Below are a few of the most important questions that entrepreneurs ask about the SBA and loans from the Small Business Administration.
1. What is a small business administration loan?
The SBA, or Small Business Administration, is a federal program that is all about creating small business entrepreneurs. The SBA was put into place to help people who are trying to start a business contract with the government and have access to loans for small business purposes.
The SBA does not actually lend any money directly to a business. The actual loan is made by a private bank that opts into the financing for SBA loans. Banks gain additional guarantees from the federal government for giving these loans to small business owners, so they are more willing to lend to people who may not be able to meet the more stringent terms of receiving a loan normally. This does not mean that getting an SBA loan is easy or simple. The process can take months, and entrepreneurs may still need collateral, financial statements and a positive credit report.
There are two major types of SBA loans. First is the SBA 7(a) loan that is more general in nature. The CDC/504 loan is used specifically to purchase large assets that are usually used in hardware based companies like commercial real estate ventures. There are also special loans known as "microloans" that deal with smaller amounts of money than the normal small business loan.
2. Who needs a small business loan?
Companies that are looking to get off of the ground or expand will have need for a small business loan. Small business loans from the SBA are also a great way for entrepreneurs who do not have the best credit to get started with an independent business. Small businesses in industries that may be riskier are also good candidates for SBA loans.
As mentioned above, although it is not necessarily easier for a poor or new business to get a loan, these companies are more likely to qualify for an SBA loan than any other type of loan.
3. How to Get a Small Business Loan
The process to obtain a small business loan is substantial. The first step to getting the SBA bank on your side is to get your paperwork together. You will need the following at minimum:
- Your up to date credit report
- Records of your past business sales and time in business
- Information on the collateral that you have on hand
- An accurate business description
- Statement of how the loan proceeds will be used
In order to be in good contention for an SBA loan, you should have the following in line:
- A solid business credit report with few defaults
- A good financial record with a history of paying bills on time
- A good employment history and personal credit history
- A record of having a business in the black
- Good descriptions of what your business is all about and how you will use the influx of money
When you have all of this information, you should schedule a meeting with an SBA lending institution. You will likely be asked for additional information on the personal and the business side. Be prepared with records of bills and personal references. You may need a co-signer in certain situations, so it is best to have this association ready at your first meeting with your SBA banker.
Your loan documents will be processed over the course of weeks to months. Within this time, do your best to build up your business into profitability if you have not already. Records that you can present within this time frame may help you obtain the loan.
4. Small Business Loan Terms
The terms that you get for your loan depend first upon the type of loan that you get. A 7(a) loan program contains a guaranty fee that is built in. This fee is based on the dollar amount that is guaranteed to you, which may be between $5000 and $5 million. If you ask for more than $1 million, then you will have an additional fee to pay of 0.25 percent on top of the guaranty fee, which may be up to 3.5 percent on loans that are above $700,000.
The 504 loan program will have fees that are about 3 percent of the amount borrowed. Fees may be financed with the actual loan.
7(a) loans have different maturity dates based upon the purpose of the loan: seven years for capital, 10 years for hardware and 25 years for real estate. 504 loans have maturity terms of either 10 or 20 years.
5. Small Business Loan Requirements
Requirements for an SBA loan vary between lenders; however, there is a definitive minimum that most lenders will adhere to. Business owners should have good credit or a co-signer with good credit and a solid idea for a business that is written down in a formal manner. You must also have certain legal forms that you will fill out and turn into the loaning institution.
You may be restricted from taking on any other loan while you are paying back an SBA loan. You may also be required to hold a certain level of collateral.
If you are looking for a certified SBA lender that has your best interests at heart, make sure that you consider doing your business with Commercial Loan Direct. A financial partner for life is a great start towards having a profitable business that will last you for generations and help to free you and your family financially.