The Small Business Administration (SBA) offers many resources for small business owners, including SBA loans. If you are trying to grow your business, an SBA loan may be an option to help you do just that. SBA loans can be used for all sorts of purposes and can help your business in a variety of ways.
Read on to learn more about how to finance your business needs with SBA loans.
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What Is an SBA Loan?
The Small Business Administration acts as a guarantor of SBA loans, but they do not lend money directly. Banks and other lenders fund the SBA loans, and the SBA guarantees that if you default on the loan, the lender will be paid back at least part of the money loaned.
The SBA will determine the amount of the loan and guarantee a certain interest rate which is typically lower than traditional bank loans. Because of the SBA guarantee, loan approval is easier than other types of financing.
You still have to provide extensive financial information about your business when you apply for an SBA loan.
Common Types of SBA Loans
The SBA has several different loan programs that serve different purposes.
7(a) Loans
7(a) loans are a popular type of SBA loan. The maximum loan amount is $5 million, and the interest rate is based on the amount borrowed. You can use the funds for a variety of things, including working capital, expansion, growth strategies, and more. Loan terms can be up to 10 years if used for working capital and up to 25 years for the purchase of fixed assets.
Also offered is a 7(a) small loan which is basically the same as the 7(a) loan, but caps at $350,000.
SBA Express Loans
SBA Express Loans also have a cap of $350,000 and have low-interest rates that vary based on the loan amount. The key difference is that these loans can be offered as a revolving line of credit or a term loan.
504 Loans
504 loans are used to purchase property and other fixed assets. The maximum loan amount ranges between $5 million and $5.5 million, depending on what’s being financed and the business size. Interest rates vary and are usually fixed.
The loans are usually structured with the SBA providing 40% of the total costs, a lender covering up to 50%, and the business owner funding 10%. To qualify, a business must have a net worth of less than $15 million and an average income (net) of $5 million or less after federal income taxes for two years before the application is submitted.
Microloans
Microloans can be up to $50,000, although the average loan amount is $13,000. Usually, some kind of collateral is required, and you will also need to personally guarantee the loan. Meaning that you are personally responsible for paying back the loan.
Microloan funds can be used for inventory, working capital, furniture, or equipment. They cannot be used to pay off existing debts or to purchase real estate.
The term of a microloan depends on several factors, but the maximum is six years. Interest rates are generally favorable compared to bank loans.
Disaster loans
The SBA offers these loans to businesses that have been impacted by a declared disaster. These loans can be used to replace or repair real estate, property, machinery, equipment, inventory, and other business assets.
Benefits of SBA Loans
SBA loans offer many benefits that can make them more attractive than traditional bank loans.
- Interest rates are generally lower because the SBA caps the interest rate that the lender can charge.
- SBA loans are easier to qualify for when compared with business loans. Credit score requirements are lower than those of bank loans.
- SBA loans typically have longer terms, even up to 25 years for the purchase of fixed assets. This keeps your payments lower so that you have more cash flow.
Applying for an SBA Loan
Most major banks and even smaller banks offer SBA loans. It’s generally best to apply at the bank where you already do business. You’ll have to fill out an application, provide extensive financial information about your business, and most likely provide a business plan. Sometimes application fees are charged.
There’s always an option to go to the small business development center in your area as well. They can assist you with the application process and gathering all the required information. They can also provide you with other resources to help with your business.
The SBA also provides an online tool called Lender Match that matches you with SBA-approved lenders.
Final Verdict
For many businesses, SBA loans are a great option and offer a host of benefits. The funds you will get from this loan can be used for a variety of purposes, whether you need working capital, funding for a strategic growth plan, funds for business expansion, or financing for the purchase of property or assets.
If you’re unsure whether an SBA loan is right for you, consult with your financial advisor or your accountant. They can help you choose the funding option that’s right for you.
