Financing

Flexible financing with SBA loans: What you need to know

Exploring when and how Small Business Administration loans could help your company thrive

An SBA loan can be a powerful tool for growth stage companies. But is it the right tool for yours? When borrowing term restrictions and the need to gather large down payments rule out conventional financing, the flexibility of SBA loans might be exactly what you need to move your company forward. These loans can be used for buying out partners, incorporating goodwill value into a transaction, and making real estate purchases, and they are extended to U.S. companies in any industry and any phase of the business lifecycle.

If your business has a larger market cap, you might think using SBA loans for small business financing is off limits, but that’s not necessarily the case. SBA loan qualification metrics aren’t universal. They vary based on the industry of the company applying.^{Disclosure 1}

In this guide, we’ll outline what an SBA loan is, when it may make sense to apply, and what steps you’ll need to take during the application process.

How does the government regulate SBA lending?

An SBA loan isn’t a government loan per se. Instead, two organizations make each SBA loan possible: The loan is issued by a bank, like Truist, or other lending institution, and the loan is guaranteed by the SBA. There are two primary SBA loan options—the 7(a) and the 504. SBA 7(a) loans are multipurpose, while 504 loans are designed to finance owner-occupied properties.

Conventional commercial financing can sometimes require collateral and down payments of 20% or more, and the lender often specifies a single use for the funds and limits goodwill financing. In contrast, SBA loans are more flexible, covering a wide range of loans for different purposes, from real estate and equipment purchases to working capital and partner buyouts.

SBA loans can offer attractive collateral and low down payment terms, as well. For example, when Jerod Willow, owner and founder of Willow Designs, needed to expand his facilities, he met with his Truist relationship manager to discuss a construction loan. Jerod qualified but was hesitant to go forward after learning the loan would require a 20% down payment and liens on both his home and vacation home as collateral. With the help of a Truist SBA loan officer, Jerod acquired an SBA loan with a 10% down payment that enabled him to build the new facility without having to stake both homes.

For both owners and lenders, this type of SBA structure is a win-win proposition. Owners can significantly reduce upfront capital requirements while helping preserve personal assets. Financial institutions can provide more loans, help business owners get attractive financing, and enable the federal government to stimulate the economy and create employment opportunities.

When are SBA loans useful?

SBA loans are often well-suited for:

Financing owner retirement: If you want to retire, whether through an outright sale or partner buyout, an SBA loan can make it happen. Two reasons your banker may recommend an SBA loan are that it could enable the acquiring partner to put down just 10% of the deal value and finance the remaining 90%, and because it has business valuation minimums that are more flexible.
Leveraging goodwill value: The SBA has frequently been known to recognize goodwill as a financeable asset that can guarantee the long-term sustainability of your business.
Acquiring real estate: The SBA 504 loan program can help you purchase facilities your company needs. If your business requires real estate and equipment or funds for other business capital needs, the 504 program can be combined with a 7(a) loan to help you access larger amounts of capital.
Funding innovation: Most innovation requires investment in human capital, product development, or technology. Want to acquire a complementary or competitive business rather than building those capabilities organically? An SBA loan can help you there too by allowing you to move quickly on a purchase to expand your business.

What are the SBA loan requirements?

The documentation required for an SBA 7(a) loan and an SBA 504 loan depends on how you plan to use the money.

The 7(a) loan is generally considered to be the more flexible of the SBA’s two primary loans.^{Disclosure 2} Qualifying for one requires:

A business plan or business summary with your financial projections
An outline of your capital needs and what you’ll use the loan for, such as ownership restructuring, business acquisition, equipment purchases, or working capital
A projection of how the financing cost will affect your financials
A timeline that demonstrates your ability to cover repayment and make interest payments
A business valuation (for a business partner buyout)
A description of how you’ll use additional funding besides the loan to execute your business plans

The SBA 504 loan is designed for use with long-term, fixed assets.^{Disclosure 3} Qualifying for one requires:

A business plan or business summary with your financial projections
An outline of your business goals, cost drivers, and how real estate investment or business expansion will affect your bottom line
The amount of required capital investment
A financial projection that illustrates how you’ll pay back the cost of accessing capital in a reasonable amount of time
A list of additional expenses associated with capital implementation, like moving costs, renovation expenses, rental charges, changes to property taxes or changes to insurance premiums
A statement of how financing will benefit your business over time

Could additional capital help your business expand?

An SBA loan can provide the capital flexibility you need. Talk to your Truist relationship manager or a dedicated SBA team member to find out if you qualify and how to apply.

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Commercial Economic Round-up

Financing

Flexible financing with SBA loans: What you need to know

How does the government regulate SBA lending?

When are SBA loans useful?

What are the SBA loan requirements?

Could additional capital help your business expand?