including 7(A) loans, are more difficult to qualify for than business loans from alternative lenders. The government wants to support small businesses, but is risk averse. Further, the bank that will be providing the loan will conduct thorough due diligence. While requirements may be relaxed compared to a traditional bank loan, they are still quite stringent.

Other Qualifications:

  • The business must be “small” for its industry.
  • Funds must be used for a sound business purpose.
  • No delinquent debt with the U.S. government.
  • Must invest personal equity.
  • Generally, requires a credit score of 680 or higher.
  • 10 to 20 percent down payment.

SBA 7(a) Loans Require Collateral, Most Alternative Loans Don’t

An SBA 7(a) loan represents a considerable risk for the government. If your business defaults or goes bankrupt, it’s the government that must pick up the bill. As such, the SBA usually requires collateral. Unfortunately, many newer businesses lack collateral.  Luckily, most alternative lending programs are “unsecured.” This means that no collateral is required or tied to the loan.

Alternative Loans Can Be Disbursed More Quickly

A business loan from an alternative lender can be distributed relatively quickly, often in as little as 72 hours. With an SBA 7(a) loan, you’re looking at an approval process that can take weeks or even months. Why does the SBA take so long to approve or decline applicants? For one, you’ll have to present a detailed business plan explaining how the money will be spent, as well as financial projections. Further, collateral will have to be evaluated. These processes can take a long time to both prepare for and complete.

Conclusion: Both Loans Have Advantages and Disadvantages

Business loans from alternative lenders are generally easier for new and small businesses to qualify for. They’re also more likely to work with businesses that have a poor credit score. However, these loans can carry higher interest rates and other fees. This is due to the higher risks associated with lending to newer businesses, low-credit borrowers, and those without collateral. Businesses that qualify for and can wait for an SBA 7(a) loan may be able to save money via lower interest rates and fees. In some cases, however, an alternative loan might prove to be a faster, smoother way to receive necessary financing.