A Comprehensive Guide about SBA Loans

Oct 31, 2023 By Susan Kelly

Traditional debt-based funding, such as an SBA loan, comes with several benefits for the owners of small businesses. These loans can offer money for small businesses of up to $5 million, which can be put toward establishing a new company or franchise, acquiring an existing company, expanding operations, purchasing equipment, or maintaining working capital. Even though these loans are approved & funded by individual banks, the Small Company Administration (SBA) guarantees between 50 and 90 percent of the loan if it falls into default. As a result, lenders are ready to provide small company owners with attractive terms and conditions.

How Do Loans From The SBA Work?

A lending institution, such as a bank or credit union, is where you apply for a Small Business Administration loan. After that, the lender submits an application for a loan guarantee to the SBA. This implies that if you default on an SBA loan, the federal government will pay the guaranteed amount to the lender.

An individual must provide an unqualified personal guarantee to the Small Business Administration (SBA) if they control at least 20% of a business. Because of this guarantee, you and your assets will be responsible for making payments if your company cannot do so.

Lenders' exposure to risk is decreased as a result of the government guarantee as well as the personal guarantee, which results in the lenders' increased willingness to collaborate with small firms.

Once you have been approved for an SBA loan, it is the responsibility of your lender to close the deal and distribute the profits of the loan. You make your repayments directly to the lender, most frequently every month.

Pros Of SBA Loans

Discounted Prices

Participating lenders in the SBA loan program are required by federal regulations to set interest rates based on the prime rate plus a spread. It's important to distinguish between the interest rate on a loan and the annual percentage rate. The annual percentage rate (APR) is the sum of the interest rate and all other costs associated with a loan.

SBA and non-SBA lenders might have drastically different annual percentage rates (APRs). Comparatively, the annual percentage rate (APR) on loans from big online small-business lenders who don't provide SBA loans can be as high as 99%. Use the Small Business Administration loan calculator on NerdWallet to see how much interest you'll pay each month and how much money you'll spend overall.

Low Cost

Typical SBA loan fees include a one-time guarantee charge determined by the loan amount plus the loan term and an annual service fee calculated as a percentage of the loan's guaranteed balance. The SBA reviews its pricing policy annually.SBA 7(a) loans of $500,000 or less are exempt from the upfront guarantee cost and the yearly service fee until September 2023.SBA Express loans to veteran-owned businesses have no up-front guarantee costs.

Cons Of SBA Loans

Hard To Categorize

While the government guarantee lessens the risk for lenders in providing loans to small firms, stringent requirements must be met to qualify for an SBA loan. A solid company history, healthy financials, and a high credit score are usually prerequisites.

Funding Is Slow

It may take one to three months to get your SBA loan cash, depending on the lender you choose and the type of loan you apply for. Additionally, a lot of paperwork is involved in applying for a small business administration loan. There are quicker alternatives to traditional small business loans if you're hurrying to get your hands on some cash.

Individual Guarantor Necessary

Any individual with a 20% or more stake in the company must be willing to guarantee the whole loan amount personally. Lenders from other business owners may require personal guarantees, either restricted or limitless in scope. In addition to providing a personal guarantee, you may need to put up physical collateral or make a down payment to get an SBA loan.

Conclusion

Although getting approved for a Small Business Administration loan might take some time, qualifying business owners are rewarded with low-interest rates, extended payback terms, and sizable loan sums. While the requirements for SBA loans are less stringent than those for conventional bank loans, only some firms will meet them. Before applying to the SBA, you should check your credit history and loan repayment capacity to ensure you can afford the payments.

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