Small businesses that are looking to raise funds in 2019 should think seriously about applying for an SBA loan.
An SBA (Small Business Administration) loan is a small business loan that is guaranteed by the government sector for Small Business Administration. Because the government provides a guarantee, the bank lenders who issue these loans are incentivized to participate because they face a smaller amount of risk.
These institutions, mostly banks, lend money to small businesses on good terms because of the safety net that the SBA guarantee provides. A small portion of the loan that you receive will be backed by the SBA while the rest belongs to the lending institution.
This means that lenders are aware of the fact that, even if you’re unable to pay back the loan for some reason, SBA will give you the share that they originally promised. If this partial guarantee did not exist, financial institutions would consider lending to small businesses quite a risky affair. Small businesses that are unable to get an SBA loan often have to settle for ones that don’t have ideal terms. At 7 Figures Funding, we match you with the best financing option for your small business, including SBA loans. Here’s our guide on what to know about this form of funding.
Terms of an SBA Loan
SBA loans vary depending on the qualifications of your business and the type of lender you choose to work with. There are several kinds of SBA loans to choose from. Their range can vary from $500 to $5.5 million, and the annual percentage rate (APR) can be as low as 6.5%. The repayment term can be between anywhere from 5 to 25 years.
However, the standard SBA loan repayment term length is usually 10 years.
One needs to have at least three weeks to spare if they plan on using an SBA loan to fund their small business. Paperwork can often take longer than usual, and you might have to wait for a while for the SBA loan to kick in. Every owner with a minimum of 20% ownership stake needs to provide a guarantee to the SBA.
This puts your personal assets on the hook in case you’re unable to pay back through your business.
How to Apply for an SBA Loan
There are a few steps involved while applying for an SBA loan. They’re as follows:
Explore the Requirements for Each SBA Loan
Before you apply for the loan, you have to know your business’s eligibility. Depending on which type of SBA loan you’re applying for, the requirements will vary. You will have to meet the requirements for both the general SBA loan as well as the SBA 7(a) loan unless you decide to go for some other type.
As far as the primary SBA loan qualifications are concerned, the requirements you need to meet are those related to credit score, down payment, collateral, your ability to repay, the duration of your business, whether your business is owner-occupied or not, if your business is profitable, and so on.
For SBA 7(a) loans, the eligibility criteria have a few more attached points. These include being a part of an eligible industry (such as retail, hospitality, or food service), the usage of alternative financial resources, whether your loan qualifies for a strong business purpose, and your ability to meet public policy goals.
Find out which SBA loans your business is qualified for with financial experts at 7 Figures Funding.
Choose the Appropriate SBA Loan Program
SBA offers various kinds of loans for small businesses, and you can choose the one that best suits your needs. Selecting the right kind of SBA loan makes the next few steps of the application process much smoother. Once you find a loan program that fits your financial goals, find a lender who offers that particular kind of loan.
Look for a Loan Provider
Once you meet the SBA loan requirements, you’ll then have to find an SBA loan provider to initiate your loan. This entails reaching out to direct lenders such as banks and brokers. You can determine the right kind of loan provider for you based on your current banking status, the amount you wish to borrow, how quickly you need the funds, and how you intend on using those funds.
For example, if the SBA loan you need is to build your restaurant, then it’s best to go for SBA lenders who are experienced in the field of restaurant financing.
Find the best loan provider with 7 Figures Funding.
Gather the Necessary Documents
The documents you require for an SBA loan also depends on the type of loan you choose. Some of the most common documents required by an SBA loan broker or direct lender include the loan request amount, an SBA business plan, business financials, your profit and loss statements till date, balance sheets till the current date, projected financials, proof of ownership, business license/certificate, application history of previous loans, both business and personal tax returns, your resume as an owner, an overview of your business, and your business lease.
These documents help you prove to the bank or lender that your business is profitable and that you have a solid business plan. It also includes presenting them with a graph of how you plan on conducting your business in the near future. The faster you provide all the necessary documents, the quicker your loan can be processed.
Complete the SBA Loan Application
One of the last few steps involves filling out the SBA loan application as well as the SBA loan forms to submit along with them. The forms vary depending on the type of loan you’ve chosen. The loan application also varies depending on the lender, but all providers require the same basic information. This includes information about your business and how you wish to make use of the loan.
Some of the basic information required by SBA to approve your loan include your business profile, an executive summary, an ownership breakdown, history of your management experience, a complement breakdown of how the money will be spent, and a statement of how you intend on repaying the loan. The application and the previously provided documents will be combined together along with your SBA forms to create your loan application package.
