If you are thinking of becoming a small-business owner, you may feel that starting and growing your business can be daunting and financially out of reach.
Through the Small Business Administration (SBA), business loans are available from lenders with flexible terms and low-interest rates. These includes loans that are specifically available to help small businesses reach goals and access important resources.
What is an SBA Loan?
SBA loans are offered by private lenders, usually banks and credit unions, and are partially backed by the U.S. government. They were created to help small-business owners who may not be able to qualify for traditional loans obtain capital.
The U.S government backs SBA loans to reduce lenders’ risk. This makes it easier for small-business owners to qualify for the capital they need. Depending on how much you borrow and the type of loan, between 75 percent and 85 percent of the loan amount is backed by the SBA.
What is an SBA 7(a) Loan?
SBA 7(a) loans are multi-purpose loans that can be used for real estate, working capital, equipment and other business needs. As with other SBA loans, the funds from an SBA 7(a) loan can be used in a variety of ways to reach long-term goals and help the business succeed — and you can borrow up to $5 million. There are different types of specific SBA 7(a) loans to accommodate a range of businesses, including the SBA microloan program that specifically helps startups and early-stage businesses.
Eligibility for Loan
Not all businesses will be eligible to receive loans from the SBA. While there are other restrictions that may make a business ineligible, the SBA lists the following as eligibility requirements:
• Operate for profit.
• Be considered a small business, as defined by the SBA.
• Be engaged in or propose to do business in the United States or its possessions.
• Have reasonable invested equity.
• Use alternative financial resources, including personal assets, before seeking financial assistance.
• Be able to demonstrate a need for a loan.
• Use the funds for sound business purposes.
• Not be delinquent on any existing debt obligations to the U.S. government.
Business Plan
Before applying for the loan, make sure to calculate the amount that you need to borrow. This will include business expenses like rent, payroll and product costs, along with any costs related to permits, fees and licensing.
If you don’t already have a business plan written out, it’s important to write this out in detail. Identify production and marketing strategies, cost and pricing, challenges you may face and any other aspects that could help show that you have thoroughly thought through your business model and have a plan for at least the first year of business.
Apply and Qualify
To apply for an SBA 7(a) loan, you’ll need to fill out an application and submit your business plan. You may also need to supply a variety of documents and your lender will let you know which are required for you. These documents will be utilized to verify and assess different parts of the business. Here is a list of documents that you may need for your application:
• Articles of incorporation.
• Personal income tax returns.
• Business tax returns.
• Financial statements.
• Franchise information (if applicable).
• Real estate appraisals (for collateral).
• Business license.
• Cash flow projection.
• Lease agreements (if applicable).
Because this type of loan is so popular, it can also be more competitive to qualify for it. Typically, SBA loans are approved by the lender and the approval process can take a variety of factors into account. Most borrowers will have a good personal credit score or be able to provide information about several years of revenue to verify their history and credit worthiness.
Using the Loan
The SBA provides loans like the 7(a) loan to help small businesses reach their goals. This means that you can use a 7(a) SBA loan for long-term goals like commercial real estate projects, business expansion or acquisition, leasehold improvement for new construction or remodeling, inventory and equipment, working capital and debt refinancing.
The majority of 7(a) loans have a repayment schedule with monthly payments that cover principal and interest. Some 7(a) loans are fixed-rate loans, while others are variable-rate loans. The fixed-rate loans will have a consistent payment amount, while variable-rate loan payments can fluctuate with the interest rate changes.
Benefits of an SBA Loan
SBA loans have several benefits that are worth considering:
Low-Interest Rates. SBA loans typically have lower interest rates than conventional loans. Government rules dictate the interest rates on these loans, which are based on the prime rate plus a markup.
Low Fees. Low fees are another important benefit. Some fees are charged by the SBA, while others are charged by the lenders. It’s important to keep in mind, however, that fees for these loans are regulated by the SBA, which is why they tend to be lower than other financing options.
Generous Repayment Terms. The repayment terms of SBA loans allow businesses to reinvest much of their earnings back into their operations instead of having to deal with high monthly loan payments. Repayment terms are:
• 10 years for working capital or inventory.
• 10 years for equipment.
• 25 years for real estate.
If you’re looking for funding for the growth of your business and to meet your business needs, it may be time to consider an SBA loan. The SBA has provided the opportunity for business owners to utilize these loans as a helpful tool in the success of your business.
Emilee Draper is the public relations specialist at Wasatch Peaks Credit Union in Ogden.