Now, let’s put you through on how to apply for small business loan. If you are an entrepreneur in the U.S.A., and you are in search of business funding, then you should have come across the term “SBA loan”. The acronym “SBA” is one that every small business owner that is based in the United States of America should know. During this article, we will be taking a dip dive into everything that you need to know about applying for an SBA loan. Without further mouthing, let us delve in.
What defines an SBA Loan?
In very simple terms, an SBA loan, a small business loan that is partially guaranteed by the United States government. It is important for a businessman seeking the SBA loan to know that it is not the financial institutions that do the lending, but the government instead. Traditional banks are still better at giving out small business loans. The reason is that the guarantee that the government gives is only partial.
It is with the partial guarantee that is given by the government that covers 85 percent of the loan amount. It is important for any loaned individual to bear in mind that most traditional banks in the U.S.A. consider lending to be very risky.
Taking an SBA loan involves a small business bringing in a government entity into the application procedure. Also worth noting is that applying for the SBA loan comes with a lot of patience and documentation.
What does the SBA loan have to offer to small businesses?
What the SBA loan has to offer to a business depends largely on what the business is all about, and the lender the business wants to work with. Just like most conventional loans in the U.S.A., the SBA loan comes in various shapes and sizes. A typical SBA loan for a business can range from $500 to $5.5 million and can offer an APR that is as low as 6.5 percent.
It is important to note that the duration it takes to pay back an SBA loan can range from 5 to 25 years. The standard duration for paying back an SBA loan is 10 years.
SBA loan Requirement – Qualifying for Small Business Loan
As stated earlier, it can be very difficult for a business to qualify for an SBA loan. But there are some general minimum requirements that ease the difficult application procedure. If your small business meets the below-elucidated requirements, then it should go on and consider the SBA funding option.
- Have at least a 2-year history with your business
- A credit score that is up to 640+ for the small business owner.
- Have over $100,000 in annual revenue for the business.
If you can meet the above-stated requirements, then it would be easy for you to get an SBA loan. That is not an automatic yes, but at least, the business owner is on the right foot to get an SBA loan.
Advantages of opting For an SBA loan
It is a loan scheme that is specifically designed for small businesses.
The SBA loan scheme is one that is majorly targeted at small businesses. With the objective to assist in the expansion and growth of these companies with a little financial push.
The funds can be used for multiple uses
It is important to note that SBA loans can be used for a lot of expenses. The loans accrued from SBA can be used to expand a start-up, get equipment for your business, get good working capital, and perform inventory or real estate purchases.
The SBA loan is a secured loan
When we say secured, we mean that the SBA agencies have a guarantee of a percentage of the money that is to be loaned out. It is important to note that in a scenario where you don’t pay what you owe, the bank can still go on to seize your assets.
Disadvantages of an SBA loan
Your Personal Credit Scores are needed
To be eligible for SBA loans as well as SBA Express, loans to qualify, you must have a strong personal credit score and excellent business credit. If both scores are not high, then the applicant is not qualified.
Must be in business for 2 years. and
Your company must be at minimum 2 years old to be eligible to receive the SBA loan. This could be a challenge when you’re one of the more than 400,000 new businesses which are launched each calendar year across the United States and need operational capital just to get going.
There are restrictions to some expenses that your business can make with the loan
Certain SBA loan programs come with restrictions on the capital they can use, which means the funds they offer are for specific uses only. If the purpose you want to use it for isn’t covered by SBA limits, it’s not the best type of financing for you. The method you intend to use the funds might affect the loan conditions, so you’ll need to consider this before making an application for the loan.
There are specific Eligibility Requirements
Getting approval for the SBA loan is very much straightforward, but usually, the eligibility requirements can be tiring. The SBA decides on eligibility based on a variety of factors, including how the business is run, the place the company is located, as well as the type of ownership. Find out more information on the requirements for eligibility for SBA loans by visiting the official website of the government.
8 Types of SBA Loans you can Apply for
There are a variety of SBA loans to choose from, so deciding on the best one for your business may be a bit difficult. How do you choose the best loan to suit your specific needs? You’ll need to be aware of the different options before you choose which one is best for you.
