Businesses need money at all stages. Money is used for marketing, paying employees, buying equipment, conducting research, and even launching new products. Unfortunately, cash is not always available, and that’s why 82% of small businesses fail because of cash flow issues.
If you run a business or plan to start one, understanding the available funding options is a great step that can help you navigate a financial struggle. There are many options, but one stands out: SBA loans.
The SBA loan program was established in 1953 and has been a reliable source of funding for small businesses. The loans have favorable repayment periods, but your business should meet strict requirements to qualify. Keep reading to learn more about SBA loans, their pros and cons, and how you can successfully apply for this funding.
What Are SBA Loans?
SBA loans are loans given to small business owners in the United States. The SBA federal agency partially guarantees them, although business owners acquire the loans through banks and other private lenders.
The SBA agency works with multiple financial institutions across the US to help offer loans. Therefore, when you need a loan, you should confirm that the lender offers it.
The SBA loan rates are favorable compared to other types of loans. The repayment period is also long, meaning you can repay the loan comfortably while meeting your business expenses.
SBA Loans Pros
The SBA loan program offers many benefits to borrowers and has benefited nearly four million businesses since its establishment. Some benefits make this loan program popular among small business owners.
1. Varying Loan Types
SBA loans come in various types to help you pick what perfectly meets your business needs. This program offers the main types of loans, including SBA 7(a) Loans, CDC/SBA 504 Loans, and microloans. When applying for a loan, your lender should walk you through the available options so that you can make an informed decision.
2. Government Backing Support
The government partially backs SBA loans. In case of default, the lender can retrieve a part of the loan amount from the government. This backup support gives lenders more incentive to lend to small businesses compared to loans that don’t have the government backup.
3. Favorable Interest Rates
Interest rates for SBA vary significantly depending on the loan type you get and the amount you need. However, overall, the rates are lower than those of conventional bank loans because the government backs them.
4. Longer Repayment Period
Lastly, SBA loans offer a longer repayment period, up to 25 years. This period offers a high level of flexibility to continue running your business without feeling the repayment burden.
SBA Loans Cons
Despite the above benefits, SBA loans may not be the right financing option for every business. Here are the main drawbacks that may make you not consider the loan.
1. Strict Eligibility Criteria
Your business should be based in the US to operate. It should meet the requirements of a small business in the US and show eligibility to repay the loan. Besides, lenders may not offer the money if you still have other unused businesses or assets that you can use to get the money.
2. They Require Collateral
All 7(a) loans above $500,000 need collateral. Still, you should have collateral for the other SBA loan types if you need a loan of $50,000 or more. The collateral requirement can be a drawback if you don’t have it.
3. Slow Approval
The approval period for SBA loans depends on the loan you need. Some loans are approved in 36 hours, while you may wait for up to 90 days for others. The waiting period may be longer than other conventional loans, which is a main drawback if you are urgently in your business.
How to Apply For an SBA Loan
The process of applying for an SBA loan is simple and quite similar to other loans. Here is a step-by-step guide.
Step 1: Choose the Ideal SBA Loan
SBA loans come in three broad categories: 7(a) loans, CDC/504 loans, and microloans. Microloans are for startups and have a maximum amount of $50,000. 504 loans are commonly used to purchase assets, while 7a loans are the most popular, and they can be used to achieve multiple goals. Carefully examine the options to pick what fits your needs.
Step 2: Choose a Lender
Now that you know the loan you need, it’s time to find a lender. You can use a match lender tool to find a lender near you for convenience and reliability when you need to consult something.
Step 3: Check Requirements
Every lender offers unique requirements you should meet to qualify for the loan. For instance, some lenders may need to check your credit score if you ask for a large loan. Ensure that you meet the requirements.
Step 4: Apply For the Loan
Most lenders allow borrowers to apply for an SBA loan online. However, you can still do it manually after consulting the lender. When applying, be keen to write accurate details regarding your name and business. Also, attach all supporting business documents and follow the right procedure to facilitate your loan approval.
Final Remarks
SBA loans are a great funding solution for small businesses in the United States. They offer low-interest rates, an extended repayment period, and varying types. However, they have a strict eligibility criterion, which may only favor some businesses. You may try getting an SBA loan if you need to grow your business and the other funding options don’t favor you. However, you should understand the details well, including the recovery measures in case you default.
