Do the benefits of SBA loans outweigh the time and effort needed to get one? Only you can answer that question. Most startup businesses can’t wait months to get an SBA loan. Nor are they prepared to supply all of the documents required.
However, many business owners drool over the six benefits of SBA loans. Including low interest rates, very low fees, and more years to repay the loan.
Even so, enjoying SBA loan benefits can be under appreciated and even unattainable for business owners requiring a quick jolt of cash into their business.
The first step is to qualify for an SBA loan according to the Small Business Administration (SBA) policies.
What Is the Small Business Administration (SBA)?
This US Government agency is responsible for all SBA loan programs and educational materials. The SBA’s job is to promote the US economy by supporting the growth of local and national businesses. This is accomplished by guaranteeing bank loans for small business owners.
This US Government agency is responsible for all SBA loan programs and educational materials. The SBA’s job is to promote the US economy by supporting the growth of local and national businesses. This is accomplished by guaranteeing bank loans for small business owners.
A small business according to the SBA includes what most Americans would call a large corporation. Well established businesses tend to get most of the benefits of SBA loans because they have a few years of business experience and business income to make loan payments.
Actually, the SBA doesn’t make any loans – ever. The SBA does guarantee a major portion of the loans created by banks and online lenders. This entices the lenders to make loans that the lender would otherwise turn down due to high risk factors. However, since the SBA is taking on most of the risk of loan default, the SBA wants lots of documents during the loan application.
Types of SBA Loans
Business owners can apply for an SBA loan online. However, having cash fly out of your computer is not one of the benefits of SBA loans. So, let’s look at the three types of SBA loans.
- SBA Microloans: The average loan amount is about $13,000 but the maximum loan amount is $55,000. The loan repayment term is for up to 6 years.
- SBA 7(a) loan: This is the most popular SBA loan type and has a maximum loan limit of $5.5 million. Borrowers can have up to seven years to repay this loan. This loan can be used most any need that a business could ever have.
- Certified Development Company (CDC) SBA 504 loan: Here the SBA has teamed up with a nonprofit organization to buy or build business buildings. This could be office buildings or manufacturing, warehouses, and machinery to go into the buildings. These loans can be paid off over a period of six years or less.
The 6 Benefits of SBA Loans Against Other Small Business Loans
1. Government Guaranteed Loans
Without the SBA loan guarantee for up to 85% of the loan lenders would not loan to startup businesses or even established business. In other words, without the guarantee, if you don’t need the money the banks would lend, but not otherwise.
2. Lower Interest Rates and Fees
Keep in mind that interest rates change constantly. However, SBA interest rates can be fixed rates or variable rates. Currently, as this is written, SBA 7a interest rates are 5.50% – 11.25% and SBA CDC/504 Loan interest rates are 3.109% – 3.168%.
Business owners that don’t qualify for these SBA loan benefits are well aware of the much higher interest rates other businesses must pay.
Remember that APRs are a combination of interest rates and fees required to get a loan. The SBA has very low fees which makes for lower APRs.
3. Bigger Loans Are Possible
The more money needed, the higher the risk becomes for the lender. More risk equals smaller loans and shorter repayment time frames. So, when the SBA is guaranteeing up to 85% of the loan amount the lender’s risk is greatly reduced.
Plus, the SBA is willing to lend up to 5.5 million dollars in the popular SBA 7a loan program. That is much more than any bank would lend on their own.
4. Longer Repayment Terms
Banks want their loan money repaid quickly, because it lowers their risk and increases their profits. However, the SBA isn’t interested in making a profit. So, the longer repayment terms will keep the monthly loan payments as affordable as possible.
After all, if the business is having a difficult time producing enough cash flow to support the loan payments, the loan will be denied. Fortunately, the SBA wants to loan as much money as possible, but also as prudently as possible.
Business owners can’t get better loan terms than what the SBA offers. Generally, loan terms are seven years for working capital, and up to ten years to buy business assets. Also, the CDC/504 Loan for real estate is 25 years long.
5. Lower Cost Down Payment Requirements
One of the most aggravating requirements of business loans is the amount of down payment required. I hear many would-be startup business owners say, “If I had had the cash for the down payment, I might not need the loan!”
Fortunately, The SBA Microloan Program doesn’t require a down payment. Whereas the SBA loan programs (SBA 7a and SBA 504) only require from 10% to 20% as down payment requirements.
Traditional bank loans will require substantially more money up front.
6. Flexibility of Loan Use
Traditional bank loans require that the loaned money only be used for specified purposes. Which can severely affect day to day cash flow needs.
Fortunately, the SBA 7a loans can be used for any purpose. Even so, your loan application must say what the purposes of the SBA loan is for. That would be part of the narrative of what the business loan is supposed to achieve for the business.
Final Thoughts on The Benefits of SBA Loans
They are the best business loans available. However, not everyone will qualify, or even want to go through the effort required to qualify. There are online lenders that want to provide SBA loans to your business. So, get started now.