Small Business Guide to SBA Loans

If you want to start or expand your small business you may need some capital to get things rolling. Many entrepreneurs look to SBA loans as a means of financing their million-dollar ideas. An SBA loan is guaranteed by the Small Business Administration and favored for its competitive interest rates and large loan amounts. SBA provides loans to a variety of small businesses, including sole proprietorships, partnerships and limited liability companies (LLC). Around 400,000 small businesses are launched every year, and the U.S alone is home to over 30 million small businesses.

What is the SBA?

Established in 1953, the U.S. Small Business Administration is a federal agency that offers support for small businesses and entrepreneurs. It is the highest level federal agency in the country dedicated to small business.

The SBA is not a lender. However, by setting certain guidelines, it makes it easier for you to work with and get funding from lenders. The SBA will guarantee up to 85% of your loan. This makes lenders more willing to finance you because if you default, the SBA will cover a portion of what you borrowed. Lenders know they can often expect a return with SBA loans, whereas if they were only dealing with individual consumers, there would be much more risk involved.

What you need to know about SBA loans

SBA loans are guaranteed by the Small Business Administration and financed by its lending partners. When you take out an SBA loan, you’re borrowing from a bank or similar financial institution.

Having poor credit won’t disqualify you from getting an SBA loan, but there are still standards you have to meet if you want to get your hands on enough funding to launch or grow your small business.

Eligibility is based on a lot of factors. When deciding whether to finance you, the SBA will be looking at:

  • What your business does to generate income
  • The character of its ownership
  • Where your business is located

Also, you have to be a certain size to qualify as a small business. According to the SBA, most manufacturing companies with 500 employees or fewer, and non-manufacturing businesses with average annual receipts under $7.5 million, will qualify as a small business. The SBA website has a comprehensive list of small business grants and eligibility requirements that you can explore to determine your chances of qualifying.

Before you get too excited, keep in mind that you can’t walk into the bank demanding a loan without a map or model of your business. You need to convince the lender your idea is worthy of financing. A credit score does not matter as much as having your ducks in a row. This is why it can be hard to qualify for an SBA loan if you’re just embarking on your business venture. Lenders prefer candidates with experience in running a business. You have to prove to the lender that your idea will make enough money to repay the loan they’re about to offer.

There are a few more criteria you should keep in mind before applying for an SBA loan.

SBA loans are for-profit businesses only. This means if you’re looking to fund a nonprofit or charity, you will have to look elsewhere. The business must be physically located and operated in the U.S or its territories. Also, the SBA will only fund you if you have invested equity in your business. This means you need to show you’ve put in your own time and money into getting your business off the ground.

How to apply for an SBA loan

To apply for an SBA loan you need to visit the SBA website and fill out an application.

Next, you will fill out paperwork related to your background and financial history. And then, you will provide paperwork pertaining to your business; these include profit and loss statements, tax returns, certificates, and licenses. Although there’s extensive paperwork involved, the SBA provides a complete list of all necessary documentation you will need to apply. Your lender can sit down with you as well to make sure you have everything in order before making your request for funding.

Remember, the SBA does not fund loans directly. So, you will need to contact a local lender and let them know you would like to apply for an SBA loan.

[Read: Small Business Guide to Home Tax Deductions]

Pros and cons of SBA loans

Like any type of funding, these loans come with their fair share of upsides and downsides. You should weigh the pros against the cons to decide if an SBA loan is right for you.

Pros

  • Capped Rates: The interest rate of your SBA loan will be the prime rate plus a spread added on by the lender. For example, your rate may look something like this: 3.25% + 2.75% = 6.00%. That’s prime rate + spread = your interest rate. As of March 28th, 2020, the current prime rate is 3.25%. You and your lender can negotiate the spread; both variable and fixed-rate options are available.
  • High loan amount: You can borrow as much as $5 million with an SBA loan. You can use the money for a variety of options. These include long-term fixed assets like real estate, machinery and construction. It also includes operating capital like seasonal financing, export loans and revolving credit.
  • Long repayment terms: SBA loans give you enough time to generate cash to repay them. For working capital and equipment, you will have anywhere between 5-10 years to repay the loan. As for real estate, you have up to 25 years to repay.

Cons

Sluggish approval process: There are many steps in the approval process, which means you could be waiting weeks or even months to get your funds.

  • A tedious process: There’s a lot of paperwork and documentation you have to file and sort through to be considered for an SBA loan.
  • Personal guarantee: The FBA guarantees up to 85% of your loans, which is why lenders are eager to finance borrowers through FBA loans. But you also must guarantee the loan. This means you will be held personally responsible by the lender and the SBA if you fail to repay the loan. If you default, your assets will be at risk, and you may lose whatever collateral you put down to secure the loan.

Other options, besides SBA loans

An SBA loan is just one of the many options available to fund your small business.

  • Business credit card or line of credit: This option could put funds in your pocket in only a few days. With a credit card or line of credit, you can borrow small amounts slowly over time, using only what you need to operate your business as efficiently as possible.
  • Best Small Business Loan Rates of 2020: You can find short term business loans through many online lenders. Some of these loans mature in as little as three months, so you will have to stay on your toes and be prepared to repay the debt quickly if you don’t want to default. You can often qualify regardless of bad credit, but rates can soar much higher than loans financed through SBA.
  • Personal loans: This is a good option if you’re new to the business world and have good credit. According to Experian, the average personal loan interest rate is 9.41%. Just make sure your lender is ok with you using the loan for your business.

Too long, didn’t read?

SBA loans are a good option for anyone in need of funds for their business. You don’t need a stellar credit score, but it could help sway the lenders’ decision in your favor. At the end of the day, the lender, together with the SBA, will decide if your business model aligns with their standards. You have to prove to them your business can and will generate enough revenue to repay what you borrowed in a timely fashion. This is why you should take the time to map out a repayment plan before applying for an SBA loan.

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Bents Dulcio
Bents Dulcio
Contributing Writer

Bents Dulcio is a personal finance writer based out of Orlando, Florida. His work has been featured in Debt.org, InCharge.org and elsewhere.

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  • Andrea Perez
    Andrea Perez
    Personal Finance Editor

    Andrea Perez is an editor at The Simple Dollar specializing in personal finance. Prior to that she specialized in digital marketing content for online learning websites. She holds a master’s degree in journalism and media studies from the University of South Florida.

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