In subsequent paragraphs, we will look into the 8 options that are available to choose from regarding SBA loans.
1. SBA 7(a) Loans
The most popular loan offered by the SBA is the 7(a) loan, which provides up to $5 million to small entrepreneurs in the U.S.A.. Companies that qualify can make use of the money to pay for expenses for starting up or purchasing equipment, acquire new land, replace existing assets, grow the existing business, establish an additional business and refinance debt, acquire equipment and inventory, and much more.
To be eligible for this type of SBA loan, business owners have to be able to demonstrate good credit and solid business history. Usually, borrowers are required to provide collateral to secure this kind of funding.
In general, repayment terms should not exceed 10 years for many loans, and 25 years for real estate loans. Interest rates vary between 5 and 10 percent.
2. The SBA 504 Loans
If you are a Small Business, and you are n dire need of loans for long-term needs to purchase fixed assets? Some of which include; building, property, or heavy equipment, you can get some funding with the SBA 504 Loan.
If they’re approved, they’ll be able to be eligible for a total of $5,000,000 in financing. Most of the time, business owners are expected to guarantee up to 20 percent on the loan.
For a U.S.A. business to be able to qualify for funding, businesses cannot be worth more than $15 million and they should have an average net income of $5 million or less.
It is important to note that SBA 504 loans have fixed rates that are attached to them. Here is a breakdown of ways that you can use them;
- The SBA 504 loans can be used to purchase buildings.
- They can also be used to make land and land improvements purchases.
- It can also be used to build new facilities and also renovate ones that are in existence.
- They can be used to buy machinery or equipment that is intended for use over the long term.
- Another interesting use of the 504 loan.
The 504 program is not without limitations. It is not possible to use the funds to purchase stocks, pay off debt, or fund working capital.
As per the SBA, businesses usually need to create or keep one job per $65,000 in funding they receive through 504 Loans. Small businesses must either make or keep one job for every $100,000 of SBA financing.
As a substitute, CDCs fund businesses that achieve community development goals, like strengthening or stabilizing the economy, encouraging the growth of other businesses, and bringing fresh revenue into the community. CDCs also invest in businesses which help them achieve their policy objectives, such as revitalizing communities and expanding exports.
Furthermore, CDCs are more likely to accept loans that can help their facilities be updated to ensure they meet safety, health, and environmental standards.
3. The SBA 8(a) Business Development Loans
Every year, the government is aiming to distribute at minimum 5 percent of federal funding to less fortunate small business operators. One of the methods they employ to reach this objective is with this special type of SBA loan known as the SBA’s 8(a) Business Development loan.
Businesses accepted into the program could receive federal contracts with sole sources with a maximum value of $4 million for services and goods. And that is not all; there is an additional $6.5 million for production.
For a small business to be eligible to receive SBA 8(a) funding, business must need to be 51 percent owned by a U.S.A. citizen who is economically or socially marginalized. The owners must possess at least $4 million in assets and a personal net worth of no more than $250,000. Also worth noting is that their average adjusted gross income in the past three years must be less than $250,000.
4. SBA Microloans
This is a special type of loan that was created to aid minority people and low-income entrepreneurs. The borrower that is seeking the SBA microloan should be able to provide a personal guarantee and would also need to bring collateral for the funds.
It is important to note that in 2017 the SBA approved more than 5,000 microloans, which totaled more than $70 million. The average of the approved loans was $13,884 and carries a 7.5 percent interest rate. The terms of repayment for microloans aren’t more than the 10-year limit.
5. SBA Community Advantage Loans
This fifth SBA loan type is an interesting kind of loan that was launched way back in 2011. It was originally designed to support businesses that operate in communities that are underserved.
In the SBA community advantage loan, there are funds of up to $250,000 that are available for startups and companies that are established that want to boost their business.
These SAB funds are flexible and can be used to cover working capital costs, assets and inventory. The qualified businesses typically will have between 7 or 10 years in which to pay back the loan with interest that is typically between 7 percent to 9 percent.
6. The SBA Capline loan Type
The SBA provides working capital loans to businesses that require help to resolve issues with cash flow or fulfill the requirements for financing for seasonal events.
