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Understanding the many types of SBA-backed small business loans is the first step toward getting one. Credit: Dollar sign image via Shutterstock |
Considered by many to be the most affordable loan option available to small business owners, loans guaranteed by the Small Business Association (SBA) are in high demand. With reasonable monthly payments and low interest rates, these loans are an excellent choice for small businesses in need of funding.
A federal government agency, the SBA does not lend small businesses money directly. Instead, it sets guidelines for loans that are made by its partners, which include lenders, community development organizations and microlending institutions. The SBA guarantees that loans granted by these institutions will be repaid, eliminating much of the risk for lenders.
SBA loan programs
While SBA loans are a great option for small business owners, they're not available to small businesses that have access to other reasonably termed financing. But for those who don't have access to such financing, the SBA offers four loan programs, each with different terms and different purposes. They include:
- 7(a) Loan Program: The SBA's primary program to help startups and existing small businesses obtain financing. 7(a) loans are the most basic and most commonly used type of loans, as well as the most flexible. The money can be used for a variety of general business purposes, including working capital, machinery and equipment, furniture and fixtures, purchasing or renovating land and buildings, leasehold improvements and debt refinancing. Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed assets. Borrowers can apply through a participating lender institution.
- Microloan Program: Offers very small loans to startups, newly established or growing small business concerns. The loans can be used for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery or equipment. The SBA makes funds available to specially designated intermediary lenders, which are nonprofit organizations with experience in lending and technical assistance. Those intermediaries then make loans up to $50,000, with the average loan being about $13,000. The loan cannot be used to pay existing debts or to purchase real estate.
- CDC/504 Loan Program: Provides businesses with long-term fixed-rate financing for major assets, such as land and buildings. The loans are typically structured with the SBA providing 40 percent of the total project costs, a participating lender covering up to 50 percent and the borrower putting up the remaining 10 percent. Funds from a 504 Loan can be used to purchase existing buildings or land or long-term machinery, construct or renovate facilities, or refinance debt in connection with an expansion of the business. These loans cannot be used for working capital or inventory. Under the 504 program, a business qualifies if it has a tangible net worth of less than $15 million and an average net income of $5 million or less after federal income taxes for the preceding two years before application. The maximum amount of a 504 Loan is $5 million.
- Disaster Loans: The SBA also offers a fourth option for businesses that have been affected by a declared disaster. These low-interest loans can be used to repair or replace damaged real estate, personal property, machinery, equipment, inventory and business assets.
What you'll need to apply
When applying for a SBA loan, small business owners are required to fill out forms and documents for the specific loans they are trying to get. In addition, the SBA encourages borrowers to gather some basic information that all lenders will ask for, regardless of the loan type. Among the required items are:
- Personal background and financial statements
- Business financial statements
- Profit and loss statement
- Projected financial statements
- Ownership and affiliations
- Business certificate/license
- Loan application history
- Income tax returns
- Résumés for key team members
- Business overview and history
- Business lease
The SBA also advises small businesses applying for a loan to be prepared to answer several questions, including:
- Why are you applying for this loan?
- How will the loan proceeds be used?
- What assets need to be purchased, and who are your suppliers?
- What other business debt do you have, and who are your creditors?
- Who are the members of your management team?
David Hall, a public affairs specialist with the SBA in Washington, D.C., also recommends that business owners prepare a business plan before meeting with an SBA-approved (or any other type) of lender.
"The business plan not only is the roadmap that will guide the business from planning to startup to (hopefully) success, but also will show any potential lender that the potential business owner does have a clear view and understanding of the business, how to run it and, most importantly, how the loan will be repaid," Hall said in an email interview with Business News Daily.
Hall also recommends that business owners take full advantage of the business planning resources offered by the SBA and its partners, such as SCORE, SBDCs (Small Business Development Centers) and WBCs (Women Business Centers).
Small business owners can find SBA loan applications on the SBA website.
Where to apply
Once you've gathered up all the necessary paperwork, you have two options for how to apply for a loan through the SBA. Option No. 1 — the more traditional choice — is to contact a business development or lender relations counselor at any SBA District Office. These professionals can put you in touch with SBA-approved lending institutions in your area.
And for small business owners looking to take out an SBA-guaranteed loan between $5,000 and $150,000, there's also another option. SmartBiz, an online, automated loan service, provides quick access to guaranteed loans through its SBA preferred partner, Golden Pacific Bank. By automating the loan application process, SmartBiz has made it possible for small business owners to apply for an SBA loan online in as little as 30 minutes. Funding can be granted within five to seven days.
"I think a lot of businesses have been turned away by banks in the past or look at the SBA loan process and think that [it] has to be a two- to four-month process," said Evan Singer, the general manager at SmartBiz. "We changed that."
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