What is an SBA loan and how to benefit from it?
By: Kate Samano January 8, 2021If you are searching for business financing, you have probably heard of the term SBA loan. Let’s get to know what small business loans are and their benefits.
What is SBA?
In simpler terms, SBA loans are small business loans that the government partially guarantees (an acronym for Small Business Administration). People usually refer to these loans as government small business loans. But, the truth is it is not the SBA who acts as a lender. Instead, they work with certified financial institutions that serve as an intermediary between SBA and borrowers. This is especially beneficial for financial institutions as they mitigate the risks of default.
Courtesy of sba.gov
What terms does the SBA loan offer, and how to get approved?
Like any other type of loan, SBA loan terms and conditions vary based on your business’s qualifications and the institution you prefer to borrow from. SBA loans vary in size, from $500 to $2 million, and can offer an annual percentage rate of as low as 6.5%. For these loans, the more extended the maturity date the lower the interest rate and monthly SBA payment.
Many businesses are skeptical about whether or not they can apply and get approval for SBA loans. There are a lot of platforms offering help to small businesses to get financing. If you are interested, head over to Lendzi, and find many useful SBA loan tips to get approved.
Types of SBA loans
There are generally three types of SBA small business loans: SBA 7(a) loan, CDC/504, and SBA microloan. Let us briefly explain what these are all about.
- SBA 7(a) loan is the largest, offering up to $5.5 million financings with a maturity of up to 7 years.
- CDC/504 offers the most extended maturity terms and is specifically lent for real estate and machinery acquisition.
- The last type, SBA microloan, concentrates explicitly on helping businesses with the purchase of inventory, supplies, fixtures, and machinery for operational purposes. This program is offered through community-based organizations that are qualified as SBA Microloan lenders.
How can your business benefit from an SBA loan?
Lower interest rates
The first and foremost SBA loan advantage is that they have longer maturities than traditional business loans, which automatically reduces interest rates. This allows businesses to reduce their monthly costs of SBA loan payments and focus more on other operational costs. The interest rate you will get on a loan will depend on the creditworthiness and qualifications of your business. The interest rates of this loan are as low as 6.75% in the case of SBA 7(a). There are slight differences in the other two types of SBA loan terms and conditions, but they are equally inexpensive.
Repayment terms
Small businesses do not want to get into financing mostly because of the stressed-out schedule of loan repayments. That is why many stick to shareholder capital without a need to expand their operations and be successful in the market. Admittedly, taking a loan for business is a stressful process, which companies want to avoid. What if the project fails? Will this mean all the stress I have put into the financing of a business was not helpful? You do not need to stress out that much with the favorable repayment of SBA loan terms and conditions. Longer repayment terms will not put pressure on you or the stable development of your business.
Down Payments
The reason behind having a down payment requirement arises due to a low credit score. Most often, financial institutions monitor your credit score; the lower it is the higher your down payment will be. In the case of these loans, the policy is almost the same with one significant difference. Unlike other types of business loans, SBA loans have lower down payment requirements. If different types of loans require up to 30% down payment, in the case of SBA 7(a) and CDC/504, the required down payment varies from 10 to 20%. SBA microloan does not require down payments at all.
Flexibility of Use
Business loans have strict guidelines on how you are allowed to use funds. Business owners need to have detailed budgeting on how they are going to use those funds, and financial institutions will decide whether to provide a loan. From the bank’s perspective, this is a way to mitigate risk, knowing that finances are appropriately used for development and operational purposes.
Undoubtedly, this is not a bad thing. But the truth is, that businesses may need money for general purposes. There may not be a single massive project to finance, especially when a company is small. They may need money for daily office expenses, and that’s when SBA loans may come to help.
With an SBA 7(a) loan, the finances may be directed to almost anything. You can refinance existing debts in other institutions, buy land, purchase inventory and supplies, etc. CDC/504 and SBA microloans are a little less flexible. For example, funds from CDC/504 should be directed to the acquisition of real estate and equipment only. But all in all, these loans offer more flexibility of use compared to other investments.
Wrapping up
Overall, the approval process and paperwork of SBA loans are relatively complicated compared to other types of financing. But alongside complexity, there come many SBA loan advantages and benefits, which will help your business grow. Longer terms, lower annual percentage rates are just a part of the perks.
Both the time and effort you put into the application for SBA loans are worth it! It offers loads of support for small businesses, and many online consulting companies are ready to help you whenever you have difficulties in the application process.
You will have a lot of flexibility to use your capital and direct it to those spheres which need more financing, rather than concentrating on a solo project. Before applying, do proper research and budget your future cash flows to see which specific type of SBA loan will be the most appropriate for your business needs.
About the Author
Kate Samano
Kate Samano is a copywriter and Head of Content at Lendzi. She believes in helping small businesses grow by providing access to viable financial advice.