How Small Business Administration (SBA) Loans Work

How Small Business Administration (SBA) Loans Work

Small business owners can get affordable Small Business Administration (SBA) loans through a network of lenders chosen by the government agency. A common misconception is that SBA loans are given by the Administration, but this is not the case. The Small Business Administration has established guidelines for loans given by chosen lenders, micro-lenders and community development organizations. These guidelines minimize risk for the lenders and give them easier access to capital for the loans.

This makes it easier for them to offer favorable rates and grant approval to small businesses seeking loans.

Some of the advantages of an SBA guaranteed loan include competitive rates and reduced fees compared to standard loans. Small business owners can also get business advice and support from the Small Business Administration and the lending institution. Some loans require little or no collateral and may feature lower down payments, flexible requirements and other advantages geared toward making it easier for small business owners to take advantage of the loans and successfully repay them.

There Are Four Kinds of SBA Loans

The Small Business Administration has developed more than one SBA -backed loan option to fit the varying needs of borrowers. The most popular is the 7(a) loan, which is a guaranteed term loan providing funds for expansion, equipment purchases and working capital. You can borrow up to five million dollars through approved banks, specialized lenders and credit unions.

The 504 loan is also federally guaranteed and provides funding to buy facilities, equipment and land. You can only purchase fixed assets with this loan (not inventory or services). These are provided by nonprofit groups and private lenders.

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A microloan for $50,000 or less can provide funds for inventory, working capital and equipment or starting a new, small business. These loans are available through local nonprofits.

A disaster loan is exactly what it sounds like. A small business damaged by a natural disaster or some other emergency can borrow up to two million dollars. Disaster loans are provided by banks and other lending institutions but are processed through the SBA.

What makes a Small Business Administration loan different?

Although the loans are called SBA loans, they are not issued by the Small Business Administration. It is a commercial loan that has been structured to meet SBA guidelines. SBA-backed loans are guaranteed by the Small Business Administration, minimizing the risk for lenders. They are designed to make it easier for small business owners to get affordable loans to fund, improve or grow a business.

The SBA can guarantee up to 85 percent of loans smaller than $150,000 and 75 percent of loans over $150,000. The maximum loan available is five million. The monthly payments and interest rates for SBA -backed loans are almost always more manageable for small business owners.

The Small Business Administration determines the interest rates for guaranteed loans, using a standard formula, usually based on the U.S. prime rate. They also take into consideration the term or length of the loan and the size of the loan, both of which will affect the final interest rate.

If you are considering a Small Business Administration-backed loan, then you can do a quick internet search for “current SBA loan interest rates.” You will get multiple results, including helpful tables that outline current rates for the various types and sizes of loans. Be sure you check with reputable websites and compare a few different results to make sure you are looking at accurate, current information.

How to Find an SBA Approved Lender

The Small Business Administration can help you find an SBA approved lender. You simply answer a few basic questions and explain your current financing needs. Within a few days, you will receive a list of lenders interested in working with you. You will then have the opportunity to talk to these lenders about terms, interest rates and fees and other details. You can then choose which lenders you are interested in working with and fill out their application forms.

How to Qualify for a Small Business Administration Loan

Small businesses cannot apply for an SBA-backed loan unless they meet certain criteria. When you apply for one, you will have to prove the following:

  • You are an officially registered, legal, for-profit business.
  • The business is located and operates in the United States.
  • You have invested both your time and your own money in the business.
  • You have exhausted other loan options.

If you meet the requirements above, then you can apply for an SBA-backed loan but this does not guarantee approval. Other considerations will include meeting size standards, having a good business plan, being able to repay the loan. Having bad credit does not automatically mean you will be turned down. When you talk to the lender you will get more information.

What You Need to Apply for a Small Business Administration Loan

There are several things you will need to apply for a Small Business Administration loan. Be sure you have all of these items so the application process goes smoothly:

  • A detailed business plan, particularly if you are applying for a business startup loan
  • How much money you will need and what you will be using it for
    • You need to be able to detail how the money will be used, and it must be used directly for your business. Personal purchases are not allowed.
  • Credit report or credit score
    • This information is used to determine interest rates and risk. The lender will check this when you apply but knowing what your score is before talking to a loan officer will prevent unpleasant surprises. Keep in mind the SBA sometimes guarantees loans even for business owners with a poor credit rating.
  • Financial outlook
    • Understanding your finances and being able to demonstrate how you will repay your loan is important.
  • Collateral
    • Whether it is a house, building, automobile, equipment, inventory or other tangible assets, many lenders will require some kind of collateral in the event you default on your loan.
  • Business tax returns for the last three years (if you are already in business)
  • Personal tax returns for the last three years
  • Articles of incorporation
  • List of equipment/properties (if applicable)
  • Inventory list (if applicable)
  • Personal financial statement
  • Current business financials (if not a startup)

One more thing that can help you get the loan, although it is not a requirement, is evidence you have experience in your industry or service sector. Experience translates to fewer mistakes and gives lenders confidence you will use the funds wisely.

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By Admin