SBA loans are tailored to meet the needs of small business owners by providing them with flexibility to succeed. These types of business loans are partially guaranteed by the Small Business Administration (SBA) to fund small businesses and eliminate the financial risks for the banks that issue them.
What Is a SMB Loan Used For?
Most businesses use SBA loans to cover a wide range of expenses that include expansion, working capital, and equipment purchases. Not only does the expansion enable them to serve their customers better, but the huge market share puts them at a vantage point and increases the competitive advantage.
Types of SBA Loans
Understanding the various types of SBA loans helps business owners to choose the option that best fits their needs. The banks that participate in the SBA program offer the following loans.
1. 7 (a) Standard Loans
With a 10 percent down payment, businesses owners that apply for the 7 (a) standard loans can acquire funds that range from $125,000 to $20 million. Businesses such as retail stores, car dealerships, and auto repair shops require significant financing to expand or acquire specialized equipment.
For businesses to qualify for this loan, they need to:
- Operate for profit
- Do business in the U.S.
- Have significant owner equity to invest
- Use personal assets and alternative financing options
Real estate companies that want to diversify their portfolio need a lot of money and longer repayment periods of up to 25 years. Clearly, such businesses won’t benefit from conventional financing options that offer repayment periods of up to five years.
2. CDC/504 Loans
When handling projects that cost between $10 million and $100 million, small businesses require funding that ranges from 60%-80% of the total capital. Such businesses are at risk of becoming cash-strapped when handling capital-intensive projects. Project finance through 504 loans helps to structure the funding around the projects cash flows and raise the finance to keep the businesses afloat.
Following are the eligibility requirements:
- Proof of financial responsibility (ability to pay other loans)
- Business protection through hazard insurance
- Restriction from incurring additional encumbrances or financial burdens
- Ability to raise at least 20 percent of the capital
Since the businesses receive payments through interim certificates at various levels of completion, such loans help to avoid the consequences of negative cash flows. The ability to handle various operations while undertaking such projects can help a business to grow.
Benefits of SBA Loans
SBA loans have flexible requirements compared to conventional financing systems via traditional banks. The lower down payment requirements allow most small businesses to qualify.
1. Low Interest Rates
Low interest rates reduce the cost of borrowing and encourage business owners to apply for more funding to finance their operations. When interest rates are high, businesses have less income to fund their operations as they are paying more money to the lenders. Sales plummet as a result.
SBA loans have huge advantages as they come with low interest rates. A typical 7 (a) loan has a low interest rate of 6.75 percent. Even if the CDC/504 loans are more expensive, they don’t rise to double digits.
2. Flexible Repayment Terms
Longer repayment terms alleviate the strain on businesses by reducing the amount of money they pay every month. Instead of applying for short-term loans that give them only five years to repay, entrepreneurs are opting for loans that give them more cushion (up to 10 years for equipment and 25 years for real estate). Such flexibility allows them to fit the loan payments into their business plans.
With some of the highest loan amounts and longest repayment terms, SBA loans are the undisputed champion when it comes to financing a small business. Those who qualify for these types of business loans have what it takes to build a solid foundation for the future.