Figuring out how to fund a new venture is a critical step in starting a business. There are many options for entrepreneurs, including small business loans offered by banks and loans offered by the Small Business Administration (SBA). SBA loans are the most advantageous to small businesses because of their low interest rates, capital flexibility, support and flexible repayment terms.
The Purpose of the SBA
The SBA’s mission is to help small businesses develop and expand in the United States. They achieve this objective through flexible lending and ongoing educational programs. Although they don’t lend money directly to entrepreneurs, they do guarantee loans that originate at other institutions. Doing so reduces the risk involved thereby facilitating access to these funds.
Advantages of SBA Loans
The most important considerations when researching business loans are the funds available, expense of the loan and repayment terms. Capital availability – or the amount you can borrow – tends to be the highest with SBA loans. The expense of the loan – the interest rate you will pay to access the money – tends to be the lowest. Another advantage is the repayment terms, which are the longest of any financial institution.
Types of SBA Loans
There isn’t a one-size-fits-all SBA loan to benefit all types of businesses. Instead, there are three types that serve different purposes:
- Microloans
- SBA 7(a) loan
- CDC/504 loan
With the microloan, the maximum amount that can be borrowed is $50,000. It must be repaid within six years. The SBA 7(a) loan is ideal for business ventures that require more capital as the maximum loan amount is $5.5 million. This loan has a repayment term of seven years. For machinery and real estate purchases, the SBA offers the CDC/504 loan with a repayment term of 10 years for equipment and 25 years for real estate.
Who Wouldn’t Benefit From an SBA Loan
Despite the advantages of SBA funding, there are some business that may better off securing other loans. The main reason is quick access to funds. SBA loans are hard to get because they require good credit and a strong history of business performance. The paperwork is extensive and time consuming, demanding very specific documentation. For those who don’t have the time or the needed proof, going the route of a bank or alternative lender with lower barriers to qualify may be ideal.
Although the requirements are high for an SBA loan, the payoff is great if you can prove your credit worthiness and business strength. Small business owners need all the help they can to succeed. Putting in the time and effort to secure SBA financing will ensure your business is able to prosper.
