Top Reasons An SBA Loan is a Great Way to Fund a Company

The Small Business Administration works with financial institutions and specialized lenders to offer business loans. These loans are typically easier to qualify for. At least compared to traditional business financing. And you can use them for many aspects of your business. The amount of time you have to pay back these loans depends on the purchases that you make. Working capital is tied to a seven-year repayment term. You can pay back equipment purchases over 10 years, and real estate has up to a 25-year repayment term. In most cases, you can use this funding for practically any expense that has to do with your business. And it’s especially good for gathering the resources for rolling out new locations, equipment, and other improvements in operations.

A Quick Summary of SBA Loans Types

Before we get into why you should choose an SBA loan to fund your company, let’s take a quick look at the various types of SBA loans. It’s extremely important that you are familiar with them. This is the only way you can actually choose the right type for you. And also figure out all the benefits that come with the right SBA loan.

7(a) SBA Loans

SBA loans come in several forms. The 7(a) is the one that typically comes to mind when someone refers to this loan program. The 7(a) loan is intended for working capital, as well as business expansion and major equipment expenses. You can borrow up to $5 million under this program.

CDC/504

Your company needs to purchase real estate, buildings, or machinery. And you don’t have a need for other types of working capital. Then the CDC/504 loan may be the better option than the 7(a). It has a higher maximum of $25 million. This provides more flexibility on getting the high-cost real estate and equipment needed to invest in your company’s success.

Microloans

Typically, these loans are issued through nonprofit organizations and specialty lenders, rather than your typical bank or credit union. This program is geared towards very small businesses and those at the beginning stages. Much like the 7(a) loans, you can use microloans as a source for working capital. The maximum loan available under this program is $50,000.

Disaster Loans

It’s very easy for unexpected disasters to ruin a small business and cause it to become bankrupt. The SBA offers assistance during these situations. The aim is to help companies avoid going out of business. This loan program provides funding for needs that arise during an emergency. Typically, the SBA handles these loans directly.

Do SBA loans require a personal guarantee?

The SBA requires a personal guarantee from every owner with at least a 20% ownership stake and from others who hold top management positions. A personal guarantee puts you and your personal assets on the hook for payments if your business can’t make them.

Reasons to Get a Loan for Your Business

Secure working capital:

One of the primary reasons that small businesses get loans is to secure working capital for their companies. When you have more working capital available, you can make investments and purchases that lead to a higher revenue stream over time. You’re setting up a foundation for long-term gain. Doing so by financing these purchases. As the upfront cost may be significantly more than your small business can cover from its current cash flow. Either it is for real estate, equipment, inventory, technology, or other expenses.

Expand new locations:

Another reason to get a loan for your business is to expand to new locations. If you’re doing great at your current venue, but you want to expand, then a loan will give you the funding you need. It will allow you to establish your business in the new market until the revenue starts flowing for that location.

Small business loans help these companies compete against larger organizations, which already have substantial resources available to fund their operations. You may want to use the money to bring in new employees, invest in time-saving software, or fund product development.

A healthy mix of small business financing combined with your current and projected cash flow is a valuable resource for steadily and sustainably growing your company. You don’t have to pass up profit-generating opportunities because of a lack of capital when you have access to this type of funding loan.

Give you more options:

Ultimately, a loan gives you more options. That is excellent for a savvy business owner that knows the company isn’t living up to its full potential yet. In the long run, it helps the company’s health that there is another funding source outside of investors and the existing cash flow. This diversity means that if something happens with one of the other sources, it creates a lower risk of the company going into bankruptcy.

List of major benefits of an SBA loanMajor Benefits of an SBA Loan

SBA loans have many benefits that they bring to small businesses. Here are a few reasons to consider applying for an SBA loan.

Low Interest Rate Compared to Other Business Loan Options

Commercial loan rates can be significantly higher than what you’re used to with consumer rates. This can make it difficult to get the necessary financing to establish or grow your business. An SBA loan has significantly lower rates, with many in the single digits. The exact rate depends on the type of loan that you’re getting, as well as the repayment terms and your company’s creditworthiness.

Multiple Types of Loan Options

There are three primary categories of SBA loans: 7(a), microloans, and CDC/504. Each has a specific financing use that they cover, which allows businesses to choose the one that makes the most sense for their needs. In most cases, the 7(a) ends up being the loan option that covers most typical business use cases, while microloans are suitable for smaller businesses, and CDC/504 are intended for large fixed asset purchases.

Both Established and New Businesses Benefit

Businesses of all sizes can take advantage of the opportunities that SBA loans provide. Through this program, you have access to more resources when you’re first starting out or as part of your ongoing expansion. This flexibility makes it accessible to more business owners and allows for people to realize their vision for their companies.

Government Backed

One of the biggest advantages of the SBA program is that the loans are federally backed by this agency. They guarantee the loans up to 85 percent of their value, reducing the risk for banks and other financial institutions that participate in this program. The biggest impact to businesses is that companies that wouldn’t normally be able to access financing, are willing to reduce their qualification criteria because they have less concerns if someone defaults on their SBA loan.

Relatively Low Qualification Requirements

Many commercial loan qualification requirements can be onerous, requiring extensive time in the industry, large cash flows, significant assets, well-established business credit lines, and countless other factors. The SBA loans have lower requirements, both on the business side and the personal guarantee side of things, which make it much easier to qualify for these products. It can be difficult to become a great loan applicant on paper when you need to expand your business so you can show its true potential, which makes SBA loan options particularly useful in this kind of situation. The three primary factors they look at are credit scores (both business and personal), how long you’ve been in business, and your cash flow.

