According to reports, there are over 30 million small businesses in the U.S. In addition, small businesses employ 47,5% of the workforce, which equates to roughly 58.9 million people. Small business owners need to know more about Small Business Administration loans.
Thanks to the fact that small businesses are powering the U.S. economy, the government has opted to support the opening and growth of small businesses via Small Business Administration loans.
As these loans are designed to provide relief and stimulus to small business owners, they hold a number of benefits, such as low-interest rates and longer terms.
If you are trying to obtain financing for your business, you do not want to skip over Small Business Administration loans. These loans offer small business owners an opportunity to capitalize on some of the lower interest rates.
However, before you go ahead and apply, there are a few things that you need to get prepared beforehand to increase your chances of approval. Read on to find out what these are, as well as how to apply for a SBA loan.
The Benefits of Small Business Administration Loans
The are many benefits of Small Business Administration loans as they are designed to provide government-backed assistance to small business owners in the U.S.
The following are some of the main benefits of SBA loan programs.
Most small business administration loans are actually made by independent lenders but are backed in part by the Small Business Administration. Because a majority of the loan amounts are covered by the SBA, lenders are able to extend more generous terms than for regular loans.
For example, depending on what lender is administering the loan, you could enjoy APRs ranging from 5.0% to 10.0%. The exact rate you get will depend on what type of Small Business Administration loan you take out. It also depends on the duration of the loan and the spread that the lender applies.
SBA loans are fixed at the prime rate; however, lenders are allowed to add on a spread in order to cover their own costs. To keep these down, the Small Business Administration caps spread at 2.25%-2.75%, depending on the loan maturity.
Because of this, SBA loans often have much lower interest rates than other loans that you might apply for. This is particularly true if you do not have a high credit score and therefore can only secure loans with high-interest rates.
Fewer Excluding Requirements
The other benefit of SBA loans is that they can be easier to apply for than other types of loans.
In many cases, a business that hasn’t been up and running for a year or so will have a very hard time getting a loan. This makes it difficult for business owners to raise capital and grow their business. SBA loans were designed to solve this problem.
What’s more, they are also geared to assist people who typically have a hard time with business loan approval. Such as business owners in outlying areas, female business owners, or disadvantaged business owners.
However, at the same time, you will need to have a viable business model. You should prove that your business will be able to achieve growth. A small business that is sinking in debt or mismanaged is not likely to gain an SBA loan approval.
What You Need for a Small Business Administration Loan Application
The benefits of Small Business Administration loans make them a good funding option for many small businesses. However, SBA loans are designed to have less stringent requirements.
They are meant to be more accessible for small business owners, but the approval process can take some time. One of the things that can lengthen SBA loan approval times is not having the right documentation together from the get-go.
To prep for a smooth SBA loan application process, you should assemble all the required documents. These include your business certificate or license, personal financial statement, office lease, loan application history, and resumes for key team members.
Besides these items, there are a number of other documents, statements, and returns you should get lined up. These are as follows.
1. Know Your Personal Credit Score Before Applying for an SBA Loan
If you are starting a new business, then it likely won’t have its own credit history. Even businesses that have been running for some time might not have their own credit score. Because of this, your personal credit score might be used during your approval process to determine your eligibility.
You won’t have to provide your credit report along with your application, as the SBA or lender can access this themselves. However, it is a good idea to request your credit report in advance. The three main credit reporting agencies are Experian, Equifax, and TransUnion.
Once you get the three copies of your credit report you can look them over for discrepancies. If you spot any errors, you should take these up with the reporting agency in writing and have them rectified before you apply for an SBA loan.
Although the importance of credit scores is not as high for ordinary loans, your credit score will make a big difference to your SBA loan application. This is why you should take the time to make sure that everything is accurate.
2. You Business’s Credit Report (If It Has One)
If your business does have a credit score, then this will be used by the SBA or lender to ascertain your business’s track record with credit repayment.
If your business has a credit history, you should invest the time to pull your business’s report from Dun & Bradstreet. Then ensure that it is error-free before you move forward with applying for a Small Business Administration loan.
3. A Professional Resume
When applying you should also submit a professional resume. This details your business and industry experience. This is your chance to let the lender or SBA know why you are qualified to run your business and make it a success.
4. Your Personal Tax Returns
Besides your credit report, you should also have your personal tax returns ready. These will be required by the SBA, especially if you have yet to submit your first business tax return.
5. Knowledge of the Types of Small Business Administration Loans
Before you apply for a Small Business Administration loan, you will want to know which type of SBA loan you need. The SBA has four types of loan programs. These include:
- The 7(a)-loan program
- CDC/504 loan program
- Microloan program
- Disaster loans
The 7(a)-loan program is the most popular. Funds from these loans can be used for a variety of things. Like working capital, purchasing property, other asset purchases (such as machinery and equipment), and even debt refinancing. These loans have a maturity of up to 10 years for working capital and 25 for fixed assets.
The CDC/504 loan program, on the other hand, offers loans that are specifically designed for financing major assets such as the purchasing of land and buildings. For these loans, you will typically have to put up 10% of the costs and will have 25 years in which to repay the loan
The microloan program offers businesses the chance to borrow a small amount of money to be paid back on shorter terms. These loans are typically for startups or very newly established businesses.
If you have been in a disaster, you might be eligible for the SBA’s disaster loan program. These loans have very low rates of interest and are designed to get you back on your feet after a set back from a declared disaster such as a hurricane.
6. The Financial Statements, Tax Returns, and Bank Statements of Your Business
If your business is up and running, then you will need to gather together its tax returns, as well as its financial statements and bank statements for the last three years.
The financial statements should include copies of your business’s income statement, balance sheet, business debt schedule, and cash flow projection.
7. A Business Plan is Required for Small Business Administration Loans
For both new and existing businesses, the SBA will require you to submit a business plan. The business plan needs to outline your operational and financial projections for the future. It will need to lay out the more intangible aspects of your business such as its mission and values.
Your business plan is the opportunity to convince the SBA and lenders that your small business is worth the investment. Therefore, take time to make sure that it is based on market data and conveys your vision clearly.
Small Business Administration loans do require collateral. Although the SBA backs most of the loan, you will need to back a portion of it. What’s more, if an SBA lender deems your loan to be high risk, you will be required to provide more collateral.
You can choose to use personal or business assets as collateral to secure your loan. These are some of the main things that you will need to apply for a Small Business Administration loan.
Most small business administration loans are actually made by SBA lenders we work with. For more information on how to apply for an SBA loan, you can take a look at the Small Business Administration’s application checklist.
Need to Apply for a Small Business Administration Loan? Start Here
The benefits of Small Business Administration loans make them a prime option to choose if you need funding for your small business. If you want to apply for a Small Business Administration loan, you are in the perfect place.
Instead of hunting down and choosing a bank to apply through, you can use our convenient online application service. Within our network of approved lenders are SBA backed providers who will want you to apply for an SBA loan with them.
Simply complete our fast and free online application and one of our SBA loan advisors will match you with up to five Small Business Administration lenders. Find out more by applying today.