What is An SBA Loan?
Small Business Administration (SBA) loans are small-business credits guaranteed by the US federal government agency (SBA) and issued by various approved lenders, such as banks and microfinance institutions.
SBA mitigates the lenders’ risks by guaranteeing up to 80% of the loan amount. Through SBA loans, you can get money to buy equipment, pay bills, and refinance other debts.
Understanding SBA Loans
If you don’t have adequate cash to open a new business location, pay employees, and buy inventories, an SBA loan is the best option for you. The Small Business Administration is a federal agency in the US dedicated to assisting enterprises to enhance their business operations and get access to small business loans.
SBA Loan Types
The most common SBA loan types include SBA Express Loans, SBA 7 (A) Loans, SBA 504 financing, SBA Microloans, and Disaster loans. The following is a brief highlight of the SBA loan types.
SBA Express Loans
SBA Express Loan is a product meant to be serviced on a long-term basis, and it is ideal for your working capital requirements. To qualify for this loan, you must be a US citizen or a green card holder with a business that is more than 18 years old.
With SBA Express Loan, you can get up to $350,000. It is crucial to note that a loan up to $100,000 doesn’t require any proof of income. However, loans above $ 100,000 require two years of business record and personal tax returns.
The interest rate on this loan varies quarterly, and it ranges from prime plus 1 to prime plus 4. Usually, the repayment period is between 3-5 years, but there is an option to extend it to 7 years.
SBA 7 (A) Loans
SBA 7 (A) Loans are ideal for your working capital needs, business expansion, and equipment purchase. Those eligible for this facility are the US citizens or green card holders. SBA 7 (A) Loans are suitable for financing long term and short term assets used in enterprise activities.
The Loan amount granted is up to $5 million, and to get it, you are supposed to provide three years business tax returns and two years personal tax returns. The interest rates for this facility vary between 1-2%. Although SBA doesn’t lend to small businesses, it regulates the price charged by the lenders. For instance, for a seven years loan term, SBA permits lenders to charge up to 2.75% above the prime rate.
SBA 504 Financing
SBA 504 financing is a long term credit facility offered on a fixed rate. For a small business to qualify for this product, it must own at least 51% of the real estate asset and meet all the federal business requirements. This product is ideal for funding long term assets, such as equipment or houses.
The loan amount offered is up to $5 million, and the interest rate you pay for the first mortgage can be either fixed or variable. However, for the second mortgage, you are supposed to pay fixed rates only.
It is vital to note that the fixed rates are around prime minus 1. You ought to bear in mind that you can pay the first mortgage loan for up to 25 years and the second one for a maximum of 20 years.
Microloans are offered to cater for working capital, inventory, equipment, and business startup. The loan amount granted is up to $50,000, and it is processed through nonprofit organizations within the community.
It is crucial to note SBA does not secure microloans, and they can be useful to small businesses that are unable to obtain the small loan amount from the traditional banks. The Microloans are repayable between 1-6 years.
SBA Disaster Loan
SBA Disaster Loan is a credit facility meant to help small business owners affected by natural calamities, such as Coronavirus. The loan amount offered is up to $2 million, and it is disbursed through SBA.
What You Need to Know About Interest Rates on SBA Loans
All the approved lenders adhere to the SBA rules by charging interest rates based on the prime and a markup rate. It is crucial to note that the higher the loan amount you apply for, the lower the interest rate you pay.
It is essential to bear in mind that the approved lenders also charge an annual percentage rate (APR) on various loan products. The APR is a rate that incorporates all the loan charges together with the interest rate. For instance, lender X charges a 7% interest rate on SBA 7 (a) loan and an APR of 10% on the same facility.
Unlike traditional bank loans, SBA loans are payable on a more extended period, making them convenient to small entrepreneurs. Paying your SBA loan on a long term basis implies that you are servicing it at a lower interest rate and lower installment.
Insights about SBA Loan Guarantee
It is critical to note that although SBA doesn’t give loans directly to the small businesses, it guarantees up to 80% of the loan amount they get from the approved lenders. Therefore, this implies that SBA will pay for the guaranteed amount in case of default.
Through SBA loan guarantee, lenders are comfortable to advance money on a long term basis; hence lowering the borrowers’ monthly installments. Also, note that SBA guarantee makes it possible for risky businesses to get loans from lenders.
Who Qualifies for SBA Loan?
All businesses are eligible for SBA loans as long as they have a good credit score. Before you apply for an SBA loan, bear in mind that it requires a lot of documentation, and it takes time for the facility to be approved. If you want to grow your business, don’t hesitate to go for an SBA loan.
