Is Your SBA Loan Really "Using Someone Else's Money"?

by Eric Schechterman

There is an increase in the number of people looking to become business owners, and funding the business is key to a successful launch. In today’s environment, one of the most sought funding sources is an SBA loan. But do borrowers fully understand what is involved with an SBA loan?

Candidates often mention their preference for an SBA loan because they believe they are “using someone else’s money” to fund their business. Actually, this isn’t true. If someone gifted money for a business, with no strings attached – that’s using someone else’s money.

With an SBA loan, you are being given funds to use for a business – and usually with more favorable terms than if you were to borrow directly from the bank or tap into a line of credit. But it is a loan, and with a loan there is a repayment schedule and interest, much like with a home or automobile purchase.

As an example, an SBA loan for $150,000 will cost the borrower more than $200,000 over the term of the loan in principal and interest (using a current estimated interest rate). Plus, if the business goes under – even if you declare bankruptcy — an SBA loan must still be repaid. It’s a government loan, and the government will get their money.

So how is that using someone else’s money?

Not only that, but the terms of the loan are dependent on other factors like liquid assets, collateral, and a good credit score.

On the other hand, there is a funding option that doesn’t require loan repayments, a great credit score adequate liquid reserves or collateral. And it’s not dependent on someone else’s money. Known as a ROBS (Rollover as Business Startups) strategy, this option allows you to fund your business with your own retirement funds – without upfront taxes or early withdrawal penalties.

Although the goal is to run a successful venture, there is always the possibility of the business going under, regardless of what funding is used. Because a ROBS isn’t a loan, but rather an investment, the loss is written off as a bad business investment.

About Eric Schechterman:

Eric Schechterman is the chief development officer at Benetrends, the International Franchise Association’s (IFA) preferred vendor for ROBS rollover financing and a trusted leader in franchise and small business funding for over 40 years. He can be reached at eschechterman@ benetrends.com.