What are SBA Loans?
Business loans that are backed by the Small Business Administration are SBA loans. Banks are the normal SBA lender, and the government will guarantee up to 85% of the amount of the loan. There are three SBA loan options, and a business can borrow a loan for any reason. You might need to equipment, you might need to pay an employee, or you might need to refinance other loans. You might even want to expand your business.
How can your Business Secure an SBA Loan?
When determining if you can qualify for a loan, your credit score is the most important thing lenders consider. If you have a solid credit history, it is not that difficult to qualify for a loan. It doesn’t matter if your business is small, and it doesn’t matter if your business is new.
It is important to keep in mind that these loans require much time and documentation.
It takes a little time for you to receive your money, so do not expect to have the funds immediately. You can get these loans at a low rate, so they could be beneficial to your business.
If you have bad credit or if your business has not been successful, it will not be easy to get an SBA loan. Anytime a lender approves you for a loan, they are taking a risk. They are betting that you are a reliable customer.
Applying for an SBA Loan
The best place to look for an SBA loan lender is with the banks. Your lender will examine the finances of your business. The application process will be thorough. The entire process normally takes about 2 weeks to complete.
How these Loans Work
When it comes to a less expensive way to expand your business, SBA loans can help. Many business owners are desiring to know more about how these loans work and how to qualify for a loan.
However, is it difficult to qualify for?
Fundera has assisted thousands of business owners be approved for an SBA loan. We are knowledgeable and experienced, so we can help prepare you for applying for a loan.
If you know how these loans work and what the requirements are, you can decide if the loan is right for your business.
The Basics of SBA Loans
SBA (Small Business Administration) is a government agency that is committed to helping business owners enhance their small business by taking advantage of these loans.
SBA loans to not give money to businesses.
Federal money is used by the SBA to guarantee a certain percentage of the loan that is given by traditional banks. Since the SBA guarantees these loans, lenders are more likely to loan money to the business.
The loan is less risky for the lender because part of the loan is guaranteed by The Small Business Administration. Therefore, more business owners will be approved for these loans with low rates and a longer term.
You must have a strong credit score; however, because a portion of this loan is guaranteed by the SBA, banks are more likely to approve you, even if your credit is not perfect.
The Application Process
Do not expect the application process to be quick. You are applying with a bank, and banks are usually slow. However, these loans are simpler to qualify for than traditional bank loans.
When you apply for a loan at a traditional bank, the process can be long and complex. A lender will go over your financial history, and they will pull your credit. In some cases, a lender will want you to secure the loan with collateral. They will go over your business plan as well as legal papers.
However, the bottom line is that not all business owners can be approved for a loan. In some cases, the entire process could take a few months to complete.
The truth is that with the lower interest rates and lengthy terms, you will not mind waiting for these loans.
What is it Truly Like to Apply for these Loans?
When applying for these loans, expect the lender to ask for financial documents, an overview of your business, and a description of how you will use the funds. You might also be asked to provide collateral. You will go through an extensive application process.
The lender will want the borrower to have good credit, a successful business, and a strong business plan. They also need to have the income to make payments on the loan.
The bank will also review your borrowing history to make sure you do not have any financial issues in your past.
Choosing the Best SBA Loan Program
You have numerous loan options to choose from. But there are 3 types that are the most common.
- The Microloan Program
- The CDC/504 Loan Program
- The 7(a) Loan Program
How do you Know which one is Best for your Business?
The size and your future goals will determine which program you need. The age of your business will also be a factor.
The most common loan program is the 7(a) Loan Program. This loan is best for businesses that need the money for traditional things, such as expanding your business, refinancing, or remodeling your business. Here are the facts about 7(a) loans:
Loan amounts can be up to 5M
For working capital loans, the length of the loan can be up to 10 years, and for commercial real estate loans, the length can be up to 25 years.
