What is a guaranteed SBA loan and what are its benefits?

Small Business Administration (SBA) provides guarantees to the lenders to offer loans to small business. Guaranteed SBA loans can be utilized for any purposes, like purchasing machinery and equipment, refinancing, and working capital needs. SBA guarantee is more helpful for the potential borrowers who cannot raise funds from any other sources.

The conventional lender usually does not wish to offer financing to a small business owner who has insufficient collateral. Guaranteed SBA loans therefore help him to obtain financing essential to meet his business needs. The guarantee of SBA works as a substitute for the collateral required by the lender. Since the risk of the lender is considerably reduced, he is ready to offer loans on reasonable terms and conditions.

The main benefit of guaranteed SBA loans is that they involve minimum down payment. Conventional lenders require at least 20 to 30% of the loan amount as down payment, whereas SBA-guaranteed loans require only 10% down payment. The conventional loans do not finance the soft costs of the loan but a guaranteed SBA loan covers the soft costs and thereby reduces the burden of the borrower.

Most of the commercial lenders offer amortization period for 15 years. A lower amortization period can have some significant effect on the business of the borrower. He may find it difficult to make cash flow during sluggish periods. Guaranteed SBA loan has longer amortization period, usually 20 to 25 years.

The main concern of most of the small businesses is cash flow. Long-term financing obtained through Guaranteed SBA loan is the best possible way to generate cash flow. SBA loans generally range from 7 to 25 years depending upon the purpose of loan.

Guaranteed SBA loan involves no balloon payments. The additional expenses for refinancing the loan are eliminated by SBA. The borrower is therefore relieved from the pressure of renewing the loan.

Guaranteed SBA loans have lower monthly payments and flexible terms. There are only limited pre-payment penalties. If the term of the loan is more than 15 years, the borrower has 3-year prepay and he is allowed to pay up to 25% of the balance without incurring prepayment penalty.

For more than 25% of the balance, the prepayment penalty is 5% in the first year, 3% in the second year, and 1% in the final year. The penalty amount is considerably less than that of conventional loans. Hence, the borrower can pay off the loan amount easily.

Since SBA guarantees the loans, the lenders do not require any deposits from borrowers. There is also no need to maintain any additional collateral with the lender. A guaranteed SBA loan has a one-time close. The borrower needs to sign only one set of documents and work with only one lender. This increases the convenience of the borrower and enables him to do single closing. One-time closing also saves him more money.

The guaranteed SBA loan is more suitable for new and small growing businesses. The borrower can enjoy maximum flexibility and he can use the loan fund for wide variety of purposes, like renovation, real estate, payment of prior debts, and so on.