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Understanding SBA Loans
Questions to ask before choosing SBA loans for your small business
How long will this take?
The process of applying for a loan guaranteed by the Small Business Administration (SBA) can be long and arduous. In most cases, you’re required to submit a large amount of paperwork: financial records, insurance forms, bank statements, tax documentation, business plans, credit information, resumes, the loan application itself, and more. Once that’s done, an SBA-approved lender will then assess your application to determine whether you qualify for the loan. In the event you’re approved, you’ll have to fill out another round of paperwork. When the dust settles, it could take two or three months—or even longer—before your business is finally funded.
Am I likely to qualify for funding?
SBA-approved lenders tend to be very selective when it comes to signing off on small business loans. For the most part, these lenders will not fund brand new businesses. They are also unlikely to fund entrepreneurs who have low credit scores or questionable finances. In some instances, lenders will require borrowers to put up collateral in order to secure financing. That way, they can recoup their costs in the event borrowers default on the loan. Before you apply for SBA financing, make sure you’ve done enough research to determine whether or not you have a good shot at approval. The last thing you want to do is spend a lot of time applying for a loan you’re unlikely to obtain in the first place.
How fast do I need this funding?
If you have several months to spare, and you’re willing to risk applying for a loan you very well might not qualify for in the first place, it may make sense for you to try and secure financing from the SBA. If you need small business financing right away, though, you may want to look at faster sources of funding.
How much funding do I need?
The amount of money you need to finance your business could have an impact on whether SBA loans are a good choice or worth the effort. Small businesses can secure up to $5 million in financing through traditional 7(a) loans from the SBA. But remember, it can take up to three months for those funds to come through. If you need money quicker, you can apply for an SBA Express Loan. Note that you can only get up to $350,000 if you choose that route.
How much does an SBA loan cost?
Generally speaking, SBA loans—if you’re lucky enough to qualify—are one of the more affordable small business financing options. Traditional 7(a) loans carry a maximum interest rate of prime + 2.75% while SBA Express Loans tend to have higher rates of prime + 4.5%–6.5%, depending on the size of your loan. Larger SBA Express Loans usually have lower interest rates than smaller ones.
How big of a loan can I afford to take out?
You know your business’ financial situation better than anyone else. Before you apply for financing, do your due diligence to figure out how much money you need—and how big of a loan you can afford to take out. As you begin your search for an SBA-approved lender, remember that rates and funding amounts may vary from bank to bank. If you decide to apply for an SBA loan, shop several vendors to make sure you’re getting the best deal.
Table of Content
What is an SBA Loan?
Pros & Cons of an SBA Loan
How to Apply to an SBA Loan
Who Needs an SBA Loan?
Alternatives to SBA Loans
SBA Loans vs Other Options: Analysis
Most small business owners consider a variety of funding and credit options at one time or another. If you run a small business, you may have already heard about or considered Small Business Administration loans, or SBA loans.
SBA loans are a great choice for some businesses. To help you decide if they’re the right choice for you, we’ve collected the benefits, drawbacks, application information, and other things you may need to think about when considering an SBA loan.
SBA loan programs are drafted in agreement between lenders and SBA agencies. Borrowers use these programs when looking for lenders for their small businesses. Lenders appreciate SBA loan programs because the SBA shoulders some of the risk for the lender by guaranteeing a portion of the loan amount. Because of that guarantee, lenders are able to offer more flexible payment terms and lower interest rates than most small businesses would otherwise be able to get.
SBA loans and SBA Express loans are a useful option for many SMBs, but they do have several drawbacks that you should consider before applying. Here are some to think about before you make a decision.
|Pros of SBA Loans||Cons of SBA Loans|
If you decide to apply for an SBA loan, the best place to start is the internet. Go to the SBA website and fill out the loan application form. To complete your application, you’ll need to provide documents and information verifying your identity, legality of your business, personal and business history, and creditworthiness. (For more information about what’s required, start here.)
This information includes:
You can also visit your local district SBA office in person to ask about approved lenders who deal with SBA loans. This page is a good starting place for locating a local SBA resources. Usually, the lending institutions have their own evaluation process and eligibility criteria to accept SBA loan applications, even for applications that follow guidelines drafted alongside the SBA agencies.
The whole process, from application to loan decision, may take several weeks. In recent years, SBA agencies have introduced the SBA Express loan process which business owners can complete in days instead of weeks. As you might expect, this is very popular with small business owners looking to secure loans faster, but it is also harder to obtain. You must have high personal and business credit scores in order to qualify for the SBA Express process. Check with the lender before starting the application to find out which path is appropriate for your business.
Most small business owners use SBA loans and SBA Express loans to accomplish several goals. Here are some uses for which an SBA loan might come in handy:
In short, many business owners will find uses for SBA loans. Borrowers can use the money from SBA Express loans and SBA loans for most legitimate business purposes, though there are some restrictions, making them less flexible than other funding sources.
