Even in a pandemic-stricken year, the number of small businesses grew to over 31 million in 2020. It’s no secret that these small shops need some capital to get started, which is where loans come in.
Small Business Administration loans are the perfect solution to many of these scenarios. But just what is SBA lending, and how does it all work?
That’s what we’re here to look at today. Read on to find out more about SBA lending here.
What is SBA Lending?
SBA stands for Small Business Administration, a government agency aimed at supporting America’s small businesses and entrepreneurs. Borrowers look to the SBA to find potential lenders for their ventures.
One of the key features of SBA lending is that the Administration shoulders much of the burdens of borrowing money that small business owners are scared to take on. The SBA guarantees a portion of the loan amount.
This allows lenders to offer flexible terms of payment and lower interest rates than other types of loans. Better yet, these loans are designed specifically for small businesses.
As such, the parameters of these loans are suited for small businesses to succeed, such as the low-interest rates mentioned earlier. They can also be used for any number of business expenses, such as equipment or overhead.
Like we mentioned prior, parts of the loan are secured, meaning you won’t be in danger of defaulting. As long as you pay your agreed amount of the loan, SBA lenders will continue to charge lower interest rates.
SBA loans, therefore, allow small businesses to strike deals with lenders on friendly terms. This ensures a healthier financial future for businesses and a secure business transaction for lenders.
Do SBA Loans Actually Work?
If you’re looking for reliable lenders for your business, SBA loans might sound like a great deal. However, we understand if you still have a few reservations.
Does an SBA loan actually work? When has it been successful in practice?
There are, in fact, quite a few SBA loan success stories that you might be familiar with. Some participated in SBA’s startup competitions, while others simply benefited from SBA lenders’ help.
Chobani, the world-famous yogurt brand, won the 2012 SBA Startup competition and promptly thrived under a 504 loan. They’re now a premier yogurt manufacturer present in almost every major grocery store.
Smaller, up-and-coming businesses continue to benefit from SBA loans and their flexible structure.
Down to Earth Cuisine, an independently-owned restaurant in Seattle, was one of many small businesses struggling to stay open during the pandemic. The owner eventually leveraged SBA loans to hire more staff.
Whether you’re an entrepreneur growing a big idea or just a business owner looking to stay afloat and thrive, SBA lenders are often the best option. These loans are built to benefit these businesses for years to come.
So How Do They Work?
Now that we know why SBA lenders are crucial to businesses and examples in which they’ve worked let’s break down how they actually work.
It’s important to first know that the SBA doesn’t actually lend you money. They actually guarantee a loan from another lender, such as a bank.
Their role as semi-middlemen assures banks that the borrower is legitimate and reduces risk.
Borrowers are put in contact with an SBA-approved lender to go over terms and restrictions. You’ll go over all your options and the right financial vehicles for your situation.
A slew of documents like your credit score, employment verification, and tax returns are required for SBA loans. The lender will go over these documents to make sure you’re able to make consistent loan payments.
Once you get approved, you’ll be prompted to sign documents affirming your ability to pay. After that, they’ll send the funds soon thereafter.
SBA lending is not a short process, as it takes weeks to check your background information and process paperwork. If you’re looking to apply for a loan, always make sure your documents are in order.
Different Types of SBA Loans
Another great thing about SBA lending is that loans aren’t restricted to a single type. There are plenty of different loans offered through the SBA that fits various situations.
Let’s break a few of them down here:
SBA 7(a) Loans
The 7(a) loan is one of the most common SBA loans available. Borrowers can take out anywhere from $30,000 to $5 million in loans.
This loan is typically used for financing equipment, purchasing land, repairing old assets, and refinancing existing debt. Borrowers need good credit and some collateral in many cases to qualify.
SBA 504 Loans
Small businesses that need to purchase land, buildings, or other long-term assets often turn to 504 loans. These loans can go up to $5 million, with borrowers guaranteeing to pay about 20% of that amount.
504 loans have terms up to 25 years, meaning businesses won’t be strapped to paying everything back immediately.
There are certain income requirements for 504 loans, and businesses can’t be worth more than a certain amount. There are also other requirements, such as creating a job for every $65,000 in financing.
SBA Microloans
Minority, women, and veteran business owners use SBA microloans to secure smaller funds for their businesses. Borrowing amounts typically range from $500 to $50,000 for these microloans.
These loans are relatively short-term, have low interest, and provide needed support for businesses in underserved communities. It also allows businesses to return to SBA lending once their shops get off the ground.
Leverage SBA Lenders Today
SBA lending is an incredibly valuable tool for small businesses to thrive despite their limited capital. If you’re asking yourself, “what is SBA lending,” use this guide to help you get on the right track for your business today.
Looking for SBA lenders in your area? Looking for the right SBA lender match? Find the right contact through our site today!