If you own a business or are looking to start a business you may have heard about Small Business Administration (SBA) Loans. To many business owners, SBA Loans seem like the best solution to all their business problems. As with all financing options, however, there are advantages and disadvantages to these government guaranteed loans.
If you are a small business owner In the Finger Lakes region looking for financing to start a new business, buy equipment or purchase real estate for your new business, then you will need to understand what SBA Loans are, the terms of these loans, and what the application process entails.
What is an SBA Loan?
SBA Loans are overseen and approved by the Small Business Administration. While individual financial institutions may offer these types of loans, the SBA dictates the application process, approval, and terms.
There are four main types of SBA Loans:
- General Small Business Loans 7(a)
- Mircoloan Program
- Real Estate and Equipment Loans (CDC/504)
- Disaster Loans
The federal government guarantees up to 85% of these loans that are less than $150,000 and 75% of loans that are more than $150,000. This guarantee is what makes these loans so appealing to both lenders and business owners.
The most common uses for these loans are for working capital, business expansion, purchasing new equipment, buying a business, or purchasing real estate. The maximum loan amount you can request is $5 million dollars but the Microloan program allows new or growing businesses to borrow minute amounts for a short period.
Loan Maturity and Interest Rate
If you are looking to finance working capital, you can have up to 10 years to repay your loan and if you are looking to finance fixed assets you can have up to 25 years to repay the loan.
The interest rates are reasonable and controlled by the SBA. While rates vary depending on the type of loan you are requesting, the SBA puts a cap on the spread financial institutions can add. The term spread is used to define the mark up financial institutions can add to the prime rate of a SBA loan.
For example, if you are looking to borrow $50,000 for 5 years, the interest rate would be the prime rate with no more than a 6% spread added onto the loan by the financial institution you are working with.
SBA Loans and Repayment Terms
Another benefit of an SBA Loan is the repayment terms. Loans with a longer repayment term have a lower interest rate and monthly payment than loans that mature in a shorter period. This allows you to obtain the financing or equipment you need without having to worry about high payments or a short-term loan.
SBA Application Process is Rigorous
While there are many benefits to applying for an SBA Loan, the qualification process is rigorous and time consuming. In addition to the application, the SBA demands a copious number of supporting documents, including:
- Your resume
- Your personal income tax returns
- A Personal Financial Statement form
- An overview of your business
- Your Profit & Loss Statements
If you are interested in viewing the entire check list, then you can view it here.
Individuals who have a sound personal and business financial history have a better chance of being approved for an SBA Loan and even then, you must wait several months to receive your funds.
If you are interested in learning more about SBA Loans and if your business would qualify, contact the loan experts at Business Loan Connection and they can help you determine if an SBA Loan will help you meet your business goals.