The U.S. Small Business Administration (SBA) estimates that more than 627,000 new businesses open in the country every year. If you’ve recently started a new business, then you need to know about SBA small business loans.
As you seek to get your startup off the ground, it’s likely that your expenses will outpace your income, at least in the beginning. This is where SBA small business loans can make a world of difference.
Of all your financing options, SBA small business loans are some of the most established and secure. Are you considering applying for one?
If so, you’re already on the right track. Read on to learn 10 reasons why it pays to look into these loans, and the benefits they can offer your small business.
What are SBA Small Business Loans?
The SBA offers a number of funding programs designed to help small business owners in the U.S.
While the SBA doesn’t lend money directly, they work with lenders who provide and distribute the funds to small businesses. These direct lenders include:
- SBA approved lenders
- Financial institutions
The loans guaranteed by the SBA range from $500 to $5.5 million. They are designed to help business owners cover various expenses, from fixed assets to working capital. The most common types of SBA small business loans include:
- 7(a) Loans (Working capital)
- CDC/504 Loans (Fixed assets)
- Microloans (New businesses)
- Disaster Loans (Emergency-related needs)
- Paycheck Protection Program (PPP)
Of these, 7(a) loans are the most wide-reaching, encompassing a variety of ways that business owners can use the funds for. Next, let’s take a look at a few of the benefits that borrowers can expect after being approved, and why it’s smart to apply for an SBA loan today.
1. There are Low Interest Rates on SBA Small Business Loans
When you’re wanting to grow your business or increase the likelihood that your new business starts successfully, every expense can feel like taking one step backward. This is especially true if your existing business loan carries sky-high interest rates.
Unavoidable but never a joy to pay, interest can mean the difference between a manageable loan and one that’s a burden for years. The good news? An SBA loan will carry a far lower rate than what you’re used to seeing from other types of small business loans.
In general, the interest rates on SBA small business loans are much lower than those offered by traditional lenders. In fact, many SBA-guaranteed loans carry rates and fees that are comparable to a bank line of credit, even dipping into the single digits.
SBA lenders will be able to give you up-to-the-minute interest rates to make sure you’re comfortable with the terms. A few of the factors that will influence your company’s interest rate include:
- Your SBA loan type and amount
- Agreed upon repayment terms
- The business’s credit history
- Your personal credit score
2. Flexibility of Use for SBA Small Business Loans
Compared to other loans, which come with strict restrictions on how you can use the funds, SBA small business loans are generally more flexible.
Take the 7(a) program, for instance. Designed to be applied as working capital, this loan allows qualified borrowers to apply for up to $5 million to cover a variety of needs, including:
- Equipment purchases
- Real estate purchases
- Short-term and long-term working capital
- Construction projects
- Business acquisitions
3. Manageable Repayment Schedules
It’s not uncommon to find traditional lenders within the small business lending industry that require weekly or even daily payments on a loan. SBA small business loans do not work this way.
Most loan payments are due on a monthly schedule and can last for quite a few years. This makes them some of the longest-term loans in the financial services industry.
While exact timelines can vary among the different SBA lenders, the following maximum repayment schedules are standard:
- 7(a) Loans: 7 years
- CDC/504 Loans (machinery and equipment): 10 years
- Commercial Real Estate Loans: 25 years
These generous terms allow you to make your payments on time while growing your business steadily in the background.
4. Professional Counseling and Education
The SBA is dedicated to helping small business owners succeed. That said, many SBA loan programs provide more than just money. There are some that also include professional business counseling and education for new business owners.
This is made possible through the SBA’s partnership with a range of career services, including business development centers and local SCORE chapters.
With these resources, small business owners can gain access to the skills and tools they need to put their money to good use. The SBA can also put business owners in touch with personal mentors they can contact directly for guidance and advice.
5. SBA Funding for New or Existing Business Owners
Think only new startup owners can apply for SBA small business loans? That isn’t the case. These loans are designed to support both new and existing business owners alike.
