All About Small Business Administration Loans
What are Small Business Administration loans?
Small Business Administration (SBA) loans are loans guaranteed by the federal agency. It offers flexible terms with low interest rates. It is one of the best ways to finance your business without having to worry about crippling your revenues.
SBA loans are indirect loans which SBA provides a guarantee to lenders for the money that small businesses are borrowing. The guarantee acts as a protection for lenders. When the business owner defaults the loan, the lender gets a portion of the loan back.
When a business opts for a loan application, the loan is processed through a bank or a lending company that is authorized by SBA. The loan comes with a guarantee and is structured according to the requirements of SBA.
One of the goals of SBA loans is to lower the risks in lending money to businesses that may not qualify for traditional loans. Thus, SBA loans have become the most popular form of business financing.
SBA lending programs offer the most flexible option for small businesses. Interest rates are incredibly competitive because it is SBA regulated. The primary loan program of SBA can guarantee up to 85% of loans for as much as $150,000. For loans of more than $150,000, the guarantee is up to 75%. The maximum loan amount is $5 million.
SBA loan terms vary according to the type of loan. For real estate, the loan term can last for up to 25 years. For equipment, loans may be for 10 years or for as long as the equipment is useful. For working capital, loan term may be for up to 7 years.
An SBA loan is a long-term small business loan. It is a government-guaranteed loan that aims to help small business grow and develop. It partners with lending agencies to provide the most flexible terms that are beneficial for you and your business.
Requirements for Small Business Administration Loans
If you are planning to apply for an SBA loan, please exercise patience. You may need to prepare a lot of documents and requirements.
Here are the necessary things you may need to prepare when applying for Small Business Administration loans:
- Credit Score
Your credit score should be at least 680 to qualify for the loan.
When a loan application is backed by a sufficient collateral, it is more likely that your SBA loan will be approved. There is no need for collateral for loans under $25,000.
- Down Payment
When the loan will be used to purchase a business, commercial real estate or equipment, the required down payment is at least 10%.
- Other Requirements
Your records should show that you do not have recent bankruptcies, tax liens, or foreclosures.
- Necessary Documents
Here are the documents that you may need to prepare for your SBA loan application include:
- Business plan
- Business and personal tax returns
- Balance sheet
- Profit and loss statements
- Bank statements
- Driver’s License
- Voided business check
- Business debt schedule
Aside from these requirements, startup businesses may need to show the lender that they have comprehensive skills and proven experience in the industry or in business management. Startup businesses also need to provide a strong business plan that can support the loan.
The business plan should include a detailed written feasibility study and business analysis. This should include financial projections that will show how the business should perform for the next 3-5 years.
The biggest setback for startup businesses may be the requirement on down payment. SBA lenders may require an equity injection or a down payment of 20-30% of the projected business cost. This is quite huge amount for startup businesses, thus, you may need to find lenders who are innovative in coming up with a solution.
In addition to this, SBA may also ask you to follow other eligibility requirements. This includes being defined as a small business. This means that your business must be within the definition of small business under SBA. For a complete list of eligibility requirements, visit the SBA website.
Types of Small Business Administration Loans
Whether you are a startup business or wanting to expand your business, SBA loans may work to your advantage. SBA loans can be used for working capital, equipment financing, business renovations, company facilities, and even to consolidate your bills.
When you plan on applying for an SBA loan, make a research to understand the programs under SBA. Here are the types of loan programs under the SBA:
- 7(a) Loan Program
SBA 7(a) loan program is the most flexible and popular type of loan for both startup and existing businesses. It is flexible because this SBA loan can be used for different purposes. The term of these loans also vary. For working capital, the term is up to 10 years, while the term for fixed assets may last for up to 25 years.SBA 7(a) loan programs include SBAExpress, export loan, rural lender advantage, and special purpose loan programs.
- CDC/504 Loan Program
This SBA loan provides long-term loans with a fixed rate for small businesses. The main purpose of this loan is to finance the purchasing of equipment or real estate. It may also be used for business expansion and modernization.Certified Development Company (CDC) is a private, non-profit corporation that aims to help economic development. CDC picks up 40% of the loan and the borrower must contribute 10% in equity.
- Microloan Program
A microloan program is designed to finance small loans and provide for technical assistance. An SBA microloan program is a short-term loan for up to $35,000 that can help boost your business.Applying for an SBA loan is similar to a bank loan application. As a borrower and a business owner, you must have done a lot of research that will backup your business plan, revenue projections, and the impact of the loan to your business.Once you have gathered the necessary information and documents, choose the right SBA loan for your business. Not all loans are the same. Get a loan that is the most advantageous to your business. Remember that a loan should help you grow your business and not put your finances down the drain.
Applying for Small Business Administration Loans
SBA loan programs aim to provide a good opportunity that small business owners may benefit from. It creates opportunities for both business owners and lending agencies to grow. It also creates a lasting business relationship founded on trust and confidence.
Lenders and borrowers should work hand in hand to come up with the best loan program that will benefit them both. Here is the application process in getting the best SBA loan program:
- Review your credit report
One of the requirements for an SBA loan is a credit score. To qualify for an SBA loan, you must have a good credit report with a score of at least 640 for microloan programs. For SBA 7(a) and CDC/504 loan programs, your score should be at least 680.Lenders are more likely to say “yes” to an application whose borrower has a good track record for paying loans. And in most cases, SBA is also likely to guarantee a loan that is based on a good credit report.
- Develop your business plan
A business plan is a written report that includes the concept of the business, the projection of the success of your business, and the reason for your loan application. Your business plan should act as a leverage in getting the optimal loan for your business.
- Prepare a complete financial history
Financial history is a detailed information about the financial transactions that were conducted in relation to your business. It includes purchases, expenditures, sales, and other financial accumulations. A lender may evaluate the profit and losses that your business has incurred over the years.This step is not necessary for startup businesses.
- Contact lending companies
Find a bank or lending agencies that are SBA-accredited. You may need to set an appointment to know what loan programs they offer. Remember to shop around for lenders and choose one who can cater to your business needs.
- Cooperate with the lender
A loan application is not a one-way relationship. The borrower should provide the necessary information and requirements to jumpstart the application. The lender, on the other hand, will evaluate the application thoroughly and offer the best loan program.
Find the right Small Business Administration loans that will support the vision and purpose of your business. Grow your business with SBA loans!