At some stage, most business owners have to consider and evaluate several funding and credit options. Several types of SBA loans might fit your business and you can have more than one SBA loan at the same time.
Of all the options available for bigger companies, an SBA loan is one of the best ways a business owner can use to finance their business. SBA loans offer huge benefits for many companies that continue enjoying what SBA loans provide.
An SBA loan offers competitive solutions ranging from commercial real estate loans to startup loans. There are times that bigger companies require large sums of money, and traditional lenders and banks tend to take a long time to process these. There is also the possibility that your application may not be successful.
In this article, we’ll take a look at what SBA loans are, the different types available, and the benefits that make them attractive.
Facts About SBA Loans
SBA loans are different from other loan types in that borrowers and lenders work via an SBA agency. This means that SBA (Small Business Administration) loans are written agreements between SBA lenders and agencies.
The concept revolves around lenders providing money to the SBA agency and not to companies directly. Business owners therefore use the SBA program to look for suitable lenders. As the SBA loan agency guarantees part of the loan, different types of SBA loans enable the lender to be more flexible and help them in charging lower interest rates.
Established Companies Can Access Different Types of SBA Loans
There are several types of SBA loans available for businesses and knowing what they are will help you take full advantage of their benefits. It can however be tricky to choose the one that is best suited for your current requirements.
Let’s look at the options:
SBA CAPLines
With SBA CAPLines, the SBA offers working capital loans where a company has to meet short-term cash flow problems or has to resolve seasonal financial obligations.
Loans of up to $5 million are offered and the maximum repayment period granted is 10 years. This option is excellent for resolving unforeseen expenses or for meeting recurring operational costs.
There are currently 4 types of CAPLine loans:
- Builder CAPLine loans are used for financing construction and renovation projects.
- Contract CAPLine loans are used for contractors wanting to finance specific contracts. They are not used to finance debts, buy assets, as working capital loans, or to pay taxes.
- Working Capital CAPLine loans are used for resolving short-term working capital requirements.
- Seasonal CAPLine loans are used for paying for inventory during peak seasons, or for offsetting high receivables.
The interest rates of this type of loan typically range between Prime rate + 2.25% and + 4.75%.
SBA 7(a) Loans
SBA 7(a) loans are the most often used by businesses and they offer amounts of between $30,000 and $5 million. Companies that qualify for this type of loan can use it for purchasing equipment, funding startup costs, buying new land, acquiring a new business, expanding the existing business, and much more.
To secure this financing a business has to put up some collateral. In terms of repayment, most loans will not go longer than ten years. The repayment period can however be extended to 25 years for commercial real estate loans.
Loan interest rates are determined between borrowers and lenders. However, these are subject to maximums specified by the SBA. The SBA uses a base rate (the LIBOR rate, or the prime rate) plus an additional percentage rate. Interest rates may be variable or fixed. The interest rates of this type of loan will range between Prime rate + 2.25% and + 4.75%.
SBA Franchise Loans
There are numerous well-known advantages for business ownership through franchising and franchise owners often use SBA Franchise loans. The SBA grants about 7,000 franchise loans each year. Franchise owners use SBA loans for a variety of reasons, including for starting up a franchise, expanding a franchise, refinancing a franchise, or buying another franchise and getting a loan to do so.
There are specific SBA rules that apply to franchises. These rules also apply to other industries that are not strictly speaking franchises but have similar affiliation models. These would include insurance agents, hotels and gas stations.
Use the SBA Franchise Directory to check if a specific franchise is eligible for SBA financing. It should be noted that franchises not listed in the directory may still be eligible for funding.
If you are wanting to start or buy an existing franchise operation, you’ll need to consider the following:
A startup loan analysis relies heavily on your personal liquidity and credit score. You should therefore ensure your personal credit score is good and you have between 10% and 20% available as a cash down payment for the required equity. A franchise acquisition loan will also depend on the cash flow likely to be generated.
SBA franchise loans are also often ideal to restructure a current business loan via refinancing. Debt refinancing can alleviate cash flow issues by reducing monthly debt payment amounts. SBA loans will normally consolidate outstanding business loans and extend the amortization period.
It should however be noted that it is generally fairly complicated to refinance other SBA loans, personal debt, defaulted loans, and loans recently taken out.
Individuals already operating a franchise and wanting to grow their franchise by opening or acquiring new units will find SBA franchise loans an ideal option to finance this growth.
We may be able to offer excellent terms depending on your cash flow and balance sheet.
SBA 504 Loans
The SBA 504 loan program is typically used to acquire fixed assets and use a long-term loan to finance this. This program is a good choice if you’re wanting to buy property, buildings, or heavy equipment.
Individuals that qualify can receive a loan of as much as $5 million. They will however need to guarantee a minimum of 20% of the loan amount.
SBA Loan Benefits
Irrespective of which types of SBA loans are best for your specific requirements, these are some of the benefits:
- As the funds can be used in several different ways, you will likely be able to find a loan that suits your requirements.
- SBA loans are secured and SBA agencies guarantee a specific percentage of the loan to lenders, thereby reducing the risk. Which enables more businesses to receive a loan.
- Longer repayment periods provide the opportunity to grow while repaying.
- Lenders are more comfortable with the risks which leads to many being willing to offer financing at lower interest rates.
- Loans are more accessible due to reduced down payment requirements.