There are many different types of loans offered by the Small Business Administration, too many to count, really. For the purpose of today’s comparison, we will be discussing the SBA 7a Loan program. This program provides loan guarantees to banks while setting caps on maximum allowed interest rate, as well as maximum allowed fees. We’ll be comparing the SBA 7a Loan to traditional bank financing from major financial institutions.
As a borrower, you will find the SBA Loan program a much better deal. Because interest rate maximums are set, you don’t have to worry about paying more than you have to for the privilege of borrowing. This is especially true for those people who have less than perfect credit. In fact, many of these people would not otherwise qualify. One disadvantage is that many banks choose not to participate.
From the perspective of the major lending institutions, the SBA loan program is more of a mixed bag. On the one hand, having loan guarantees up to 90% provides a great deal of stability in an otherwise volatile lending market. The default rate, especially among brand new ventures and professional services, is very high. Sometimes it’s in the high double digits to triple digits.
So having these loans guaranteed goes a long way. From the perspective of banks, the issue is the interest rate caps. Often times, they’d prefer to take on individuals on a case-by-case basis. They want to set their interest rate based on the risk that each customer represents. As such, many banks don’t get involved with the program. They prefer to lend directly without stipulations, if at all.