What Every Attorney Should Know About SBA Loans

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By: The NBI Team

Tuesday, July 28, 2020

What Every Attorney Should Know About SBA Loans

Small and medium-sized businesses are frequently in need of capital; law firms are no exception. Unlike some businesses, lawyers notoriously run into cash flow issues. This is especially true for firms reliant on sporadic, large settlements. To bridge the gap during dry spells, or to help sustain momentum early on in a firm’s history, many businesses rely on small business loans. Understanding the process of obtaining a small business loan is useful for attorneys seeking capital for their own firm or advising a client of the same.

Obtaining funding might not be challenging for established companies, but the same is not always true for new businesses. Banks typically have strict requirements that must be met before they will enter into a small business loan agreement. This leaves many without funding options. Thankfully, the Small Business Administration (SBA) can offer relief in some cases. Like with any loan, there are benefits and drawbacks to using an SBA-backed loan. Consider these factors before discussing an SBA loan as an option for a client.

Understanding SBA Loans

While commonly referred to as SBA loans, it is worth noting that the SBA does not lend money. These loans are backed by the federal government, but a business owner will need to find a bank to work with before securing the loan. Using what is formally known as the 7(a) Loan Guarantee Program, the SBA can help small companies just getting started or intending to expand their practice by backing the loan provided by a commercial lender. These loans come in varying amounts but are legally capped at $5 million.

Under an SBA loan, the lender will fund 100 percent of the money paid out. However, the SBA will guarantee repayment of specific portions of the loan should the company default. This option is available in cases in which a bank is interested in working with a business even though they do not meet their typical standard for funding.

Like with any government program, there are limitations on the availability of SBA loans. The loans are only for small, for-profit ventures. When it comes to professional services like the practice of law, a business is small if it has less than $6.5 million in annual revenue. In other words, the vast majority of law firms throughout the country meet those criteria. The annual revenue cap is different in other industries. There are other requirements as well, including a reasonable amount of owner equity.

To fully grasp the requirements of an SBA loan, consider investigating the NBI course on SBA Loan Essentials. In this course, SBA Area Manager Sharon Harvey provides a thorough overview of eligibility, lending limits, and guarantee amounts under a variety of SBA loan programs.

How an SBA Loan Could Impact a Growing Business

The manner in which SBA loans could benefit a new business is limitless. There are different types of loans, each with different funding goals in mind. Some companies use these loans to fund office construction or real estate purchases. Others purchase new furniture or project management software. Frequently, these loans cover the cost of opening a new business or location. Startups require capital, which can be difficult to obtain with a traditional loan. For some, an SBA loan is their best option.

There are other important considerations to make when taking out an SBA loan. Like any loan, the basic factors like the maturity date and interest rate are important. There is no set maturity length for SBA loans, but the interest rates can vary with the amount of principal borrowed and the maturity date of the loan.

Arguably the most important factor to consider when taking out an SBA loan is the mandatory personal guarantee. To increase the odds the loan is repaid, the SBA requires some individuals to personally and unconditionally guarantee repayment. For law firms, this requirement applies to any partner that owes 20 percent or more of the borrowing entity. This means the key partners of the firm will be on the hook to repay the loan should the firm default. This requirement is more than just a promise to repay – it generally requires a pledge of valuable collateral like real estate.

Consequences and Other Considerations for SBA Loans

Defaulting on any loan can have steep consequences for a growing company. While an SBA loan might provide an owner with the capital they need to get their firm off the ground, it can also lead to serious personal consequences upon default. When these loans work, it can provide a valuable way to build a relationship with a lender that could pay off in the future.

SBA loans are only one option for getting a new business off the ground. To learn more about advising clients on capital funding or growing a firm, see what the NBI Course Catalog has to offer.

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This blog post is for general informative purposes only and should not be construed as legal advice or a solicitation to provide legal services. You should consult with an attorney before you rely on this information. While we attempted to ensure accuracy, completeness and timeliness, we assume no responsibility for this post’s accuracy, completeness or timeliness.

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