How To Get an SBA Loan for Your Professional Practice
A Comprehensive Guide to SBA 7(a) Loan Eligibility
Whether you’re launching a medical practice, a law firm, or other professional services company, there’s a good chance you’ll need an influx of money to get it off the ground. One option is a Small Business Administration loan, which can provide you with funds to hire staff, purchase equipment, improve cash flow, and more.
Taking out an SBA loan for your professional practice requires jumping through some hoops, but when you can secure the financing, it may be preferable to putting up your own money to finance your business startup. Not only is dipping into your savings or home equity a risky move for your financial well-being, but there are also some tax implications that come with using your money for business purposes.
SBA loans don’t mitigate all the risks inherent in starting a business, but their costs and terms often make them an attractive option for many entrepreneurial professionals. Our guide provides an overview of the loan options, the application process, and other points you need to know to make an intelligent decision for your burgeoning practice.
What are practice loans, and how can they be used?
A practice loan is a loan made to a licensed (or, in some cases, soon-to-be-licensed), certified, accredited, or specially trained individual to open their own practice. While doctors and attorneys are often the first professions that come to mind, practitioners in other fields, including dentists, accountants, architects, business consultants, marketing firms, mental health providers, and more, can also apply for financing.
In many ways, these loans are similar to other business loans. Lenders typically only approve creditworthy applicants and often require collateral. However, applicants may need to provide additional documentation, including proof of their professional license, to qualify, and the approval rates can be much lower than for other lenders.
If you qualify for a practice loan, you can use the money to acquire or grow your business. Some of the most common uses include:
- Commercial real estate acquisition
- Startup costs
- Equipment purchases
- Refinancing existing debt
- Working capital
- Payroll
- Business expansion
- Marketing and advertising
The funds from professional practice loans, including those backed by the SBA, can also be used to acquire an existing business. For example, if you are a partner or employee of a practice, you may be able to access a loan to buy out the current owner’s stake in the business.
The basics of SBA loan programs
The Small Business Administration does not make loans itself but rather sets lending parameters, backs loans from other lenders, and helps entrepreneurs access the money they need. Providing this government-backed support reduces risk for the lenders, ostensibly making it easier for small businesses to access money.
The SBA 7(a) loan program is the organization’s largest and the most likely source for professional practice funding. Qualified applicants can borrow up to $5 million through the 7(a) program, with a repayment term of up to 25 years. Interest rates vary by how much you borrow and whether you select a fixed or variable rate; currently, the maximum rate is capped at the base or prime rate plus 6.5%.
The Pros and Cons of Getting an SBA Loan
For many professional practices, an SBA loan is the ideal way to access the money they need to get off the ground. For others, seeking funding from other sources may be a better solution.
One of the greatest benefits of an SBA 7(a) loan is that while lenders must adhere to strict eligibility requirements, government backing allows them some leeway in extending offers to applicants with lower credit scores. In fact, a 7(a) loan is a last resort, only for businesses that cannot access financing with reasonable terms from any other source.
Getting a 7(a) loan for your professional practice could be more affordable than other options over the life of the loan. In addition to offering competitive rates, some SBA lenders ask for lower down payments and less collateral than others. The flexible overhead requirements and repayment terms (including no penalty for pre-payment on some loans) can save money over time.
Some SBA loans also provide business owners with additional support and education to help them effectively manage and grow their practices. The counseling experienced advisors offer can be invaluable to individuals learning how to balance their professional practice with the financial, marketing, and management aspects of running a business.
On the downside, SBA loans are not ideal for entrepreneurs who need a quick infusion of cash to get their companies off the ground or cover an unexpected expense. The approval process takes time and it can take months to process an application. Applicants must provide a lot of paperwork and documentation; some businesses may not qualify for funding at all.
Do you qualify for an SBA loan?
If other lenders have turned you down, or the terms on alternative financing options are unreasonable, you may be able to access money through an SBA-backed lender. The first step is to use the SBA’s Lender Match tool online. You’ll answer some questions about your business and needs, and the SBA will connect you with lenders who are willing to work with you.
Your professional practice loan approval hinges on whether you meet the qualifying criteria. At a minimum, these include:
- Owning and operating an existing for-profit business in the United States
- Meeting the SBA definition of small business
- Not operating an ineligible type of business
- Creditworthiness; the average minimum credit score is 640, but applicants with at least 680 tend to be more successful
- Ability to repay the loan, provide collateral, and make the downpayment
- Clean personal and business credit histories free of bankruptcies, foreclosures, and liens
- Demonstrated professional education and/or experience (i.e., a license to practice)
- Good character, based on your day-to-day business dealings and financial track record
Many lenders prefer to extend loans to borrowers who have been in business for at least two years and demonstrate a steady income. However, new graduates can qualify for SBA 7(a) loans to start their practices.