In fact, the SBA requires that a company show evidence of its experience within its industry before applying for certain high-dollar loans.
For example, say you’re a small business owner applying for a substantial loan amount via a 7(a) or CDC/504 loan. In this case, you’ll need to prove that you’ve been in the business for several years before you can qualify.
At the same time, if you only need a small amount of funding, a microloan ($500 to $50,000) can help you establish a financial credit history with the SBA.
6. Application Process for SBA Small Business Loans
Most small business lenders have your best interest at heart, but they’re also looking out for themselves. Taking on a new client is risky, especially if it’s a relatively new business. Ultimately, it’s easier for them to lend money to well-established businesses that have a track record of success.
As such, most banks and traditional lenders will require an extensive and lengthy application process. They want to know the details about your financial stability and your potential for success.
This has made it increasingly difficult for new business owners to secure the funding they need. In response, SBA small business loans applications are designed to be as quick and painless as possible.
7. Secured Working Capital for Small Businesses in the U.S.
Your monthly expenses as a small business owner can feel like a mountain, you’ll never be able to climb. In addition to your basic operating expenses, you also need a good source of working capital to make key investments and important purchases for your company.
When you finance these investments and purchases from the proceeds of an SBA loan, you set your company up for long-term stability.
Otherwise, rushing out to purchase equipment, real estate, or other items without a plan could deplete your already-precious cash savings. SBA small business loans can provide you with the ongoing funds you need so you can better manage your company’s cash flow.
8. SBA Lenders are Backed by the U.S. Government
One of the most important aspects of SBA small business loans is that they are backed by the U.S. government. This limits SBA lenders exposure to potential losses due to non-payments from borrowers.
The SBA can guarantee up to 85% of the loan if it is $150,000 or less and up to 75% of any SBA small business loans equaling more than this amount.
They do so to reduce SBA lenders risk, including banks and other financial institutions. The U.S. Government protects SBA lenders against defaults on payments, which makes it easier for SBA lenders to extend favorable terms and conditions to small businesses.
9. More Lenient Qualification Requirements
When you apply for a small business line of credit with a bank, it can feel like walking through fire just to get your application and paperwork submitted and reviewed by a loan officer.
This is because most lenders in the small business lending space set extensive qualification requirements to pre-vet applicants. These include demonstrating that you have:
- A certain number of years of experience within your industry
- Significant assets that can be used as collateral
- A profitable business
- Established business credit history
SBA small business loans have more relaxed requirements when it comes to the business and its owner(s). SBA lenders know that you can’t show your business’s true potential until it has steady cash flow and are willing to work with you in the interim.
That said, the three main factors that SBA lenders will look at the most include:
- Your personal and business’s credit scores
- How many years you’ve been in business
- Your business’s cash flow
These factors hold weight in determining whether or not you qualify for an SBA loan. However, as detailed below, they are not designed to act as strikes against you.
10. An Option for Bad-Credit Applicants
Is your business credit score less than stellar? What about your personal credit score?
While most SBA lenders will check your credit score, they won’t base their entire decision on the credit score number. Instead, SBA lenders take a wider and more comprehensive view of your financial picture.
Many business owners circle back around to SBA small business loans after exhausting all of their other funding options. However, starting with the SBA in the beginning would be a more effective approach to improving your small business’s cash flow.
Learn More About SBA Small Business Loans Today
You deserve access to the funds you need to help your business grow. Yet, there are many financial challenges that might stand in your way. Whether you’re an experienced or a new business owner, don’t be afraid to ask for financial assistance.
Take the time to research SBA small business loans so you can fully understand how they work. Do you want a quick and easy way to search for SBA lenders? Then you came to the right place.
Our online application takes less than 2 minutes to complete and helps us match your business to SBA lenders. Apply today or call 704-904-0774 to speak with a financial advisor.