Another loan option is the CDC/504 Loan Program. This loan is best for traditional financing needs. This loan is normally used to purchase big fixed assets. This can include major equipment or commercial real estate. Here are the facts about a CDC/504 loan:
The loan amount can be up to 5.5M
Length of the loan is between 10-20 years
To buy big fixed assets
In addition, the other loan option available is the Microloan program. These loans are under 50K, and they are intended for smaller businesses or new businesses. The term length can be expanded, so they are not considered short term loans, even though they are smaller. Here are the basics of an SBA Microloan.
The loan amount is up to 50K
Term of the loan is up to 6 years
Excellent choice for a new business or for starting a business
Fundera can help you decide which SBA loan is best for your business. We will explain the loan process to you, and we can help you decide if you meet the requirements for the loan. You can then decide which loan is the right one.
If you are not quite ready to qualify for a loan, we will work with your business, so that you will be ready for a loan. We will help you obtain a loan with a long term and a low rate.
The Cost of an SBA Loan
Before you apply for an SBA loan, you will need to know how much it will cost you.
Each type of loan program is different, so the amount you will pay depends on which loan you choose. Here is the cost and rates of each of these loan programs.
7(a) SBA Loan Program
These loans carry a guarantee fee of 1.7% if the loan amount is up to 150K. If the loan is higher than 150K, the guarantee fee is 2.25%. You need to know that the total amount of the loan could include the guarantee fee.
(Keep in mind that the Small Business Administration does not loan the money straight to you. It also does not back the full amount of the loan. Therefore, the guaranteed dollar amount is not the same as the total amount of the loan)
To service the backing of the loan, the SBA will charge a guarantee fee. In some cases, the lender will ask you to pay the guarantee fee, and in some cases, the lender will just pay it.
Depending on which lender you choose, you might be required to pay an originating fee or a loan packaging fee.
Even though these loans have additional fees attached, they are not nearly as expensive as a smaller loan with a high rate. Therefore, you are saving money by getting these loans.
The highest amount- 2.75% plus Prime rate, which is normally between 5-10%
With a 7(a) loan, you can get a fixed or variable interest rate. The variable interest rate usually changes each quarter. The lender will decide which loan you will receive.
The SBA places a limit on how much the bank can make from your loan.
The Prime rate will set your rate if the loan is over 50K and the term of the loan is less than 7 years. 2,25 percentage points is the most the spread can be. If your loan is over 50K and the term is more than 7 years, the Prime rate will still set your rate, but the spread raises to 2.75 percentage points. Your credit score and life of the loan will determine the amount of interest you will pay.
If you desire to apply for a loan through Fundera, the banks we work with will offer you an interest rate of 8.25%. The Prime Rate could change this rate.
Lastly, when your lender shows you their offer, review the APR. It will not be the same as your interest rate. When you get the exact cost you owe, it will include any guarantee fee or origination fee.
Paying Back the Loan
For capital loans and equipment loans, the repayment term is up to 10 years. For commercial real estate loans, the repayment term is up to 25 years.
What would this type of loan mean for the finances of your business? You will make your payments each month for up to 7 years for working capital. For equipment, the payments will be up to 10 years, and for real estate, up to 25 years.
Remember that these loan terms are longer than with any other loans, so it will be easier to make the payments.
The fees associated with these loans is 3% of the total amount of the loan. To secure the loan, you will be required to put 10% down.
The financing for this loan is very complex.
It will be up to 45 days before you will know the exact rate of your loan, but it will be between 5-6%.
50% of this loan comes from a bank, and 40% of the loan comes from a Certified Development Corporation.
Therefore, you will not receive the total amount of the rate until about 45 days after you close with the CDC.
You do not need to fret over the numbers; it will be handled automatically.
Paying the Loan Back
With this loan program, you will have terms of 10 or 20 years.
10 or 20 years is different from the other loan programs.
There are no fees.
With this program, the rate can be anywhere from 8-13%,
You will work with a partnering institution. This interest rate will be set by this institution. Your credit score will help determine your interest rate.
With all Microloans, the rate will be between 8-13%.
Paying the Loan Back
You will pay each month for up to 6 years.
The amount of the loan and how you are going to use the funding depends on the term of the loan, but it will not be more than 6 years.
Just like other loans, you will need to pay a monthly fee.