Starting and growing a small business requires capital. Many entrepreneurs and small business owners need to secure finances as a critical step in attaining success. To finance your small businesses SBA loans offer numerous benefits, which makes it very attractive for your businesses.
What is Small Business Administration (SBA) loan
Small Business Administration loan is an offer guaranteed by the U.S. department to small businesses. These loans are provided by participating lenders, like banks and other financial institutions. Small Business Administration guarantees a portion of the loan amount which reduces the risk for lenders, making it easier for small businesses to obtain financing under favourable terms.
Types of Small Business Administration (SBA) Loan
There are several types of small business administration, each of them are designed to meet your different business needs. Here a re the most common types of small business administration loan:
Small Business Administration 7(a) Loan Program: Small Business Administration 7(a) loan is the most popular SBA loan program. This loan provides you working capital, funds for equipment and expansion of business. The amount usually can go up to a million and a flexible repayment period for as long as 25 years for real estate and up to 10 years for working capital.
Small Business Administration 504 Loan Program SBA 504: If you are small business owner looking for a loan to improve your fixed assets like real estate or equipment. This is the best option. It is structured with a 50-40-10 split, where 50% of the project cost is covered by a conventional lender, 40% by a certified development company (CDC), and 10% by the borrower.
Small Business Administration Microloan Program: The microloan program offers small loans up to $50,000 to help small businesses and certain not-for-profit childcare centers start and expand. This can be used for working capital, inventory, supplies, furniture, fixtures, machinery and equipment.
Small Business Administration Disaster Loans: If you are a business owner, home owner or a renter, this loan helps protects you against declared disasters. The loan will provide you with low-interest loans to repair or replace damaged or destroyed real estate, personal property, machinery, equipment, and other business assets.
Small Business Administration Express Loans: This is actually part of the 7 (a) loan program but with expedited processing that can approve applications within 36 hours. The Loans can be up to $500,000 and the SBA guarantees 50% of the loan.
Benefits of SBA Loans
SBA loans come with numerous advantages that make them an appealing option for small businesses:
Lower Down Payments: SBA loans typically requires lower down payments as compared to conventional loans. This makes it a lot easier for small businesses to secure financing without depleting their cash reserves.
Longer Repayment Terms: If you are looking for longer repayment terms, then small business administration loan is your best beet as it reduces your monthly payments and improve cash flow. They can range from 10-25 years all depending on the type of loan and purpose.
Competitive Interest Rates: With small business administration loan you can be rest assured that the interest rates are lower than those of conventional loans. This will always help you save significantly over the life of the loan.
Flexible Use of Funds: When you obtain the small business administration loan, it can be used for a wide variety of purpose like working capital, equipment purchases, real estate acquisition, debt refinancing and lots more. SBA loans are extremely flexible.
Easier Qualification: Lenders are usually more willing to extend credit to businesses that might not qualify for conventional loans because the small business administration guarantees a portion of the loan. This makes the process a lot easier for startups and businesses that has less than perfect credit histories.
Eligibility Requirements for Small Business Administration (SBA) Loans
For you to qualify for a small business administration loan, your businesses must meet certain eligibility requirements. These criteria are:
Your Business Size: The size of your business is very important as it must meet small business administration standards which varies by every industry. For example if you are a non manufacturing and mining company, having fewer than 500 employees and less than $7.5 million in average annual receipts works.
For-Profit Business: The business must be a for-profit entity. Non-profit organizations are not eligible for a small business administration loan.
Operational History: You should have an established operational history which will improve your chances of approval. This is because lenders always prefer businesses that has at least two years of operating history. Notwithstanding, startups can still qualify for small business administration loans.
Creditworthiness: While small business administration loans are even more forgiving as compared to conventional loans, you still need to have acceptable credit histories as both business and individual. If you have a good credit score, it improves your likelihood of approval.
Collateral: The amount you intend to receive determines if collateral will be required or not. For larger loan amounts, collateral may be required
Owner’s Equity Investment: As a business owner your investment must be accounted for in the business, this shows commitment and reduces the lender’s risk. No lender wants to take a high risk
How to Apply for Small Business Administration (SBA) Loan:
Applying for Small Business Administration loan involves several steps which you need to be prepared for, to have a smooth and efficient process. Here’s a step-by-step guide:
Determine Your Financing Needs: Identify why you need the loan and how much funding would be enough to achieve your goals. This will help you as a business owner to the choose the appropriate Small business administration loan
Check Your Eligibility: Always go through SBA’s eligibility requirements to be sure your business is qualified for the loan program you need.
Gather Documentation: Small business administration requires you have your detailed business plan, financial statements, tax returns, personal background information and a loan application form, it’s with this that your application will be reviewed.
Choose a Lender: Select an SBA approved lender, it’s important and beneficial to you to choose an experienced lender with small business administration loans, because they are familiar with the process and requirements.
Complete the Application: Fill out the loan application form which will be provided to you by your lender. This form includes detailed information about your business, the loan amount and purpose of the loan.
Submit Your Application: Right after filling out the loan application form, submit your completed application and supporting documents to the lender which will further review your application and submit it to the SBA for approval.
Loan Approval and Closing: If your loan is approved, you will receive a commitment letter outlining the loan terms. Review the terms carefully before signing the agreement because once signed, it’s done. Your loan will disbursed once signed and you can start attending to those business needs.
Maximizing Chances of Small Business Administration (SBA) Loan Approval
Securing a small business administration loan can significantly impact your business’s growth and success. Here are some tips to increase your chances of approval;
Maintain a Strong Credit Profile: You need to have a good credit score both your personal and business credit score for loan approval process. Ways to create this good credit score could be by paying your bills on time, reducing your outstanding debt and correct any errors on your credit report.
Prepare a Solid Business Plan: A comprehensive plan demonstrates your business’s potential and your ability to repay the loan. A solid business plan is definitely crucial in getting an approval. The plan should include financial projections, market analysis and a clear explanation of how the loan will be used.
Demonstrate Cash Flow: Lenders wants to see that your business generates enough cash flow to cover loan payments. You have to provide detailed financial statements, including income statements, balance sheets, and cash flow statements.
Offer Collateral: If possible, you can offer collateral to easily secure the loan. Collateral makes it easy to secure the loan because the lender’s risk is reduced.
Common Misconceptions About Small Business Administration (SBA) Loans
There are some misconceptions about small business administration (SBA) Loans that can hinder business owners from applying. Here are some of the myth and truth behind them;
Myth: Small Business Administration loans take too long to process
Truth: Small business administration loans requires more documentation and thorough review process, but with modern technology and experienced lenders the process has been expedited as compared to other loan types.
Myth: SBA loans are only for struggling business.
Truth: Small business administration loans is not just struggling business, it is available to a wide range of businesses, from startups to well-established companies. These loans are created to aid business grow and succeed by providing them a lifeline.
Myth: Small business administration loans have high-interest rates.
Truth: Small business administration loans often have lower interest rates as compared to conventional loans, so saying it has higher interest rates is entirely wrong.
Conclusion
Small business administration loan is an amazing solution to grow your small businesses as this loans comes with juicy interest rates as compared to conventional loans. Always prepare the necessary document to be qualified.
