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December 2006
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5 'truths' about getting an SBA loan
One of the best programs in the United States for helping start new businesses is the Small Business Association (SBA) loan program.
As with any government run program, it can be easily misunderstood. These five pointers will help you better understand what an SBA loan is and isn't.
By far the most misunderstood method of financing in the U.S. is the SBA loan. Many people think an SBA loan is a low-interest, non-collateralized loan issued by a government agency.
In reality, a lending institution actually makes the loan to you, with the SBA guaranteeing a portion of it. The SBA limits its guarantee to loans of more than $150,000 to 75 percent of the loan value, so the lender is still on the hook for 25 percent of the loan if it goes into default. The primary benefit to an SBA-backed loan is that the lending institution probably wouldn't have done the loan otherwise.
SBA-backed loans fill a void, helping new business owners start businesses. You can use SBA loan proceeds to purchase land, buildings, equipment, fixtures, or supplies; pay for construction costs; and provide working capital while you expand or get your practice up and running. The term is usually 10 years, longer if a building is included.
If you are considering an SBA-guaranteed loan, here are five things to keep in mind to facilitate the process:
1. Getting an SBA-guaranteed loan takes time. If you are going to get a loan backed by the SBA, you are going to have to follow government generated procedures. That means putting in a lot of time and effort. These loans are more paper-intensive and take much longer to process than standard term loans.
It's not uncommon to see SBA loans drag out a month or two (or even longer). Before you even begin the SBA process, make sure you've completed a business plan with detailed pro forma financials. (For more information, check out the SBA's Web site on Business Plan Basics, www.sba.gov/starting_business/planning/basic.html.)
2. You will have to pay a number of fees. Many people don't realize the SBA charges a guarantee fee that is typically around 3 percent. In addition, the lending institute will often pass on other third-party costs, including: appraisal fees, legal fees, and a loan packaging
One fee the SBA doesn't have for loans less than 15 years is a pre-payment penalty. This allows you to pay the loan off at any time without penalty.
3. Interest rates will be higher. Another myth is that SBA-guaranteed loans have low interest rates. In most cases the SBA guaranteed loans interest rate will be higher than many traditional loans.
The SBA does ensure that the interest rate for loans over $50,000 does not exceed prime rate plus 2.25 percent for loans less than seven years, and prime rate plus 2.75 percent for loans longer than seven years. One of the benefits of an SBA loan is that the terms are often longer than traditional loans — for example, 10 years instead of five years for a traditional loan.
The longer the term equates to lower monthly payments, which can help you as you build up your practice.
4. Additional collateral and a down payment will usually be required. SBA-guaranteed loans usually require additional collateral if the business assets are not adequate to cover the loan. Personal residences are often the most used source of this additional collateral.
You will generally need a 20 percent down payment, but expanding physicians may only require 10 percent. The down payment can come from a personal home equity line.
5. You'll have to wait to see all of the money. Once approved, the lender is not going to cut you a check for the full amount of the loan. What typically happens is you will need to submit vendor invoices, purchase orders, cancelled checks, or quotations before payment will be made.
In some cases you may have to pay the vendor first, then get reimbursed from the lender. When the loan closes, your working capital will be disbursed in a lump sum to you.
The above five pointers should help you better understand how SBA guaranteed loans actually work for physicians, so you can be better prepared.
Jeff Russell is president and CEO of Oakridge Healthcare, which provides turnkey healthcare financing solutions to medical practices and equipment vendors throughout North America. He can be reached at 800-485-5759 or through the company's Web site, www.oakridgehealthcare.com.
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