Your business idea is solid and you’ve proven your viability as an entrepreneur by either getting investors or self-funding your new venture. However, you need capital to expand your operations or open a new location. In most cases, you may find it difficult to get funding from banks or other traditional lenders. This is where the SBA loan comes in handy. The Small Business Administration (SBA) loan is a type of financing for small businesses that are not able to get loans from traditional lenders because of their size or risky nature of their business ideas. An SBA loan has less stringent requirements compared to other types of loans available for startups. Here we will discuss how you can get an SBA loan and the various benefits it offers as a small business owner.
What is an SBA Loan?
SBA loans, also known as 7(a) loans, are a type of financing offered by the Small Business Administration (SBA). It is one of the easiest methods to get funding for your business, as the SBA has streamlined the application process quite a bit. SBA loans are often used by startups or entrepreneurs with less than perfect credit who are unable to get funding from a bank or a venture capitalist. SBA loans typically require 10% of the amount being borrowed as equity in the business, which makes them a less risky option for lenders. This “guarantee” from the borrower makes it easier for the SBA to approve a loan. Basically, when you apply for an SBA loan, the government guarantees a portion of the loans issued by participating financial institutions, which allows these lenders to make loans to businesses that might not otherwise qualify for financing.
6 steps to get an SBA loan
- Determine your business’s eligibility for an SBA loan:
First and foremost, make sure your business is eligible for SBA loans. The SBA has an online eligibility tool that lets you enter information about your business to see if it qualifies. The tool includes several eligibility criteria, including the type of business and the amount you want to borrow.
- Get a business plan ready:
Along with the eligibility requirements, lenders will also want to see a business plan. If your business idea is in the early stages, you can use templates to help you put together a cohesive plan.
- Research SBA loan options:
Once you know you will be applying for an SBA loan, it’s time to do some research. You can start by searching online for SBA loan providers near you or ones that are online.
- Apply for an SBA loan:
Once you’ve narrowed down your options, it’s time to apply for the loan. You can do this online or apply in person at your local SBA office. Some lenders have streamlined the application process, making it easy to get everything set up and complete.
- Meet with your lender:
After you’ve applied for the loan and been approved, you’ll have to meet with your lender to sign the loan documents. This is when you will be asked to provide proof of your business’s revenue and assets.
- Repay the loan:
After you’ve been approved for a loan, it’s important to make sure you repay it on time. Your loan provider will let you know the terms of the loan, including the repayment period, interest rate, and any other relevant terms.
What are the eligibility requirements for an SBA loan?
– Business type – The type of business you have will dictate the amount of funding you receive. Lenders have different maximum loan amounts based on your line of business. – Size of the business – The amount you’re seeking will also depend on the size of your business. Lenders have different size requirements based on the amount you want to borrow. – Credit score – Although lenders look at more than just your credit score, a borrower’s credit score is an important factor in the SBA loan approval process. – Collateral – If you need a larger amount of funding, you may be asked to put up collateral to help secure the loan. The lender will take the collateral if you fail to repay the loan. – Local or national financing – If you’re just starting out, you may only qualify for a local SBA loan, which is a loan that’s guaranteed by the SBA but issued by a local financial institution. Once your business has been operating for at least a year, you will likely be eligible for a national SBA loan. These loans have more competitive interest rates.
Pros of SBA loans
– Easy application process – The application process for an SBA loan is much simpler compared to other types of loans. Lenders have automated the process and made it easier for business owners to apply for a loan. – Longer repayment terms – Most SBA lenders offer terms of 7 to 15 years, which means you have more time to repay the loan. – Competitive interest rates – SBA lenders offer interest rates that are lower than what you would get from banks or other lenders. – Fewer upfront costs – SBA loans do not require a large down payment or collateral, meaning you don’t need a large amount of cash upfront. – Government guarantee – The government backs these loans and guarantees them, making them a safer option for lenders.
Cons of SBA loans
– Limited funds – Although the SBA loans are a good option, they only account for a small percentage of the overall lending market. Therefore, they may not be the best option if you’re looking for a large amount of funding. – Lengthy application process – The application process for an SBA loan is lengthier compared to other types of loans. – Competitive interest rates – Although SBA loans have low interest rates, the loan approval process can be lengthy. You may have to wait for weeks or even months to get the loan approved.
How to apply for an SBA loan?
– Find a lender – The first step is to find a lender that offers SBA loans near you. You can start by searching online for SBA loan providers. Some lenders also have offices in multiple cities, so you can apply in person. – Apply online – Most lenders offer a streamlined online application process. You may have to provide some basic information about your business and financial standing, but lenders often let you upload documentation at a later date. – Meet with your lender – After you’ve applied for the loan and been approved, you’ll have to meet with your lender to sign the loan documents. This is when you will be asked to provide proof of your business’s revenue and assets.
Conclusion
SBA loans are a great option for business owners who need a loan but don’t have perfect credit or don’t have enough cash saved to make a down payment on a loan. The application process is relatively straightforward, and depending on your business’s size, you may only need to make a 10% down payment, which is easy for most businesses to do. That said, SBA loans do have their drawbacks. They have lengthy application processes and competitive interest rates, and you might only qualify if you have a relatively small business.