Do I Qualify For An SBA Loan?
The Small Business Administration (SBA) has fostered many types of businesses through SBA loan creative financing. There are many ways to do collaborative financing for large scale projects that require more than one lending team. This article highlight points on Small Business Administration loans and what the pros and cons are to you as a small business owner.
What is an SBA Loan?
SBA funding is a form of financing backed by the Small Business Administration which is a federal agency whose objective is to help small businesses get on their feet. It enables entrepreneurs who cannot access traditional forms of funding to get loans for their business.
One of the top goals of the U.S. Small Business Administration (SBA) is to insure business loans in order to generate investments for businesses in low income communities. While the SBA was created to help assist with economic growth, it does this by guaranteeing loans on behalf of the business owner. The SBA shares the risk with lenders, it does not offer loans directly to small business owners.
The guarantee the SBA provides, allows lenders to consider loans for small business entrepreneurs they would have otherwise declined. The lower risk opens up new opportunities for both the lender and the entrepreneur. Putting yourself in the shoes of an investor or even as a business owner, you could see how this could be advantageous. It helps create more investments into many sectors of the American economy which helps promote growth.
Having an Small Business Administration backed loan will ensure to the lender that a portion of funds will be recovered in the case of default. What that means is, if a small business where to default on their long term business loan, the Small Business Administration will pay a portion of the debt back to the lender.
However, this does not mean that when you default your personal guarantee – which can be between 10% and 25% – that it is protected. In case you default, the bank will first come for the collateral you put against the loan. Only then will they go for the SBA guarantee which is 85% for a loan of $150,000 or less and 75% for a loan of more than $150,000.
Is SBA Funding Right for Your Business?
SBA loans can be a lifesaver for entrepreneurs looking for startup capital or for existing businesses seeking to expand but can’t access traditional financing. The guarantee the SBA can provide to your small business allows lenders to provide you with cheaper financing and better terms for your business endeavors.
You can inquire for a Small Business Administration Loan at most national banking institutions. You can also inquire with CDC lenders which are considered non-profit lending institutions. This form of financing is not for every business. It can however, be a good choice for your small business if you meet the SBA & CDC requirements.
SBA and CDC's
As a nonprofit organization, CDC’s are focused on improving the lives of those in a low-income neighborhood. The Small Business Administration works with these organization to manage loans and increase access. The SBA works with CDC’s because they expect to create a job for every $65,000 they guarantee.
CDC’s help to link lenders with financiers looking for a loan. One of the biggest problems that entrepreneurs face is finding an SBA lender that will accept their applications. Terms can vary between banks. CDC’s have experience working with banks and can shop around and pinpoint the lender that is most likely to accept your application. If you can show that your existing business has had good cash flow, or if you are looking to start a business and you have management credentials, CDC’s can make it easier and faster to pinpoint the lender most likely to give you the loan.
CDC small business lenders are all across the U.S. and focus on minimizing the risk lending institutions incur. This is accomplished by providing a percentage of the loan based on the type of loan program that is right for your business. In some cases, like an SBA 504 loan, a CDC lender will provide up to 40% of the total loan amount. The lending institutions provide 50% and you, as the borrower, will require a 10% down payment.
SBA’s can be a great alternative for businesses that do not have the collateral required by traditional lenders and those struggling with debt. If you meet the criteria, you can access cheaper financing with flexible terms to start or expand your business. If you can’t get approved by a CDC lender, you can count on the professional and flexible alternative financing options a factor like Meridian PO Finance can get you. A factor like Meridian PO Finance can get you the right financing for products that will help you fulfill your large purchase orders.
Types of SBA loans
There are many types of SBA financing options, this article will highlight the top two forms of SBA loans for commercial real estate & equipment financing. These are the SBA 7(a) and SBA 504 loans. You can get more information on loans and grants from the Small Business Administration website.
SBA 7(a) Loans
Flexible cash for a wide variety of uses such as setting up a business, expand an existing business, or refinance expensive loans. 7(a) loan rates are determined based on a daily prime rate which may fluctuate based on actions by the federal reserve. The maximum financing one can get is $5 million but the average loan is about $370,000.
7(a) loans can be variable or fixed rate depending on the lender’s terms. The Small Business Administration sets rates for lenders. The maximum term also varies depending on a number of factors such as the ability to repay the loan, and the purpose for taking the loan. If you plan to take the loan to finance daily operations the maximum loan term is seven years and if you plan to buy new equipment you’ll have 10 years to repay.
SBA 504 Loans
The SBA 504 loan is meant for entrepreneurs that wish to access financing for big commercial projects. The loan can be used to finance initiatives such as the purchase of land, improvement and modernization of facilities and long term machinery among others.
You can get a loan of up to $5 million. The repayment period varies based on what you intend to use it for. If you intend to use it to buy equipment the repayment period is 10 years. For real estate projects, the maximum repayment period is 20 years.
You can only use an SBA 504 loan to refinance part of the project related to real estate. However, the loan is not meant to finance working capital or refinancing debts. You’ll need to show that you can pay the loan based on the operating cash flow of the business.
In any case, it can be a tedious process having to get approved by multiple institutions for financing. Each lending institution follows their own lending guidelines and meeting the requirements set forth by all 3 institutions involved can be difficult for some businesses.
Meridian PO Finance helps provide financing solutions that can provide B2B business owners leverage. As a factor, Meridian PO Finance leverages your purchase orders and invoices and converts them into financing for working capital and purchasing equipment.