What if I told you that there are loans out there with better terms and lower interest rates?
That sounds like a dream, right?
Well, it’s not.
Let me tell you why…
You’ve probably heard about SBA loans, but what are they really all about?
The fact is that business loans are great tools for growing your business.
They can buy you property, expand your business, or purchase expensive, large equipment so you can grow faster and larger.
With 25 years of experience as a financial coach and banking expert, I’m here to break it all down for you so you can succeed and achieve your goals.
In this article, we’ll explore each type further and determine the best option for your needs.
Let’s go!
What’s a SBA Loan?
SBA loans are business loans partially guaranteed by the U.S. Small Business Administration (SBA), a government agency, and issued by participating lenders, typically banks.
While these loans have strict lending standards, their flexible terms and low interest rates make them an attractive option if you qualify.
How do SBA loans work?
When you apply for an SBA loan, you do so through a bank or credit union.
The lender then seeks a loan guarantee from the SBA, which means that if the borrower defaults, the government will cover the guaranteed portion.
This reduces the lender’s risk and increases your chances of approval.
However, be prepared for an unconditional personal guarantee, putting your personal assets on the line if your business can’t make payments.
The SBA also requires an unconditional personal guarantee from everyone who owns at least 20% of the company.
With the government’s and your personal guarantee, lenders are less likely to hesitate to work with your small businesses.
Once approved, your lender will disburse the funds, and you’ll repay the lender directly, typically monthly.
How long does it take to get an SBA loan?
Generally, SBA loans will take a considerable time to process your loan application.
The funds are often received in 30 to 90 days. So, if you need the cash ASAP, this might not be your best option.
Instead, consider alternative financing options, such as online lenders, business credit cards, or business lines of credit.
Fortunately, lenders who are part of the SBA’s Preferred Lender Program are usually quicker since they don’t require SBA approval before processing your application.
Types of SBA Loans
If you want to apply for an SBA Loan, several options are available, each with different terms and conditions.
Here’s a quick rundown of the most common SBA loans:
SBA 7(a) loans
This SBA’s flagship loan can be used for various business purposes, including working capital, equipment purchases, real estate acquisition, and business expansion.
Loan amounts can reach $5 million, with repayment terms typically up to 10 years for most uses and up to 25 years for real estate purchases.
These loans are known for their flexibility and competitive interest rates, making them a popular choice for many small businesses.
SBA 504 loans
The 504 loan program is designed for businesses looking to make major fixed asset purchases, such as real estate or large equipment.
This program provides long-term, fixed-rate financing through Certified Development Companies (CDCs) in partnership with banks.
Loan amounts can reach up to $5 million, but small manufacturers and certain energy projects can qualify for up to $5.5 million. Repayment terms are typically up to 20 years.
These loans are ideal for businesses aiming to expand facilities or acquire heavy machinery at favorable terms.
SBA microloans
Smaller loans are designed to help small businesses and certain non-profit childcare centers start and expand.
The loan amounts go up to $50,000 and can be used for working capital, inventory, supplies, furniture, fixtures, and machinery or equipment.
Microloans are administered through nonprofit community-based organizations, providing management and technical assistance to borrowers.
Terms can vary, but the maximum repayment period is generally six years.
SBA disaster loans
These loans provide vital economic assistance to small businesses that have been affected by natural disasters.
They offer low interest rates and more relaxed eligibility requirements to help businesses recover from physical and economic damage.
There are different types of disaster loans, including Business Physical Disaster Loans, Economic Injury Disaster Loans (EIDL), and Military Reservists Economic Injury Loans.
Each type caters to different needs, whether repairing or replacing real estate, equipment, or inventory or helping businesses overcome temporary revenue losses.
Pros of SBA loans
Competitive rates
One of the major perks of SBA loans is their competitive interest rates.
Since the government partially guarantees these loans, lenders can offer lower rates than you might find with other loan options.
Interest rates are based on the prime rate plus a markup, typically lower than non-SBA lenders. This can result in significant savings over the life of the loan.
Low fees
SBA loans generally have lower fees compared to other financing options.
There is an upfront guarantee fee based on the loan amount and maturity and a yearly service fee based on the outstanding balance.
These fees are usually lower than those charged by non-SBA lenders, making SBA loans a cost-effective option. Moreover, veteran-owned businesses applying for SBA Express loans are exempt from upfront guarantee fees.
Longer terms
Another advantage of SBA loans is their longer repayment terms.
This means you have more time to pay back the loan, which can ease cash flow pressure on your business.
The term depends on how you plan to use the funds: up to 10 years for working capital or equipment loans and up to 25 years for real estate loans.
Longer terms can result in lower monthly payments, freeing up cash for other business needs.
Large loan amounts
SBA loans offer substantial maximum loan amounts, making them suitable for significant business investments.
For instance, SBA 7(a) loans and 504 loans can go up to $5 million, with even higher limits for certain projects.
This is often much more than what you can get from traditional bank loans or online lenders, which typically max out at $500,000 to $1 million.
Large amounts can support major expansions, equipment purchases, or real estate acquisitions.
Cons of SBA loans
Hard to qualify
Despite the government guarantee, SBA loans have stringent qualification criteria. Lenders typically require strong business financials, a solid credit history, and several years of business operations.
Startups and businesses with less-than-perfect credit might find it challenging to qualify.
The extensive documentation required can also be a hurdle, including detailed business plans, financial statements, and personal credit histories.
Slow to fund
The SBA loan application process is thorough and detailed, which means it can take a considerable amount of time to get approved and receive funding.
It’s not uncommon for the process to take one to three months, depending on the lender and the type of loan. If your business needs quick access to capital, the lengthy approval process might be a significant drawback.
Require some form of collateral
Most SBA loans require some form of collateral, which can be a concern for businesses that don’t have significant assets to pledge.
Additionally, an unlimited personal guarantee is typically required from anyone with at least a 20% ownership stake in the business.
This means that personal assets, such as your home or savings, could be at risk if your business is unable to repay the loan. This added risk can be a major consideration when deciding whether an SBA loan is right for you.
SBA Loans: Final Thoughts
SBA loans offer great benefits, such as competitive rates, low fees, longer repayment terms, and large loan amounts. However, they can be tough to qualify for, slow to fund, and often require collateral.
It is crucial to weigh the pros and cons. SBA loans can be a fantastic resource for growing your business, but they also come with their own set of challenges.