Conventional Loan or SBA Loan?

When you are ready to expand or update your practice, or start one from the ground up, you’ll most likely need to borrow money. 

TMA’s practice consultants have worked with many physicians to create a financial proforma — a realistic projection of the practice’s start-up costs and finances over a specific period — to take to the bank when applying for a loan. The question arises: Which is better, a conventional bank loan or a Small Business Administration (SBA) loan?

“We typically advise our physician clients to pursue conventional loans first,” said TMA Associate Vice President Heather Bettridge, a practice consultant. “While an SBA loan’s interest rate may look favorable on the surface, there are hidden costs in addition to a down payment.” 

Conventional or SBA, you will be applying for a commercial loan. SBA doesn’t lend money directly to small business owners. Participating banks lend money to qualified applicants under SBA guidelines. So when you apply for an SBA loan, you are actually applying for a commercial loan. The federal government partially guarantees SBA loans and sets interest rate ceilings.  

Here are the drawbacks of an SBA loan, according to Ms. Bettridge: 

Extra work: Because both SBA and the lending institution have to approve the loans, applications involve an extraordinary amount of detailed, time-consuming paperwork.

Extra wait: Because of the above, processing the loan typically takes a long time — often several months before you have cash in hand.

Extra fees: SBA loans are assessed a guarantee fee of zero to 3.5 percent of the guaranteed portion of the loan. SBA can guarantee as much as 85 percent on loans of up to $150,000 and 75 percent on loans of more than $150,000. So, for example, on a $150,000 loan to be paid over 10 years, SBA could guarantee 85 percent, or $127,500, which is subject to a 3-percent guarantee fee of $3,825. The fee amount generally is added to the loan. Some physicians also incur additional legal and documentation fees in submitting the required paperwork. 

“When applying for a loan, you should also factor in lost income due to wait time, in addition to the extra fees,” Ms. Bettridge said. “We find that conventional loans — or lines of credit for short-term working capital — are typically more advantageous for physicians." 

TMA PracticeConsulting works with physician practices of all sizes and types to meet their practice operations needs. Contact TMA Practice Consulting today for more information at (800) 523-8776 or email[at]texmed[dot]org

Published Feb. 28, 2017

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Last Updated On

March 02, 2017

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