SBA Loans and SBA Express loans are great options for business owners to consider, but they aren’t for everyone. Luckily, there are many other alternatives that you can use to acquire funding for you small business besides SBA loans. A few of these are discussed below.
Online platforms are available where borrowers can link their accounts and apply for loans. Direct online lenders and online marketplace lenders are two different types of online sources of funding.
Direct online lenders (such as Fundbox) request information about your business and credit history, according to the criteria of the specific lender. You can apply online, which means less time spent filling out forms than with a traditional bank loan.
Online marketplace lenders (such as Lendio) are a little bit different. When working with an online marketplace lender, you would still provide your business and credit history information online. As with direct lenders, your information is analyzed to discover whether you could potentially qualify for the loan you seek. Next, there is an added step where your information is shared with a “marketplace” of lenders. Lendio, for example, shares your information with over 75 lenders who then evaluate your creditworthiness. If any of those lenders decide to offer you a loan, you are contacted by those lenders with their offers. You can then complete the application process with the lender of your choice and, if approved, receive your funding.
|Pros of working with Online Lenders||Cons of working with Online Lenders|
Whenever you think of loans, the first option that comes to your mind is probably “banks.” Yes, banks do provide conventional loans for small businesses.
|Pros of working with banks||Cons of working with banks|
If you invoice your customers on terms but need money while your customers are taking a long time to pay, then you can opt for invoice factoring. You can sell your invoices to the factor companies that will pay you a portion of the invoice value up front, and collect directly from your customers.
|Pros of Invoice Factoring||Cons of Invoice Factoring|
As you begin your search for financing available through the Small Business Administration, you’ll quickly find out you have several options. Most commonly, business owners need to decide whether to apply for a traditional SBA loan or try their luck at securing an SBA Express loan.
As the name suggests, you can potentially secure SBA Express loans faster than traditional 7(a) loans. In fact, borrowers can expect a decision on their loan application within two or three business days—which sure beats the two- or three-month long process typically associated with traditional SBA loan applications. This speed of financing is due to the fact that the SBA tends to give participating lenders more flexibility when it comes to loan approvals.
Beyond that, there are several other differences between traditional SBA loans and SBA Express loans:
Despite their speed, SBA Express loan applications still require a lot of paperwork and effort. They also tend to be much more difficult to obtain that a traditional SBA loan—particularly for young companies.
If all goes well, you may be able to secure fast financing with an SBA Express loan. But, due to lower odds of approval, it may not be worth your time to apply for an SBA Express loan unless your business has strong financials and a long track record of success.
Before you apply for a loan from the SBA, it’s worth getting familiar with the loan application process so you know what to expect moving forward.
First things first: The SBA itself doesn’t actually lend you the money. What they do is guarantee a business loan from a lender, like a bank. This gives additional assurance and encourages banks to finance businesses they otherwise might not approve for a loan.
To begin the loan application process, you need to establish a dialogue with an SBA-approved lender either directly or through a broker. The right lender will be able to walk you through a number of different loan options and recommend the financial vehicle that makes the most sense for your unique situation. You’ll have to submit a pile of documentation and financial information—your credit score, personal and business financial statements, several years’ worth of tax returns, resumes, business plans, authorization for credit and background checks, your completed loan application paperwork, and more—to determine your eligibility.
Over the next few weeks, the lender will assess your qualifications across five categories: your ability to repay the loan, your business experience, the equity you’ve invested in your company, how much debt you have and how likely you are to repay it, and whether or not you need to put up collateral to secure financing.
Let’s say the lender approves your application. Hooray! Once the lender has made an affirming decision, the loan closing process begins. Expect to sign a lot of documents once again—like a promise to pay, security documentation, insurance forms, and several SBA documents, and more. This process can last as long as three weeks.
The bottom line? Applying for a traditional SBA loan is often a long, time-consuming process with multiple steps that can take months to wrap up. Several entities are involved in the decision-making process and each step takes time. Unless you can afford to wait several months to secure financing for your small business, you are probably better off looking for financing elsewhere.
SBA loans and SBA Express loans are especially designed for small business financing, making them attractive to small business owners. However, they do bring with them several potential issues that not every business owner will be able to overcome, such as high personal credit score requirements.
Yet, SBA loans are still a better option for many small business owners when compared to conventional bank loans, which require lots of paperwork and collateral before the loan is approved. The application and approval process can take many weeks--longer than many business owners want to wait. An SBA Express loan can allow you to get a loan decision in a matter of days or hours, but qualification is tricky and depends on several factors.
Factoring invoices is a reliable way to get funding quickly when you feel confident that your customers will pay, albeit at a slow rate. Online marketplace lenders are also worth considering because they process applications through convenient web platforms and can provide decisions relatively quickly.
However, these online tools are also not the first choice of many business owners due to their high fees and the risks associated with those fees.