The following are some of the minimum qualifications you need to hold to be eligible for this facility.
A credit score of at least 620
You must have at least two years of work experience in running your business. However, startups can qualify for the microloans without this requirement.
You must have at least $100,000 annual revenue
You must be doing business in the US
How to Apply for an SBA Loan
SBA loan application encompasses a length process, and, therefore, you have to be patient as you pursue it. Note that before lenders decide whether to give you the loan, they have to review your credit history and your financial records.
If you want to enhance your chances of getting an SBA loan, it is crucial to have your collateral ready because it is one of the requirements for some loan types. Also, note that another qualification for this loan is your business performance.
Moreover, some documents, such as business plans are vital when applying for an SBA loan. Be prepared to fill in a detailed loan form with particulars regarding collateral, business, and an explanation on how you will use the credit.
In brief, the following is a list of some of the documents you require to apply for an SBA loan.
Personal tax returns
Business tax returns
Profit and loss statements
Statement regarding your personal history
How to Select the Right Bank
If you are applying for an SBA loan for the first time, it is vital to work with an experienced lender. Dealing with a seasoned financier is the best way of getting professional advisory services regarding the loan. Therefore, before you pick the lender, find out its history regarding the number of SBA loans they have processed and their frequency of funding SBA loans.
SBA Loan Online
Although traditional banks are commonly known to grant SBA loans, online financiers have made the application process convenient. If you want to qualify for the online loan, your personal and business financial records must be solid to convince online lenders to give you the money.
Acceptable Uses of SBA Loans
Applying for an SBA loan cannot be complete without specifying the purpose for the credit. The following is a list of the acceptable uses of these loans.
- The purchase of furniture, equipment, inventories, and any other asset.
- To invest in real estates, such as land and houses
For the construction of a new building or renovation of an old one
- To revamp your business or expand to a new location
- To refinance the current business debt
Non-Acceptable Uses of SBA Loans
Also, it is vital to be aware that SBA loans cannot be used for purposes contrary to SBA policies. The following is a list of non-acceptable uses of SBA loans.
- To refinance an existing non-performing loan
- To undertake changes in your business that are not beneficial to your enterprise
- To repay delinquent funds federal funds that should be held in trust
- Any purpose not allowed by SBA policies
Advantages of SBA Loans
SBA loan are granted to small business people to help them with working capital, investment, bills payments, and refinancing of existing debt. The following is a highlight of the pros of SBA loans.
Favorable repayment terms
Most of the SBA loans have long repayment periods; hence their monthly installments are lower and affordable.
Source of capital
As a small entrepreneur, banks consider you to be a risky customer; therefore, they hesitate to lend you money.
However, with SBA loans, you can quickly get funded for your working capital and other business needs.
It is vital to note that low-interest rates characterize SBA loans. Also, it is essential to bear in mind that the interest rate charged is based on your creditworthiness and other qualifications.
Also, SBA regulates the rate of interest charged by the lenders; therefore, small businesses are protected against the undue hike of the price.
Adequate project financing
Through the SBA loans, your project cost can be financed up to 90% of its value.
Lower down payments
Unlike other loans, getting an SBA loan requires a manageable down payment.
Flexibility of use of funds
Some credits have strict conditions on how to spend the funds. However, with SBA loans, such as SBA 7(a), you can use the loan for anything you wish.
For instance, you can use it to buy inventories, pay salaries, or refinance existing debt.
By using SBA loans, you can access essential resources, such as education. SBA runs many training programs like financial literacy that can benefit you a lot. It is vital to note that even if you don’t qualify for an SBA loan, you are still eligible for SBA resources.
Disadvantages of SBA Loans
The following are the downsides of SBA loans.
Complicated application process
The application process is tedious, and it entails a lot of documentation.
Some of the SBA loans, such as SBA 504 financing need collateral which might be a challenge to small entrepreneurs.
Lack of consistency with banks
Getting the right bank to approve your loan is not easy. Also, note that banks have a lot of inconsistencies on the way they operate. For instance, one bank may decline your application while another one can accept it.
Therefore, with an SBA loan, it is advisable to try multiple lenders in case your application is disapproved by the first one.
Long approval process
The SBA loan approval process is lengthy because it sometimes involves both lenders and SBA. Sometimes, your applications may be rejected.
Conclusion on SBA Loans
SBA loans are credit facilities guaranteed by SBA and offered by approved lenders to help entrepreneurs with working capital and other business requirements. The SBA guarantees up 80% of the loan amount, meaning that the debt will be repaid in case of default.
Through this guarantee, lenders can comfortably advance credit to small entrepreneurs despite their riskiness.