How It Works: Small Business Administration (SBA) Loans

Next up in the “How It Works” series let’s take a look at how do SBA loans work

Every business is unique.

What works for one may not work for another. With a range of choices, each with its own unique requirements and mechanisms, how do you identify which type of financing is best for your business and your needs at this time? The best place to start is with the basics: having a full understanding of your situation and being clear about what you want/need versus what your business can take on. Whether you want capital immediately, or sometime later in a lump sum, or phased over time, take stock of your situation and needs first and then consider your financing options.

Let’s take a look at one of the most frequently used business financing options available to small businesses:

Small Business Loans through SBA

Government-backed Small Business Administration (SBA) extends aid to all small businesses via loans that help them to not just start up a business but to also sustain and grow that business. While the agency itself does not provide financing, it makes affordable loans available through SBA approved lenders like banks. These loans are designed to meet very specific business purposes, so it is important to understand each of these options before applying for an SBA loan. Though cheaper, it may be difficult to qualify for them because of reasons like insufficient collateral, low credit scores or the fact that you are doing business in an industry or sector that is not qualified to receive an SBA backed loan.

SBA loan programs are designed to meet major financial requirements of varied small businesses. These include microloans, real estate loans, equipment loans, and basic loans under the 7(a) program. The loans provided through the 7(a) program can be used for a variety of purposes – setting up a new business, acquiring a business, purchasing equipment and machinery, or as an influx in working capital, among others

The general small business loans from the 7(a) program are the most popular among all SBA loans. Since these loans are guaranteed by federal agencies, lenders can offer businesses very lucrative and flexible terms for these loans. It is no secret that the 7(a) loans through the SBA are by far the best way for any small business to get financing if they are able to qualify.

To be eligible for 7(a) loans a business must be for-profit; operate within the United States; show a business need for the funds, and – most importantly – show proof that you’ve exhausted all other avenues and financial resources before applying. This means, you will need to have used your own personal assets, reached out to family and friends, and be able to show that you applied for and had been declined by a traditional lender. It’s no wonder, then, that most small businesses find these loans out of their reach. In fact, a 2016 Forbes report points out that, “The head of the U.S. Small Business Administration has cited industry estimates that 80 percent of small business loan applications are rejected.”

What you should know about SBA loans

  • Lowest cost option for small businesses looking for financing to start up or grow a business.
  • Offered by traditional and alternative lenders and backed by government guarantee.
  • Multiple types of loans and grants depending on business type and need.
  • Businesses applying for a loan must first use other resources including personal assets.
  • Personal guarantee required by business owners or top management of the company.
  • Long application and funding process compared to alternate financing options.

SBA loans may be a good option when:

  • Working capital is needed to expand the business over the next few years.
  • Consolidating loans from multiple lenders.
  • Hiring new employees or opening a new location.
  • Recovering from declared disasters.
  • Your business is impacted by NAFTA.

SBA loans may not be an option when:

  • Working capital is needed immediately for a very short term.
  • Consolidating loans will require the company to take a loss.
  • Business owner cannot provide a personal guarantee.

Besides the general 7(a) loans, the SBA provides 7(a) loans to cover special situations like companies conducting business in underserved communities and companies looking to expand export activities. There are also microloans up to $50,000, and special programs to help businesses recover from declared disasters. To learn more about SBA loans visit their website right here. Many traditional and alternative lenders also help businesses navigate through the process of applying for these loans.

Want to learn more about your options? Here are the pros and cons of the revenue-based financing.

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