Business owners seeking financing have options from conventional loans to using credit cards. Each option carries pros and cons, making one wonder which is best for their operations.
Have you considered a Small Business Administration loan?
An SBA loan offers a great option due to its flexible terms and low-interest rates. Interested? Keep reading, this is your guide to SBA loans.
A Short but Complete Guide to SBA Loans
Did you know? 29% of all startups fail because they ran out of cash. This isn’t unique to startups either as low capital strike all business types.
Alternative funding methods often carry outrageous requirements. An SBA loan is different as it’s defined and dictated through regulations. An SBA loan is a favorable option for the lender and borrower.
Here is what you’ll want to know if you choose this funding route.
What is an SBA Loan?
The Small Business Administration offers loan programs. These programs connect verified partners with businesses. In effect, the SBA becomes the liaison between the parties, guaranteeing loan repayment.
The government guarantees coverage for 75 – 90% of the loan. In the event of the business defaults, the SBA covers the loan’s value up to $3.75 million.
Lenders partnering with the SBA set loan terms but they adhere to SBA rules to make these loans flexible. The loan terms depend on how it’s used. Operational items tend to fall into a 7-year period. Equipment and mid-level expenses are around 10-years. And, big purchases, like real estate, go up to 25 years.
Do note: The business places a guarantee when taking on an SBA loan — up to 20% ownership.
The Types of SBA Loans
An SBA 7(a) loan, the most common program, gets awarded to qualifying small businesses. These loans may extend up to $5 million but typical loan amounts range from $150,000 to about $500,000. Interest rates vary, too, but range from 7.75% to 10.25% depending on its repayment schedule.
A business can use the money toward:
- Covering capital needs
- Equipment, buildings, and real estate
- New construction and/or renovations
- Development, refinancing, or acquisitions
There are other SBA loan programs including:
- 504/CDC — Major purchases (eg. new buildings)
- Microloan — Very small businesses below typical loan minimums
- Disaster — Repairing/replacing disaster-damaged items
Visit the SBA’s loan programs page for a complete list of loan opportunities.
The SBA Loan Requirements
One can’t expect the government to give out money blindly. The SBA has set guidelines depending on your business type.
The SBA will check the following criteria:
- Number of employees
- Business revenue or net worth
The SBA will also do an extensive background check to ensure you’re of good character. And, request items like a business plan, credit reports, and financial statement.
The SBA provides a handy eligibility checklist covering the requirements.
Applying for an SBA Loan
After acknowledging your eligibility:
- Pick the loan type appropriate for your business
- Find an SBA-approved lender
- Gather, file, and submit paperwork
Wait patiently until you receive the news. Use this downtime to brush up on cashflow management so the loan meets your needs.
Managing Capital at Your Business
Following this guide to SBA loans opens the doors to business funding. Saying “yes” to this funding provides the leg up needed to stay competitive.
You’ll realize new opportunities and growth potential with funding. Don’t squander it chasing overhyped strategies. And, make sure you’re managing the capital accordingly!
Do you need help launching and growing a business? Managing finances? See more of our site and get in touch to talk business!