Small Business Administration (SBA) loans empower micro-enterprises by helping them secure funding requirements from respective lenders and other financial institutions.
Supported by the government, SBA loans provide favorable loan terms for small company owners while minimizing credit risks on the lender’s side. For small businesses that require funding, SBA offers different kinds of loans that meet the company’s present needs.
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What Makes SBA Loans Better for Small Businesses?
Unlike conventional loans, SBA-guaranteed loans offer more lenient terms and credit requirements for small enterprises. Since the federal government backs SBA loans, the borrower’s default risk is lessened. Therefore, it encourages credit unions and other private lenders to offer preferable interest rates. Even micro-enterprises with poor credit standing can still apply for an SBA loan and get approved. Once the SBA eligibility requirement is met, micro-enterprises can proceed to SBA-approved lenders and begin the process to arrange their own bespoke loans.
What Are The Benefits of SBA Loans?
SBA designed different loan programs to cater to an entrepreneur’s business financing. Depending on the type of loan program, down payment and interest rates in SBA-backed loans are more competitive.
These benefits make SBA loans much more ideal than those provided by credit unions and financial institutions. Moreover, repayment terms offered by the best SBA lenders are more flexible in terms of timescales; some even offer fixed interest rates within a given period.
In this regard, greater capacity is given to the borrower to invest their money and use it for further operational needs.
What Are The Types of SBA Loans?
With the help of SBA-approved lenders, small company owners can choose and apply from various SBA loan programs. Each type differs in terms and conditions depending on the borrower’s needs. Below are some of the SBA loans:
- SBA 7(a) Loans – This type of loan is the most common among micro-enterprises that require special requirements. SBA 7(a) loan is a good option for small businesses that must acquire property and equipment for business needs.
For a maximum loan amount of $5 million, small enterprises can also use this significant amount of money to fund:
- Working Capital (short-term or long-term).
- Purchases necessary for the operation of the business (i.e., supplies).
- Renovation & improvements of company property.
- SBA 504 Loans – This type of loan provides generous financing to businesses that are looking into business expansion or real estate acquisition. Since 504 loans can secure up to $5.5 million, two lenders share the risk of meeting this funding requirement.
The SBA backs 40% of this financing from a Certified Development Company (CDC), while 50% from a private lender such as a bank or credit union. Borrowers are required to initially pay the remaining 10% as a down payment.
For example, entrepreneurs can use this type of loan to fund:
- Modernization or upgrade of existing company facilities.
- Fixed asset acquisition (to promote job creation).
- SBA Micro Loans – This type of loan is valuable to small enterprises, offering up to $50,000 of financing. In particular, the SBA Micro Loan program provides short-term financing solutions for various operational needs, such as:
- Repairs and maintenance necessary for daily operations
- Supplies and inventories
- Furniture, fixtures, and office equipment
So, by managing your business’s finances right, microloans can be invaluable.
- SBA Disaster Loans – SBA provides this loan to declared disaster-damaged areas. As natural calamities create physical and economic impacts on small businesses, this particular one does not only help small businesses to recover but also private non-profit organizations, homeowners, and renters.
Below are different types of SBA Disaster Loans catered for specific needs:
- Home and Personal Property Loans (HPPL) – Homeowners and renters who have experienced damage to their personal or home property are eligible for this program.
For repairs or replacement of primary residence, homeowners may be able to borrow up to $200,000. In case of improvement to the primary home to help mitigate future risk on the property, the SBA increases the loan amount by 20%.
For damages caused to personal properties, renters and homeowners are eligible for up to $40,000 loan value.
- Business Physical Disaster Loans (BPDL) – Private Non-Profit Organizations (NGOs) and businesses, including microenterprises, in declared disaster areas can apply of this loan from the SBA.
This loan aims to help companies recover from physical damages caused by natural disasters and restore their everyday operations.
For repairs or replacement of real property, equipment, machinery, and fixtures, small enterprises are eligible for up to $2 million.
If the damaged property is improved to help mitigate future risk, the SBA can increase the loan amount by 20%.
- Economic Injury Disaster Loans (EIDL) – Small businesses, small agricultural cooperatives, and private NGOs that have been affected and, therefore, incur significant monetary damages are eligible for this type of disaster loan.
Understandably, disruptions due to unforeseen circumstances can notably impact the overall cash flow of microenterprises.
As a solution, EIDL provides funding assistance of up to $2 million until such time that small businesses return to their pre-disaster condition.
- Military Reservists Economic Injury Disaster Loans (MREIDL) – SBA supports eligible small businesses through this particular loan in cases where key personnel are called to serve active military duty during times of national defense. This loan program aims to cover operating expenses during the employee’s absence.
If an insurance claim results from this situation and there is enough working capital to operate, MREIDL could still provide up to $2 million of funding assistance to affected small companies.
However, the law mandates that SBA be the last resort for small businesses that suffer economic injury because of this situation. Funding from other sources must be their best option if it can be secured without a financial burden.
How Can Businesses Apply For SBA Loans?
Though SBA loans are partially guaranteed by the government, not everyone succeeds in securing their much-needed funding requirement. Each SBA-approved lender has a unique eligibility requirement set that microenterprises must ensure. In general, it could be based on the company’s size, income generation, liquidity, company ownership, area of operation, and the purpose of the business itself.
Below is a complete list of steps on how to successfully navigate an SBA loan application:
- Check eligibility requirement – It is vital to conduct a self-assessment to ensure that the SBA eligibility requirement is met. Look at the company’s financial position, the character of ownership, purposes, credit standing, and size.
- Choose which SBA loan program best suits your needs – SBA offers different loan programs to cater to the various funding requirements of small businesses. Before proceeding to the application, it is best to assess the specific needs of the micro-enterprise. From there, you may narrow it down by selecting which among the wide variety of SBA loan programs is the best solution.
- Gather necessary documents – Upon choosing the best SBA loan to apply for, it is crucial to gather the required documents that support the company’s necessity for short-term or long-term funding. The documentation may include financial statements, credit reports that show your credit standing, business plans, tax returns, and other business documentation such as permits, etc.
- Find an SBA-approved lender in your area – Visit the official SBA website to view the potential creditors of your micro-enterprise. Simply fill out the form that primarily describes your needs and the lender will be in touch in due course.
- Contact your lenders – After filling out the form, you must receive a list of SBA lenders interested in financing your loan. You may contact these lenders for their requirements, loan terms, etc. From there, you can compare who provides more favorable interest rates and flexible payment terms.
- Submit loan requirements – Requirements needed by the SBA lenders in your area may vary. Upon selecting the best lender that could provide your business needs, fill out an application form, secure the necessary documents, and submit.
Remember, using the SBA lender match does not guarantee one from securing a business loan. It only serves as a tool to match small businesses and private lenders within the community. It maximizes micro-enterprises’ ability to find eligible programs suitable for their needs. While this tool generates lenders that provide SBA loans, many also offer traditional loans.
Securing funding during an economic crisis is crucial for small businesses to survive. For example, during the pandemic, many microenterprises had to shut down operations due to a lack of working capital. SBA loans are, therefore, the last straw for small businesses that cannot secure financing requirements from other resources. With its numerous, more favorable benefits than traditional loans, it attracts micro-enterprises to apply.
Though this is backed by the SBA, some lenders may require you to collateral an asset as a guarantee for your loan. Hence, small businesses with impressive credit scores and industry experience have a greater chance of securing an SBA loan. Also, private lenders in the community will likely offer a company that knows its financial projection and has a remarkable ability to pay its obligations, however, each SBA-approved lender’s eligibility requirements must be met to secure a loan.