The loan can go up to $5 million, with an average maturity of 10 years. It is important to note that this SBA loan type is ideal for businesses that require access to credit lines to ensure that they are capable of covering their regular operating expenses as well as covering unexpected costs.
Although the price of these loans can depend on your individual financial situation and the lender you work with, the interest rate for this loan type is 7.25 percent to 9.75 percent.
7. The SBA Export Loans
Another interesting type of SBA loan is the SBA export loan. The SBA also provides financing to companies that require working capital advances for invoices for exports, orders to ship, or credit letters of credit through the export working capital program.
Businesses may apply for these loans before completing any export sales. If you are approved, you may apply the funds to finance inventory, supplies, and manufacturing of export-related goods and cover accounts receivable from foreign countries and also as working capital for lengthy repayment terms.
In this program, the possibility of getting up to $5 million in funds is tangible. It is important to note that this loan type has a duration of 1 year or lower.
If you’re not sure the best SBA loan type is for you, get in touch with another lender or a reputable financial consultant.
8. The SBA Disaster Loan Type
The SBA provides loans to businesses which have been hit by natural catastrophes. Usually, the SBA provides these affordable loans to repair damage to property, and to offset the economic losses that come following natural disasters.
In the situation where a natural disaster such as Covid-19 hits your business, your business would then be eligible for up to $2 million. This would be used as relief funds to repair equipment, real estate inventory, and other equipment. The loan can be granted for up to 20 percent over the total loss, if proceeds are utilized to safeguard the property from similar damage to come.
A maximum of $2 million could be made available to businesses that suffer a loss of revenue and are unable to pay financial obligations they might have been able to meet even if the natural catastrophe had not occurred.
When there’s a natural disaster If there is a disaster, the SBA evaluates the damage to determine if businesses are eligible to receive compensation through the Disaster Loans program. Rates of interest will not be more than 4 percentages for businesses which do not have credit elsewhere and 8 percentages for businesses that do. Terms for repayments can last up by up to thirty years based on the financial situation of the company.
Practical Guide on how to apply for Small Business Loan (SBA)
If you’re planning to apply for a loan through the SBA, it is paramount that the loan applicant is conversant with the loan procedure. And that is what we tend to elucidate in subsequent paragraphs.
- First things first, it is important to note that an applicant cannot get a loan directly from the SBA. What is tenable here is that they disburse the loans through third-party financial intuitions. This adds confidence and encourages banks to fund businesses that they would otherwise not accept for a loan.
- To start the loan application procedure, you’ll need to start a conversation with an SBA-approved loan provider either directly or through a broker. A good lender will provide you with a range of loan alternatives and suggest the loan option that is most appropriate for your specific circumstances. You’ll need to provide an array of documents and financial data.
- After applying, the subsequent week would involve the lender performing an evaluation of your credentials. The lender would have to go through your ability to pay back the loan and the experience that you have in the business.
- The lender would also go on to look at how much debt that you have and the likelihood of paying back the SBA loan.
- Let’s suppose that the lender approves your application. Hooray! When the lender has reached an affirmative decision and the loan closing process starts. You will need to sign lots of papers again, including the promise for payment, security paperwork as well as insurance forms, and many SBA documents, among others. The process could last for up to three weeks.
- The most important thing to remember is that applying for a traditional SBA loan is usually lengthy and time-consuming. Also, it involves multiple stages that could be completed in a matter of months. A variety of agencies take part in deciding and each step can take a long time. If you cannot afford to wait several months to get funding for your small company, you’re likely to be better off seeking funding elsewhere.
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Conclusion on SBA loans
With all the informational bases covered, it’s now time to look back at the key aspects of this small business loan option. What appeals to you more about this information about SBA loans?
With the largest loan amounts and repayment terms that are the longest and the lowest interest rates offered for small businesses, SBA loans are the most popular for small commercial loans. If you’re eligible to receive an SBA loan and you are eligible, you ought to think about it as your top alternative for financing your business.
What you need to do from now onwards is to work on improving your personal credit. And also go on to build strong experience in business that will help to increase your annual revenues. When all these factors are set in place, you will be eligible for an SBA loan in the future.