It’s Often the Only Loan Option for Many Businesses

Since the SBA loan offers lenders more flexibility in their selection criteria, it’s frequently the only option available for business owners who have limited experience with business credit, or who have poor personal credit. After businesses get denied financing through other channels, they can turn to the SBA as a source for the funds they need to invest in their operations.

Long Loan Repayment Terms

Depending on the type of SBA loan you take up, you could have up to 25 years to repay it. Your payments are also billed on a monthly basis, rather than a shorter schedule. The typical SBA loan has at least a 7-year repayment term, which provides plenty of time to make payments while your business begins expanding thanks to the influx of capital.

Support Through Educational Resources

Many business owners looking at SBA loans are relatively new to running a company. There are many factors that go into the success or failure of a company, and the SBA has a vested interest in helping you succeed. The educational resources available on the SBA site and through the agency’s partners help you learn from your mistakes, avoid other issues, and set your company on the path to long-term growth.

Gain Mentorships

Another way the SBA helps you succeed is through connecting you with mentorships. An experienced mentor can be a significant asset as you face business challenges during your growth. Being able to get input from your mentor can make a world of difference in the way that you set up your business goals and move forward.

Preparing for the SBA Loan Application Process

If a SBA loan is right for your business, then it’s time to start preparing for the application process. The first thing to do is look at your personal credit. As part of the SBA application, if you have a 20 percent or more ownership interest in the company, you’ll need to put a personal guarantee on the application.

Having strong personal credit can help reduce your rates on this loan product. Although there are many other factors that also go into the APR that you’re given. Your business credit is also considered. So it’s important to build up that type of credit through business credit cards, lines of credit, and charge accounts with your vendors and suppliers.

Gather documentation such as your business plan, profit and loss statement, business debt schedule, bank account statements, asset documentation, cash flow projections, and other information that shows the financial health of your organization. You want to show the SBA lender that you have an established business that has a strong plan for future growth. The SBA helpfully includes a complete checklist of documents that you’ll put together as part of your application.

Choosing an SBA Lender

For most SBA loan products, you’ll deal with a bank or credit union as your SBA lender. Some specialty lenders and nonprofit organizations are also involved in the process. And the SBA works with loans directly for disaster funding. You can check a business loan shop to compare your rate options among banks and other lenders.

Experience Matters

The most important aspect of your potential lender to look for is how much experience they have with issuing SBA loans. If the SBA program is a small part of their overall lending business, then they may not have the expertise required to give you the best option that’s available to your business. If possible, reach out to other business owners in your market or your location. See which lender they prefer, and their overall experience.

When you interact with the lender, are they readily available? Is it difficult to use their online services or is everything laid out in a straightforward and easy to navigate fashion? Do they answer your questions in full and have a good reputation in your community? Are there lenders that come up again and again in your industry as great choices to work with?

Consider all of these factors when you begin evaluating the financial institutions for your business. You don’t want to pay more in interest rates than is necessary, nor would you want to miss out on important lending opportunities simply because the bank doesn’t have enough of an understanding of the SBA loan program.

The SBA loan application process, from start to finish, may take several months. It depends on the state of your business and personal finances. Your industry, the length that you’ve been in business, the lender’s familiarity with these programs, and other factors. While it may be frustrating at first to wait, that patience is rewarded through generous loan limits and low interest rates.

Reasons Why Your Application May Be Rejected

Rejection can be difficult to deal with. Especially if you’ve applied through other lenders before approaching the SBA program and you got denied. However, each denial will give you useful information to better prepare for the next application. And you will learn ways to position your company to get the investment loans that you need to fuel your growth.

Not established enough

Outside of the microloan program, you need to have a well-established business before the SBA lender will feel comfortable issuing a loan to you. The exact definition of “well-established” will vary between each financial institution. But they will generally want to see several years in business with an overall positive flow of revenue. If a microloan is too small for your needs, you may need to wait another year or two before you try to apply for the loan again.

Poor personal or business credit

Bad credit on either the personal or business side of the equation can lead to denials. The bank may not feel confident that you’ll be able to pay the loan back as agreed. While you can get around poor personal credit by not providing a personal guarantee, you won’t be able to do the same thing if you are not paying your business credit accounts on time.

SBA loans don’t cover your industry

Some industries are excluded from coverage by SBA loans. So you would not be eligible for this program at all. The denial would detail this information so that you aren’t wasting time trying to apply for a loan that wouldn’t be available to you.

You don’t have enough collateral to make the bank feel comfortable issuing the loan

The maximum percentage that the SBA guarantees for their loans is 85 percent. When you have a larger loan, that 15+ percent can represent a significant amount of money for the bank to put on the line. In these cases, you’ll need to offer up collateral so that the bank covers their risk to an acceptable level when issuing the loan. The exact type of collateral depends on the lender that you’re working with and the loan that you need covered.

You want to maintain a divide between your business and personal assets

Refusing to give a personal guarantee frequently leads to denials. Even if you’re only doing it to stop your personal and business finances from mingling together. You may need to look at loan options outside of the SBA loan program to secure financing for your company.

Final Thoughts

The SBA loan program is a valuable resource for small businesses looking to expand their operations. And to secure funding to invest back into their business. Lenders working with the SBA are able to offer a variety of loan products that have more relaxed credit requirements than other commercial loans. And there are many benefits for companies deciding to go this route. If you can qualify for an SBA loan, you can really benefit from one. If not, there are other small business funding options out there.

There are other options other than SBA loans to consider. You can find all about them in our finance education section. We have dozens of blogs on the topic of business loans and there is not a piece of information we left out. If you decide on another option for you, for example online lenders, Loanry has your back as well. We can connect you to reputable lenders and make the process of getting a loan a bit quicker and easier for you.