Let’s start with the basics, what is an SBA Loan? A small business administration loan is designed to provide financing for the purchase of fixed assets like real estate and machinery, usually at below-market rates. There are several types of loans offered by SBA, the most common being a 7(a) loan for small businesses. However, there are several other options, such as the SBA 504 loan, that cater to more mid-size businesses.
Small Business Administration loans are guaranteed by the SBA itself and issued by lenders that participate in the program. There are several types of SBA loans, but the SBA 7(a) loan program is the most popular. This type of loan typically has lower interest rates and longer repayment terms than other small business loans. However, it can be difficult to qualify for an SBA loan; the process and approval time can be lengthy, and collateral will likely be required.
Since these secured loans are guaranteed by a federal agency, lenders have more flexibility with loan terms and interest rates. SBA loan interest rates are often in the single-digits and have repayment terms of 7-10 years (and even up to 25 years for real estate purchases). This helps keep business owners’ monthly payments low, freeing up more of their capital to invest back into their business.
SBA loan requirements generally include more paperwork and documentation than a standard business loan. You should expect to provide comprehensive personal, business tax, and financial records, as well as items like a business plan and a business debt schedule. Your credit score will also be taken into account — with scores above 680 having the best chance for approval.
An SBA loan functions similarly to most traditional business loans. To figure out the total cost of the loan you could follow this formula “to borrow__x__ over a __x__ year term your monthly payment will be __x__ at an interest rate of__x__”. The difference between a traditional loan and an SBA loan is that the federal government typically backs up to 40% of the loan alleviating a large portion of the risk for lenders.
Since SBA backed loans require additional time and paperwork, they are not approved and funded as quickly as a traditional business loan. There are certain circumstances where people can qualify for an SBA express loan which has an accelerated turnaround time of up to 36 hours, but these are uncommon and hard to get. Regardless, the best time to get a small business loan is always before your business needs it. That way, you’ll be able to do your research, make a funding decision confidently, and get the best rates available.
In the case of a disaster, SBA also offers SBA disaster loan assistance which is a low-interest rate loan that allows businesses, private non-profits, homeowners, and renters to access a line of credit following a declared disaster.
Learn more about exactly what you need to apply for an SBA loan here and whether this loan strategy will work for your business. While StreetShares doesn’t currently partner with the SBA, we continue to help small businesses select the right financing option when they need it most.
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