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What Type of Loan is Right for your Arizona Business?

Alerus | JUN 02, 2017

AN SBA Loan May Not Be The Only Choice

What Type of Loan is the Best Fit?
Many Phoenix-area business owners find themselves seeking or being offered only one form of financing: a Small Business Administration, or SBA, loan. While an SBA loan will indeed be the right solution for some needs, whether it is the right loan at the right time for your specific needs is not always easy to determine.

Perhaps, then, an even better question to begin with would be, “Did you know there are many different types of commercial loans available?” 

SBA Loans Are Just One Option
Many lenders in the Phoenix area and around the country have a shown a fondness for SBA loans for two main reasons. First, these loans are guaranteed by the government, so there is less risk for the lender. Second, the loans can be packaged and sold on the secondary market, generating fee income for the bank. This second point has made SBA loans popular with undercapitalized banks that lack the ability to maintain the loans on their balance sheets. 

For borrowers, SBA loans are often desirable due to their relatively low down payments, longer terms, and the fair degree of flexibility they offer. These features can provide real benefits to business owners. However, keep in mind that SBA loan proceeds can be used only for business purposes approved the SBA itself. Some of these approved uses include buying real estate, raising working capital, and purchasing equipment. 

As useful as they can be, SBA loans are not the only option when it comes to business financing, though the aggressiveness with which they are marketed by lenders might lead you to believe otherwise. As a business owner who is looking out for the long term best interest of your company, it is likely worth your time to evaluate another possible funding source: the conventional loan.

Conventional Loans vs SBA Loans
Conventional loans may be preferable to SBA loans for many borrowers, due in part to some significant differences in features available: 

  • With an SBA loan, anyone who owns a 20 percent or larger stake in the borrowing business must provide an unlimited personal guarantee. Plus, if anyone providing that personal guarantee owns 50 percent or more of any other companies, then those companies must also guarantee the SBA loan. On the other hand, conventional loans offer much more flexibility when it comes to the guarantee.
  • Conventional loans rates can be based on several different interest rate indexes or internally by a financial institution, while SBA loans are typically priced based on the Prime index plus a spread. 
  • While SBA funding must be used for an approved purpose as mentioned above, conventional loans may be used for virtually any business need, including investment real estate and other passive investments. 

Benefits of Conventional Loans
Depending on the situation, businesses may be able to reap a number of benefits from choosing conventional financing:

  • Because conventional loans are not tied to the government, the financial institution has more freedom to develop a loan package that works best and fits the needs of companies. This may be in relation to the interest rate or term/amortization structure, prepayment penalties, or the guarantee issue mentioned above.
  • Refinancing existing business debt is usually easier using a conventional loan.
  • In certain situations, conventional loan options can cost less than those provided by the SBA. Conventional loan interest rates and origination fees may be lower.
  • Conventional loans can help businesses finance a wider range of needs that fall outside the SBA’s approved list of uses.

We'll Help You Choose the Right Option
Picking the right form of financing at the right time may seem like a daunting task, but it can be made much simpler with the help of a trusted, experienced banking team. At the Scottsdale office of Alerus, you’ll find a strong team of business-focused banking relationship managers who have been with us since we first entered the Phoenix metro area. Our clients value that stability and appreciate the opportunity to get to know everyone on the team.

No matter where you are in the life cycle of your business, we would be happy to meet with you, hear about you, your family and your business, and tell you a little bit about how we can help you achieve your financial goals. Give us a call at 408.905.2400 or stop by our Scottsdale office

This material is provided for general informational purposes and is not a substitute for professional advice. Alerus Financial, N.A., makes no warranties as to the accuracy or completeness of information presented and takes no liability for your use of this information. Alerus Financial, N.A., does not provide legal or tax advice. Please consult your financial, legal or tax advisors regarding your specific business needs before taking any action based upon this information.

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