Close the Loan with Your Lender
After all the documents and forms have been gathered, all that’s left to do is wait for your lender to underwrite your loan. Post that, they will approve your application and close on the loan. In the end, the funds will be sent to your bank account.
Different Types of SBA Loans
SBA loans exist in various forms. Some of the different kinds to choose from are as follows:
SBA 7(a) Loans
SBA 7(a) loans are the most common type of SBA loans utilized by small businesses for anything ranging from establishing working capital and refinancing debts to purchasing equipment, real estate, or for any other business. They’re also the most popular loan due to their low-interest rates, longer repayment terms, and a high loan limit. SBA 7(a) loans require you to have a credit score of at least 680, and no previous records of recent bankruptcies and foreclosures.
Businesses need to pay 10% down payment if they wish to use the SBA 7(a) loan for buying commercial real estate or equipment. Not only that, your business should have a history of being around for at least two years to qualify for this loan. SBA 7(a) loans exist in two forms, namely the SBA 7(a) Advantage Loans and the SBA Express Loans. While the former targets businesses that are cash-strapped, the latter has slightly higher interest rates.
Do you qualify for an SBA 7(a) Loan? Find out with 7 Figures Funding.
CDC/SBA 504 Loans
For small businesses that are looking to purchase or build owner-occupied commercial real estate, CDC/SBA 504 loans are the ones for you. They bring in a third party to the loan process, which is a local community development corporation. While the CDC usually lends 40%, the bank or lender gives 50% and the remaining 10% counts as down payment.
Your business will have to physically occupy a minimum of 51% of the commercial structure in order to qualify for the CDC/SBA 504 loan. This loan requires a credit score of 680, and the business must meet the job creation and public policy goals of the local CDC.
SBA CAPLines Program
For those whose business needs are more seasonal or short-term, SBA CAPLines is a good option to go for. They offer businesses revolving or fixed credit lines up to $5 million, with a repayment schedule that extends up to five years. These credit lines can be divided into five types:
- Seasonal line of credit meant for periodic annual increases in business expenditures. These can include inventory recharge, labor charges, and accounts receivable.
- Contract line of credit for materials and labor associated with assignable contracts and sub-contracts. Your business must provide proof of experience, profitability, and competence in terms of completing the projects for this loan.
- Builders’ line of credit provides up to $5 million for contractors and homebuilders. It’s basically meant for those who build or renovate residential or commercial buildings.
- SBA working capital (asset-based) line of credit provides a line of credit up to $5 million. This loan is for small businesses to transform short-term assets into cash.
- SBA Export Loans
SBA Export loans are meant to aid domestic businesses expand their export activities in global markets so that they can conduct international transactions. Owners need to provide a 20% guarantee, but can also avail this loan by being in the business for just a year. You will have to prove the viability of your business in foreign markets and also how the loan will make your exports shine internationally. The SBA Export loan can further be divided into three categories, namely SBA International Trade loans, SBA Export Working Capital loans, and SBA Export Express loans.
- SBA Microloans
SBA Microloans are perfectly suited for businesses whose capital needs are smaller, and also for nonprofit centers. Although the average microloan amounts to $14,000, the loans distributed often go up to $50,000. The interest rates associated with Microloans are higher when compared to the other SBA loans, ranging from 8% to 13%. Lenders are required to work with SBA-approved local agents to get access to a Microloan, as the SBA does not guarantee Microloans beyond the initial involvement of the administration.
- SBA Disaster Loans
SBA disaster loans are intended for recovery from both physical and economic disasters. Disaster loans can be categorized further into three types, namely the SBA Economic Injury Disaster loans (for businesses to keep running in times of economic hardships), the SBA Military Reservists Economic Injury loans (when businesses lose employees to military service), and the SBA Business Physical Disaster loans (when businesses have faced a loss due to disasters). Each kind can be employed differently, and one can also apply for multiple types of loans at the same time.
It’s not always easy for a small business to obtain a loan. Be it a startup or any other small business that’s trying to find its footing in the market, it’s tough to make the financial institutions out there believe in your worth and integrity.
In such situations, SBA loans serve as great options. With so many different types of SBA loans, businesses are free to choose one that comes the closest to their needs and requirements. Therefore, evaluate the elements such as eligibility, the different loan categories, etc, and pull the trigger to get your business off the ground.
Let our financial advisors and experts at 7 Figures Funding sort through the complexities and logistics so securing funding is easier than ever.
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