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Looking for Growth Capital? 12 Things to Know About SBA Loans

Posted by Meredith Wood to Business Advice, Funding

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If you’re a small business looking to grow, you might find yourself searching for working capital to make it happen. At anytime, you could be evaluating a business opportunity that could take you new heights… But could cost something to get there.


If you know you need growth capital, you’ve got a lot of options. But, one of the best sources of capital for SMBs can be found through the SBA.

SBA = Small Business Administration

SBA loans are one of the most sought after loan products for small businesses. With banks reluctant to lend to small businesses (due to inherent risk and smaller loan sizes), the SBA incentives them by helping to eliminate some of that risk.

But do you really know how SBA loans work?

12 things you may not know about SBA loans (but should before you apply):


1. The Loan is Not Provided by the SBA

Although the SBA is a resource center for small business loans, they’re not the ones who are actually doing the lending. The role of the SBA is to guarantee a portion of your loan in order to decrease the risk for the bank or financial institution that’s handing out the cash. With less to worry about, the SBA approved lenders are more likely to provide loans for small businesses.

 

2. You Aren’t Guaranteed a Loan

While the SBA aims to make it easier for you to receive a small business loan, you are not guaranteed approval. Lenders will still look into your financial statements and credit information. They want to see that you have a demonstrated ability to repay the loan, if not, it could disqualify your loan application.


3. You Don’t Need Perfect Credit to Get Approved for an SBA Loan

A bad credit score could definitely limit your loan eligibility, but that doesn’t mean you’re completely out of luck. SBA’s Microloan Program was designed for companies that are just starting out, so even with little to no business credit history, there’s a possibility you could still qualify for this particular loan.


4. There are Multiple Programs

The SBA works hard to ensure small businesses in America thrive. They do this by offering multiple loan programs as opposed to a one-size fits all deal. So whether you own an established company and are looking for a large sum of money, or you’re just starting out, you have multiple options to choose from.


5. You Could Use an SBA Loan to Refinance More Expensive Debt

SBA loans are great for refinancing purposes because they offer low rates and longer terms. If you do use your loan to refinance your more expensive debt, not only will you be able to lower your monthly payments, you’ll also be able to increase your cash flow.


6. The SBA Sets Limits on the Interest Rate That Banks Can Charge

In order to keep the cost of borrowing low, the SBA oversees and limits what the banks can charge their borrowers. This maximum interest rate is typically based upon the Prime Rate and the allowable spread. As of January 2016, the maximum interest rate on an SBA 7(a) loan is the Prime Rate (currently 3.25%) plus 4.75%, for a total variable rate of 8.25%.


7. The Interest Rate is Not the Total Cost of Borrowing

Aside from the interest rate, you could also be charged a guarantee fee. This guarantee fee is originally charged to the lender by the SBA, however, the lender may choose to pass it to you at closing.


You should always calculate a loan’s APR before signing any loan agreement. The APR will include all costs associated with the loan, letting you know the total cost of borrowing the loan.  


8. SBA Loans Can Be a Good Resource for Businesses Owned by Minorities, Women or Veterans

The SBA has programs and loan options that could make it easier for minority-owned, women-owned, or veteran-owned business to receive funding.


9. Applying for an SBA Loan Can be a Lengthy Process

If you’re planning on applying for an SBA loan, you should expect to complete a lengthy loan application. You’ll also be required to provide your financial statements, a description of your business, an explanation about how you’re planning to use the loan, and several other documents.


Since both the lender and the SBA look into your qualifications, the process, as a whole, could take some time.


10. SBA Loans Offer the Longest Repayment Terms

The term of an SBA loan can range anywhere from five to 25 years. Depending on the type of loan you choose, your repayment terms will vary.


11. They Can be Used for Multiple Business Purposes

An SBA loan can be used for a number of things including: working capital, purchasing equipment or inventory, refinancing other debts, purchasing real estate, or financing the acquisition of other businesses.


12. They Can be Both Big or Small

Whether you need a significant amount of money for a large purchase, or a small loan for some inventory, the SBA has loans that range from $5,000 to $5 million.


Overall, SBA Loans are a great resource for small business owners. They offer a variety of loan programs to suit the needs of entrepreneurs all across the board. If you meet the qualifications of an SBA loan, you should definitely apply. The low interest rates and long repayment terms are worth any hassle involved with the application process.

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About the author
“Meredith

Meredith Wood

Meredith Wood is the Vice President of Content and Editor-in-Chief at Fundera, an online marketplace for small business loans. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith manages columns on Inc, Entrepreneur, HuffingtonPost and more, and her advice can be seen on Yahoo!, Daily Worth, Fox Business, Amex OPEN, Intuit, the SBA, and many more news outlets.

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