SBA loans for small businesses have been increasingly popular over the years since they provide them with the needed funding. In this article, we will break down what is an SBA loan and what are the needed requirements for you to take one out.
The Small Business Administration (SBA) offers loans to businesses of all sizes. These loans can be used for a variety of purposes, such as purchasing equipment, acquiring a new business, or expanding an existing one. In order to qualify for an SBA loan, you must be a U.S. citizen or resident, have a valid business license, and have sufficient financial resources to repay the loan.
What Exactly Are SBA Loans?
SBA loans are federally-backed loans made to small businesses. The goal of these loans is to help businesses expand and grow by providing them with the capital they need to start or grow their business.
It’s important to know that SBA doesn’t directly issue you the loan. Instead, they are issued through SBA-approved lenders. The good thing about this loan is that in the case you default on the loan, they are repaying back up to 85% of the debt back to the lender.
How Do SBA Loans Work?
The Small Business Administration (SBA) is a government agency that provides loans, grants, and other financial assistance to small businesses. When it comes to applying for an SBA loan, it’s a very long process that requires a lot of paperwork from your side. SBA loan application will require you to provide your bank statement not older than three months, your credit score history, and as well the plan of how much you need to borrow and for what.
Different Types of SBA Loans
SBA, on its sleeve, has an array of different loan types available. So before choosing the right one for you, it’s good to familiarize yourself with them. Here is the list of them:
- 7 (a) SBA loans – This loan is their main program when it comes to lending money to businesses. You can borrow up 5$ million with this loan.
- 504/CDC SBA loans – Through this loan, you can get long-term, fixed-rate financing that SBA partner Certified Development Companies provide, hence the acronym CDC.
- Microloans – Meant for businesses that are looking to borrow smaller amounts, they offer up 50,000$.
- Disaster loans – This type of loan has four subgroups of loans to itself. Business physical disaster loans, Mitigation assistance loans, Economic Injury disaster loans ( for this type of loan, you can ask for forgiveness in case you are unable to repay it back), and Military reservists’ economic injury disaster loans.
SBA Loans: Pros and Cons
SBA loans offer a variety of benefits and drawbacks, so it’s important to weigh the pros and cons before deciding if borrowing from an SBA is the right option for you. Here are some key points to consider:
Pros of SBA loans:
- Flexible terms
- Lower interest rates
- They provide training for new business owners.
- Available for all businesses
Cons of SBA loans:
- Large down payment
- Might require collateral
- If you have bad credit, you aren’t able to qualify
- The business owner personally guarantees the loan
SBA loans are backed by the government, which makes them a reliable option for businesses in need of financing. On top of that, they tend to have lower interest rates in comparison to traditional loans and as well, have much more flexible terms. You are able to get this type of loan whether you have a big or small business.
As much as they are attractive to get and have some very good pros, you shouldn’t overlook the cons. You, as a business owner, personally guarantee the loan, which means if you default on it, you are the responsible person to repay it back, and your credit score will suffer drastically. On top of that, in order to secure the loan, you will have to provide collateral which you can lose if you halt the loan.
How to Apply for SBA Loans and What Are the Requirements?
To qualify for an SBA loan, you must first submit an application. The application process is straightforward and can be completed online or through your local SBA office. Once you have submitted your application, the SBA will review it and determine whether you are eligible for a loan. If you are eligible for a loan, the SBA will send you a loan offer letter. You will then have the opportunity to accept or decline the offer. If you accept the offer, the SBA will begin processing the loan paperwork.
With that said, here are the needed requirements for an SBA loan:
- Be in SBA acceptable industry
- Owner supported and funded
- You met the SBA size standards
- Acceptable personal and business credit
- You exhausted other funding options
- You must be USA based business
Alternatives to SBA Loans
If you’re looking for an alternative to a traditional SBA loan, there are a few different options available to you. Here are some alternatives:
- Direct loan program – Offer from the U.S. Department of Education. This program provides loans directly to small businesses and has a variety of features that make it an attractive option for entrepreneurs.
- Private sector loan guarantee program – This program provides insurance for small businesses against defaulting the loan. This program is available in both the United States and Canada and can be a good option if you need more flexibility in terms of repayment terms or interest rates.
- Term loans – More of a traditional form of lending money, where the lump sum is deposited and repaid over a fixed term. If you are looking to take out this type of loan, online lenders are more customizable.
- A business line of credit – Available both from traditional and online lenders. They operate on the same principle as the business card, but they tend to have higher limits and lower interest rates. They sometimes may require collateral.
- Business credit cards – Typically used by businesses to cover day-to-day expenses. On top of being easier to qualify for than traditional forms of financing, they as well provide cash back and other reward points. Using them regularly for your business can improve your credit score, which can make it easier to qualify for a loan in the future.
- Merchant cash advances – This type of loan is available both from alternative and online lenders. They are similar to short-term loans, but they are not technically counted as a loan. They are presented as a purchase of future receivables.
- Equipment loans – Specially designed loans for businesses looking to finance the purchase of inventory or new equipment. The assets you are looking to purchase are put as collateral, so they tend to be easier to qualify for.
- Invoice factoring – This is not a loan. They are a form of account receivable financing. That means that a business sends its invoices to factors, who then give them money, which they later collect from the clients of that business and send them the rest of the leftover money minus the little fee.
SBA loans are a great thing for businesses of all sizes to get the needed funding. They have an array of different types you can choose from, so do the proper research to find the most suitable one for your business.
Here we broke them down, so you can get more information and learn what types they offer. Our advice is to always do the needed diligence and research before signing your name on the dotted line. Also, consult with a financial advisor before making a decision.