I Have an SBA loan, Can I Apply for a Separate Line of Credit?
Most entrepreneurs know that having access to enough money can often make or break a small business. That’s why owners will want to consider all their options when they need help funding their operations. Possibilities include an SBA loan through the Small Business Administration and business lines of credit.
Let’s establish the primary differences between a business loan and a line of credit as both categories contain unique process features. If you’re in the market for bridge capital, startup funding, equipment financing and more, make sure to pay close attention to the following section.
Business Loan vs. Line of Credit
A business loan such as an SBA loan is essentially a lump sum of money that the borrower is responsible for paying back over a specified period of time. This can range from one to 20 years. These types of deals are “one-and-done,” meaning that once the money is repaid according to a fixed monthly payment, the account is closed and you no longer have access to those funds.
When lenders issue a line of credit, borrowers can use the pre-determined amount of funding how they see fit. Unlike a traditional loan, the underlying funding amount resets once the principal and interest are paid in full. This is referred to as a revolving line of credit.
There’s more flexibility here in terms of how you use the money as well as repayment. Borrowers have more power to negotiate minimums and prepayment structures, i.e., paying a fixed amount every month, or opting to pay the full amount.
Which Is the Better Option?
The answer to that question depends on the objective. For example, a manufacturer may want to pursue a business loan for equipment upgrades because the need is attached to hardware life cycle.
On the other hand, purchasing raw materials requires constant capital. Therefore, a line of credit is usually more appropriate.
As a matter of fact, some organizations pursue SBA 7(a) loans when shopping the market. They’re popular and attractive to business owners for a number of reasons as you’ll see below.
SBA Loan Guarantee Snapshot
The Small Business Administration doesn’t actually loan money. Instead, it sets loan guidelines and places a guarantee on each transaction up to a certain percentage based on the loan limits. Aside from that, SBA rates are generally more favorable. This is one of many competitive advantages with this particular form of financing.
Quick SBA Reference
• Max Loan Amount: $5 million
• Guaranty: 85% guaranty for $150,000 or less; 75% guaranty for loans $150,000 or greater
• Maturity: Fixed maturity; generally five to 10 years for working capital and equipment
• Uses: Starting a business, refinancing, lease-hold improvements, land purchase, expansion, new construction
Max interest rates: Loans less than 7 years
$0-$25,000 Prime + 4.25%
$25,001-$50,000 P + 3.25%
Over $50,000 Prime + 2.25%
Max interest rates: Loans 7 years or longer
0-$25,000 Prime + 4.75%
$25,001-$50,000 P + 3.75%
Over $50,000 Prime + 2.75%
Benefits to Borrowers
The SBA 7(a) is meant to be a long-term loan, hence the low maximum rates. In addition, it improves cash flow, and there are no balloon payments or pre-payment penalties for loans under 15 years.
Even with the given information, many entrepreneurs often wonder, “Can you have an SBA loan and a separate line of credit?”
Can You Have an SBA Loan and a Separate Line of Credit?
An SBA loan and a business line of credit were created to accomplish different missions. Plus, loan diversification isn’t just condoned but encouraged as a means of organizational success.
The answer is, in short, yes, you can have an SBA loan and maintain separate lines of credit. Not only that, but the SBA itself allows prime borrowers to hold many loans at once so long as your bank allows it. In order to qualify for multiple loans, the initial loan must be in good standing while cash flow, credit and collateral have to be strong and proven.
Positive Cash Flow Helps
How often and how much cash flows through any business will positively or negatively affect a lender’s decision-making focus. Showing a lender that you have enough revenue to cover overhead and debt service naturally increases approval chances. Without adequate liquidity, lenders will more than likely not approve the request as the business is overextended already.
Combining Capital Sources
On top of cash flow, lenders will use tax returns, financial statements and letters of credit to calculate debt service ratio coverage. The sweet spot for credit vendors falls above 1.25; this indicates that the business is capable of covering current payments toward credit accounts.
There are indeed limits, but here’s one scenario that illustrates the point: A business could use an SBA loan to hire staff and use a short-term loan or line of credit to assist with payroll or plug an unforeseen inventory shortfall.
Here’s another example: Rollovers for Business Startups (ROBS), portfolio loans, and home equity lines of credit (HELOC) can be used for SBA down payments.
Rollovers for Business Startups
Rollovers essentially borrow money from a customer’s retirement account and turn those funds into bridge/business financing by placing them into another 401(k) account sponsored by the new business. ROBS is not a loan or debt financing, so no repayment plan is required.
Securities-Backed Line of Credit
A securities-backed line of credit is often known as a portfolio loan. With these, savvy investors can borrow against funds in an eligible investment account at low interest rates without having to first liquidate those assets.
Home Equity Line of Credit
Similar to a credit card account, a HELOC can be used as a revolving line of credit. There are no defined payment schedules, and your home is the sole consideration.
It is important to remember that the more debt you take on, the more collateral you will need to pledge. Generally, SBA lenders want first lien positions, but such a position is advantageous to most any lender.
Put yourself in the lender’s shoes. It’s best to leave gaps between loan and LOC applications. Meanwhile, time allows revenues to naturally blossom. Each payment contributes to an attractive credit profile.
Unsecured Loans vs. SBA Loans
While an SBA loan specialist considers many factors before approving or denying a loan application, an unsecured loan lacks collateral requirements. However, it puts credit at the center (usually requires a minimum score of 690) and is a great option if you can repay the loan quickly.
Other Types of SBA Loans
• SBA Express
• Export Working Capital Program
• International Trade
• 504 Loans
• Non-7(a) Loans
• SBA Veterans Advantage
How to Improve Approval Odds
Have you ever heard about the importance of character? Generally, character refers to your reputation and trustworthiness. Things work the same in the business world. For lenders, a credit profile goes beyond score and history, but you can’t get far without paying close attention to the basics. Here are a few tips to increase approval odds when approaching a lender for a loan or a line of credit.
1. Improve your personal credit score prior to applying
Taking the time to understand every nook and cranny of your credit report makes you look confident and knowledgeable. When you can explain in detail any blemishes in your credit history, you transfer confidence to the lender.
Want to maximize creditworthiness? Pay down existing debt so you can establish great credit history and cut down on the debt service coverage ratio.
2. Be professional
Sometimes, it seems like applying for credit is a “pass or fail” game. As much as a lender wants to push your funding needs through the system, they have a responsibility to protect your business and themselves as well. Remember, they don’t have ultimate control over the situation. They compare your reports and profile against rules, regulations and guidelines.
3. Establish good relationships
Steps one and two will go a long way with step three. Once you have improved upon your own credit profiles and prepared yourself for the impact of credit market forces, you can begin to build a rapport with the lender. If you’re professional, kind and reasonable, you’ll get the same in return.
Get Help Applying for a Loan
Although the demarcation line between a loan and a line of credit is thin, it’s still quite apparent. The type of debt you choose to acquire and the effective combination of said debt should be tailored, specific and realistic.
Are you shopping around for funding and haven’t quite found a capital partner? At Small Business Funding, we invite you to explore our website and apply now so you can get the funding you need.