What about student loan debt
If you’re seeking money to start a professional practice, you may be concerned about your student loan debt’s impact on your creditworthiness and chance of approval. After all, the average law school graduate finishes their degree with $131,000 of debt; the American Dental Education Association says that new dental grads’ average debt is close to $300,000.
Although your student loan debt can impact your prospects when getting an SBA loan, carrying a large loan balance doesn’t mean you’re out of luck. Lenders want to see that you’re repaying the loan and not in default. If you keep up with the payments, you’ll protect your credit score and have a better chance of getting approved for a loan.
Understanding the risks of a personal guarantee and why you might seek alternatives
From a borrower’s standpoint, the only reason to agree to a business loan that requires a personal guarantee is to secure funding. In many cases, the only way the lender will agree to issue the loan is if the borrower agrees to these terms. They solely protect the lender, reducing their risk of loss if you fail to repay your debt.
As the borrower, your risks are much higher when you agree to a personal guarantee. If you default and the lender has to enforce the contract, the results can devastate your business and personal finances. Consequences can include:
- Being forced to sell assets like your home or vehicle
- Wage garnishments
- Significant reduction in your credit score
- Inability to get future loans, including personal loans and mortgages
- Additional costs for attorneys and court fees
- Bankruptcy
Of course, if you repay the loan as agreed, you won’t risk default and these consequences. Still, if you are dead-set against securing financing with a personal guarantee, you can pursue alternative financing options.
Securing a business loan without a personal guarantee
Although most lenders require borrowers to sign a personal guarantee if they own at least 20% of the business, and doing so can mean a lower interest rate and more attractive terms, you can pursue less-risky alternatives.
Establish a corporation or limited liability company
If you operate your business as a sole proprietor, you’re out of luck when securing loans without a personal guarantee. Unless your business is a corporation or registered as an LLC, financial institutions consider all debt personal debt.
Therefore, to get a business loan without a personal guarantee, you must incorporate your company or set up an LLC and establish a financial history as that entity. All the business’s legal and financial documents and accounts must be in that name so you can demonstrate to a lender that it is stable and you can repay the debt.
Consider putting up business collateral
One of the most common methods of seeking business funding without a personal guarantee is to take out a secured loan, which requires collateral. For example, if you purchase equipment for your business, like a vehicle, that equipment can serve as collateral that the lender can seize if you default. In other cases, you may be able to negotiate loan terms that replace a personal guarantee with a portion of your business profits or other assets.
Demonstrate business stability and good credit
Getting an unsecured (i.e., no collateral) loan without a personal guarantee is possible. Doing so requires strategically building your business from the ground up with an eye toward stability and establishing exceptional credit. The better your company’s financial position, the more likely lenders and alternative financing providers will be willing to extend a loan with your business as the sole guarantor.
A solid credit rating
When you apply for a loan as a business, the lender will likely look at your business credit rating to determine whether you qualify for funding and how much, the interest rate, and the loan terms.
Lenders could pull a business credit report from an agency like Dun & Bradstreet to get a picture of your company’s payment history to existing creditors. The faster it pays debts, the higher the score, also known as the PAYDEX score.
Understanding your PAYDEX score can affect your overall credit status. PAYDEX scores are weighted averages, meaning that they consider the value of your debts. Paying high-value invoices or bills first will increase your PAYDEX score and put it into a range where you can seek a loan without a personal guarantee.
Positive payment history
A well-established track record of managing your debt, even with lenders that don’t require a PAYDEX score or credit history, can also help you get a business loan without a personal guarantee. Establish trade lines of credit with suppliers and make on-time payments to bolster your company’s overall creditworthiness and show lenders that your company is on solid financial footing.
The bottom line? When you want to avoid the requirement of a personal guarantee, you must create a business entirely separate from yourself. Hence, the ability to get money comes from its performance, not your personal credit and assets.
Evaluate other financing options
Traditional business loans may not be the best choice in every situation. Other financing options don’t always require a personal guarantee, like:
- Unsecured Term Loans
- Merchant cash advances, which provide a lump-sum payment based on your business’s daily sales
- Revenue-based loans
- Business lines of credit
- Business credit cards
- Crowdfunding
- Peer-to-peer lending
Credit lines and interest rates vary, but these may be viable alternatives to a traditional loan.
Get help exploring your options with Finance Factory
For almost 20 years, Finance Factory has been a reliable source of funding for startups and small businesses, connecting them with alternative financing options that allow them to bring their business dreams to life.
If you’re encountering roadblocks with traditional business lenders, get in touch with us today or fill out our quick, no-obligation pre-qualification form to learn how we can help you. There’s no impact on your credit, and you’ll see in just minutes how we can help you grow your company and put it on solid financial ground to meet—and exceed— even your loftiest goals.
