Small Business Administration Loans
Access to capital is one of the most important factors for the success of any small business. Yet, many small businesses struggle to obtain the financing they need to grow and expand due to limited borrowing options.
This is where the Small Business Administration (SBA) comes in. The SBA is a government agency that provides financial assistance to small businesses through loan programs. SBA loans are backed by the federal government, which makes them more attractive to lenders and gives small businesses access to capital that they may not otherwise have.
One of the most prominent forms of support the SBA offers the businesses is through its loan programs. Here, we delve deep into SBA loans: What are they; what are their advantages; who can help you get them, and what makes you eligible for them.
What Is An SBA Loan?
An SBA loan is a federally backed loan offered by participating lenders. The SBA simply reduces the risk of lending for its participating lenders by guaranteeing that a portion of the loan will definitely be paid back.
While lenders may not be interested in lending to a small business on its own merits, they become much more amenable to lending at favorable terms when a major portion of the loan is backed by the government.
Thus, an SBA loan makes capital more accessible for small businesses in circumstances where they typically could not get a loan from a private institution on their own. And the SBA loan they get is typically at lower interest rates with a long-term payment plan.
Who Is Eligible For SBA Loans?
There are some general conditions you must meet to be eligible for any type of SBA loan, which are:
- the business must be operating for profit
- it must be operating in, or planning to operate in, the United States
- it has used all other financial alternatives, including personal assets, before asking for an SBA loan
- the business has reasonable owner equity for investment
How Do SBA Loans Work?
As attractive as SBA loans can look, it is important to know the process of applying for an SBA loan:
- Contact an SBA-approved lender: First and foremost, you need to connect with an SBA-approved lender, either directly or via a broker. It is important to know that not all SBA-approved lenders will have the same conditions for lending. This means that you might need to connect with a few SBA-approved lenders before you find one willing to lend in your given circumstances.
- Find the right option for you: Once you have found the right lender for your business, they will be able to walk you through all the various options available before guiding you to the one best suited to your needs.
- Submit documentation: There is an extensive amount of documentation required for getting an SBA loan approved. Information such as your credit score, personal and business financial statements, business plans, tax returns, completed loan application paperwork, and so much more will need to be provided.
- Assessment: The lender will then assess across a number of categories whether or not you are eligible for the loan amount requested. This can take up to a few weeks.
- Approval and loan closing: If the lender finds everything to be in order, he will approve your loan and then you will begin your loan closing process. This step will also involve a lot of paperwork and signing, but at the end of it you come out with an approved SBA loan.
Popular Types Of SBA Loans
While there are several types SBA loans available, we take a look at two of the most popular types of SBA loans:
SBA 7(a) Loans
The most common type of SBA loan available is the 7(a) loan.
This is a loan offered to eligible small businesses (with the amount being anywhere between $30,000 and $5 million) to be used for numerous purposes such as for contributing to the startup cost, for helping expand, purchase new equipment, refinance loan, and the like.
Typically, repayment for most loans is expected within 10 years. This compares to real estate loan repayment terms that can be up to 30 years. 7(a) loans can have interest rates anywhere between 5% -10%.
To be eligible for 7(a) loans, you must be registered as a for-profit business, must have had a net income of less than $5 million for the past two years, and have a net worth of less than $15 million.
SBA 504 Loans
SBA 504 is the other popular SBA loan type. It can be availed by small businesses that need a long-term loan to buy fixed assets such as heavy equipment, property, buildings, etc.
Eligible businesses can hope to get up to $5 million for financing their fixed asset acquisition. However, business owners will typically be expected to guarantee 20% of the loan.
The 504 Loan program offers payment terms of 10 years, 20 years, and 25 years, thus offering considerable flexibility to borrowers, helping with their cash flow.
To be eligible for this loan type, a business cannot be worth more than $15 million, must have had a net income of $5 million or less after tax for the previous two years, and cannot be nonprofit or engaged in speculative activities for business.
Advantages of SBA Loans
SBA loans offer several advantages. We take a look at some of the biggest advantages of SBA loans:
- Lower interest rates: SBA has capped its maximum interest rate on loans over $50,000 at WSJ Prime plus 2.75%. As of the beginning of 2022, the WSJ Prime was set at 3.25%. Add the 2.75% to it and you get 6%, which is significantly lower than what standard bank loans offer small businesses, particularly if they are struggling financially.
- Flexible payment options: The SBA loan program allows for flexibility in payment. This is especially true for disaster-relief loans. Also, in economically difficult times, companies can defer their SBA loan repayments, refinance their loan, or even schedule interest-only payments.
- Longer terms: SBA lenders can offer longer payment terms compared to what is traditionally offered. For example, an SBA lender can offer 25 years for a real estate loan whereas, traditionally, payment terms are for 5 to 10 years with a balloon payment at the end. Longer term can be beneficial for a small business because payments could be smaller and you have a lot more time to pay back what you borrowed, thereby keeping the financial pressure to a minimum.
- Easier conditions for qualification: First and foremost, the required credit rating to qualify is much lower for an SBA loan as opposed to a standard bank loan. This means that even if due to financial hardship, you don’t have a very good credit rating at the moment, you are still likely to get an SBA loan. Additionally, with federal backing, the individual lender’s conditions for lending to you as a business become much more amenable and favorable while if you approached the same lender on your own for a loan, you might find conditions for eligibility a lot more stringent and tough to fulfill.
Who Can Help You Secure An SBA Loan
If you believe that an SBA loan is the right option for you and want to get started with the process but don’t know how, then reach out to the Mountain Valley Consulting Group.
Mountain Valley Consulting Group is dedicated to helping small businesses secure the funding they need to grow and thrive. If you are considering an SBA loan, our team can guide you through the process and ensure that you get the best possible terms. We will work with you to assess your needs and evaluate your options, so that you can make an informed decision about which type of loan is right for your business. We understand that each business is unique, and we will tailor our approach to meet your specific needs.
Contact us today to learn more about how we can help you secure the financing you need to reach your goals.