Understand how SBA-guaranteed loans work so you can increase your chances of obtaining one
One of the best programs in the United States for helping start new businesses is the Small Business Administration (SBA) loan program. As with any government-run program, it can be easily misunderstood. Many people think an SBA loan is a low-interest, non-collateralized loan issued by a government agency. In reality, a lending institution makes the loan to you, with the SBA guaranteeing a portion of it. The SBA limits its guarantee to loans greater 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 of an SBA-backed loan is that the lending institution probably wouldn’t have provided the loan otherwise.
SBA-backed loans fill a void, helping new business owners start businesses. You can use SBA loan proceeds to pay for land, buildings, equipment, fixtures, supplies, construction costs, and provide working capital while you get your medical spa up and running. The term is usually 10 years, or longer if a building is included.
Medical spas face additional hurdles because many lenders don’t understand what they actually are or the revenue potential of providing cosmetic and anti-aging treatments like Botox injections, skin rejuvenation, and laser hair removal. If your local bank doesn’t understand the industry, don’t despair. There are lenders who specialize in medical spa financing.
If you are considering an SBA-guaranteed loan, here are five pointers to help you along the way.
1 MAKE SURE YOU HAVE LOTS OF TIME AND ENERGY.
If you are going to get a loan backed by the SBA, you are going to have to follow government-generated procedures, which means these loans are more paper-intensive and take much longer to obtain than standard term loans. It’s not uncommon to see the process of securing an SBA loan drag out for several months. Before you even begin the SBA process, make sure you’ve completed a business plan with detailed pro forma financials. For more information, visit the SBA’s website on Business Plan Basics at www.sba.gov/starting_business/planning/basic.
2 DON’T BE SURPRISED BY ALL THE FEES.
Many people don’t realize the SBA charges a guarantee fee that is typically around 3 percent for a medical spa. In addition, the lending institute will often pass on other third-party costs, including appraisal fees, legal fees, and a loan packaging fee. One fee the SBA doesn’t charge 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 REALIZE INTEREST RATES CAN BE HIGHER THAN TRADITIONAL LOANS.
Another myth is that SBA-guaranteed loans have low interest rates. In most cases, the interest rate on SBA guaranteed loans will be higher than many traditional loans. The SBA does ensure that the interest rate for loans more than $50,000 will not exceed the prime rate plus 2.25 percent for loans less than seven years, or the prime rate plus 2.75 percent for loans more than seven years. One of the benefits of the SBA loan is that the terms are often longer than traditional loans—seven- to 10-year loans versus five years for a traditional loan, for example. The longer the term, the lower the monthly payments, which can help you during the start-up phase.
4 EXPECT THAT ADDITIONAL COLLATERAL AND A DOWN PAYMENT IS 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 to provide a 20 percent down payment, unless you are a physician, in which case only 10 percent may be required.
5 BE PREPARED TO WAIT FOR THE MONEY.
Once approved, the lender is not going to cut you a check for the full amount of the loan. Typically, 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 is disbursed in a lump sum. For more information on the SBA and its loan guarantee programs, visit www.sba.gov.
SBA Healthcare Lenders:
https://www.wellsfargo.com/biz/loans_lines/healthcare_practitioners/index
