Small Business Administration loans are one of the best ways to finance your small business. They’re guaranteed by the federal agency, which allows lenders to offer them with flexible terms and low rates. And getting one can help you grow your business without taking on possibly crippling debt.
SBA 7(a) loans are the federal agency’s most popular type of financing. They guarantee as much as 85 percent of loans up to $150,000 and 75 percent of loans of more than $150,000. A SBA 7(a) loan is ideal for businesses with less established credit that want to improve cash flow, refinance debt, fund improvements, or purchase equipment or real estate. Like other SBA loan types, it features longer terms and lower down payment requirements than conventional loans.
What SBA Loans Can Be Used For
- Obtain working capital: Working capital is the difference between current assets and current liabilities and can be a positive or negative amount. They are funds available to pay a business’ current debts. It provides a cushion between you and your short-term creditors. A SBA loan can also be used for working capital that can be used for things like paying taxes and handling unexpected expenses.
- Refinance debt: Entrepreneurs often acquire expensive, high-interest debt when starting their businesses. Without having a strong business credit report, entrepreneurs might have to turn to a credit card, a line of credit, or another lender with high interest rates and short payback terms. This type of debt can be disastrous for a small business. Lowering your interest rate by just one percent can save you thousands of dollars each year. Those savings can then be reinvested in your business to help it grow. A SBA loan is an excellent option to help wipe out or at least pay down your debt and increase cash flow.
- Inventory: SBA loans are a great way to stock up on materials and have inventory on-hand when you need it. It also gives you the cash to buy materials in bulk which, in the long run, helps save you even more money.
- Buy equipment: Small businesses need equipment to run successfully. An SBA loan can help finance those big-ticket items such as computers, vehicles, or machinery.
- Buy or refinance real estate: SBA loans can be a great option for small businesses looking to refinance an existing commercial real estate mortgage or buy an owner-occupied commercial space.
- Hire new employees: If it’s time for you to look for help running your business an SBA loan can help pay for salary and benefits of your new employee. Without enough cash on hand, it might be impossible to bring on employees that can help you expand.
SBA Loan Terms
7(a) loans can be as large as $5 million or as small as $30,000. The SBA will guarantee a maximum of 85 percent of loans up to $150,000 and 75 percent on loans higher than $150,000. It will not guarantee more than $3.75 million. The SBA also assesses a guarantee fee that is charged to the lender. Initially, the lender pays this fee to the SBA, but it’s almost always passed on to the borrower at closing. In addition to a guarantee fee, there is often an origination fee. This fee supposedly covers the costs of the bank or financial institution of making the loan, including marketing costs. However, the origination fee is not directly based on costs and is arbitrarily set by the financial institution. An origination fee of 4% is not unusual. The fee is typically taken “off the top”.
7(a) loans can have a fixed or variable interest rate. With a fixed rate loan, the loan interest rate remains constant throughout the life of the loan. With a variable rate loan, the loan’s interest rate can change at regular intervals, such as quarterly or monthly. However interest rates cannot be higher than the SBA’s maximum rates which are prime plus 2.25% for maturities under 7 years, and prime plus 2.75% for maturities 7 years or longer.
Repayment terms depend on how you plan to use the money. For loans for working capital or daily operations, your repayment period will be 7 years, to buy new equipment will be 10 years, and you will have up to 25 years to repay your loan if you plan on purchasing real estate.
SBA Loan Qualifications
Although an SBA loan is a great option for entrepreneurs to finance their business, there are certain qualifications you must be to be approved:
- Must be in business for at least 2 years
- Personal credit score is 680+
- Seeking at least $30,000
- At least $50,000 in revenues for the past 12 months
- Business is profitable
The 7(a) loan is the SBA’s most popular and flexible option for financing your small business. You can use these funds for just about anything, operational expenses, inventory and equipment purchases, real estate deals, debt refinancing. And if you’re looking for the lowest rates, SBA loans are your best bet.
If you have any questions about SBA loans or any other loan type feel free to contact us. We know how important it is to have capital to start and grow your small business and we’re dedicated to finding you the right loan to do so!