SBA Financing Vs. Private Business Loans
Tags: business, fin
Published: 2023-02-27 09:14:52

SBA BANK LOAN VS. QUICK PRIVATE FINANCING 

Whether economic times are good or bad, there are always businesses that are ready to expand.  During good times, many companies are just a ship elevated by rising tides and are able to expand to meet the demand brought about by a strong economy. 

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During down economic times, there are some companies that have the ability to find opportunity where others only see challenges.  Sometimes negative economic factors create opportunities in the marketplace.  There sure were a lot companies selling masks during COVID, right? 

When the need or opportunity to expand presents itself, the primary obstacle is usually capitalization.  Does your business have the liquid capital to be able to pounce on an opportunity?  In economic times like this, the answer for most small businesses is NO.  In those cases, the only expansion plan is to acquire capitalization through financing. 

Acquiring debt during down times, when our economy is riddled with inflation and uncertainty, takes a special kind of vision.  Sometimes the need for expansion cannot wait, and more profits are there for the taking! 

## WHAT KIND OF FINANCING IS BEST FOR MY COMPANY? 

Once the decision has been made that you need to obtain business capital through financing, now it comes time to decide what kind of business loan will suit your needs.   

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In most cases, the most favorable rates and lowest fees come from a Small Business Administration loan through a traditional bank.    The problem with traditional bank financing is that it takes a long time.  There are many hoops to jump through, many documents to show, and it can sometimes take 6-12 months to complete this meticulous process.   You often need good personal credit, without adverse actions like liens and foreclosures in your background. 

Sometimes opportunities can slip away when are you waiting that long to obtain funds.  Sometimes the opportunity cost of how much money you could have made in the months waiting to close the loan can outweigh the savings of the lower rate and fees. 

So the other option is to obtain fast, private financing.  There are business lenders in the marketplace that are not concerned with all of the qualifications required to obtain SBA financing.    Private loan programs are usually based on cash flow, so these lenders usually just want to see bank statements that show your company is bringing in regular cash flow, and has the ability to pay back the loan.   

Since analyzing cash flow is much quicker than the full criteria required by the SBA, these loans can often fund in a matter of a few days, some on the same day for lower loan amounts. 

## THE DOWN SIDE OF PRIVATE FINANCING? 

Of course the down side of private financing is higher interest rates, and higher fees.  It’s more expensive money.  But if you don’t have good credit, and have some adverse actions in your past, private financing may be your only option.  Since it is more expensive money, the need for a good exit strategy is imperative. 

So my advice to most small business owners is that if you can qualify for an SBA bank loan and don’t need the money right away,  go with the SBA program at a traditional bank.  If you have the credit and the assets, you should try to get the least expensive loan that you can. 

But don’t let opportunities slip away if you can’t qualify for a traditional loan.     

A lot of business owners have become very successful using other people’s money.  If you see the right opportunity, and the math all works out to where your potential profits outweigh the additional financing costs, you can pull the trigger on private financing very quickly.  Sometimes the need for more equipment, more retail space, or more inventory can present an opportunity to grow your business at a rate that it has not before. 

Some companies will get private financing to jump on an opportunity quickly, then go about getting an SBA loan as a “refinancing” plan.   If you need to stay in the loan for a longer period of time, you can use the private funds a bridge loan to hold you over until you can obtain traditional financing.