Intro To SBA Loans

SBA Loans are easily the most coveted business loans on the market. No other type of business loan can compete with their interest rates, terms, and boring limits. However, these advantages make SBA Loans particularly challenging to qualify for. As if the requirements weren’t challenging enough, the application process often catches business owners off guard due to the various misconceptions surrounding SBA Loans. To earn approval, you must first understand why SBA Loans are so different and similar to the traditional Business Term Loan

What Is An SBA Loan?

SBA stands for “Small Business Administration.” The Small Business Administration is a government agency, not a business lender. Applications for SBA Loans are not sent directly to the SBA. Instead, you must apply through one of three types of financial institutions: commercial banks, credit unions, or alternatives business financing facilitators like HealthGrowth Capital. These loans help small business owners just like you start or grow businesses.

What makes an SBA Loan different than all other business loans is that the SBA guarantees up to 85% of loans up to $150,000 and up to 75% of loans over that amount and up to $500,000. This means that even if the borrower defaults on the loan, the financial institution still makes back 85% or 75% of the borrowed funds.

The SBA, however, does not approve or reject applications. That’s all up to the financial institution, each of which has its own criteria for approval. Once the institution approves an application, it submits its own application requesting the SBA’s guarantee.

MAX FUNDING AMOUNT
$50K – $5.5M

FACTOR RATES
Starting at Prime + 2.75%

TERM
10-25 years

SPEED
8-12 weeks

How Do SBA Loans Work?

The 7(a) Loan

This is the most popular type of SBA Loan. It can be used for almost any purpose: hiring more people, purchasing new equipment, paying off existing debts, ordering bulk inventory, etc. You can access up to $5M, with repayment terms of up to 25 years, depending on the type of investment. Interest rates range from 5% – 10%. There is a 1.7% fee for loans up to $150K and a 2.25% fee for loans greater than that amount. This fee might be presented as part of the total cost of the loan. There may also be an origination fee or loan packaging fee.

7(a) Loans cannot be used for certain purposes. These purposes include purchasing a building that will be leased to another business, reimbursing a business owner for a previous investment in the business, and repaying debts owed to the U.S. government.

What Are The Advantages of SBA Loans?

Much of the appeal for SBA Loans comes from their incomparably low interest rates. For many borrowers, interest is the most important factor they look for when shopping for loans. Business term loans from banks also carry low rates, but rarely as low as 5%. These two products are much cheaper than newer or alternative options. Short-term financing products, for example, can have APRs as high as 99%.

SBA Loans also carry very high borrowing limits and very long terms. If you use the loan for the right purpose, it can revolutionize your business. These are the kind of loans business owners pursue when they have significant investments on the horizon. Not only can you access the capital to afford your investment, but the low interest charges help to prevent you from damaging cash flow in the process. With more expensive products, you might have to cut expenses or put other plans on hold to make monthly payments. With SBA Loans, on the other hand, you’ll probably have no trouble making payments while covering operational costs. This also makes SBA Loans the ideal choice for businesses looking to maximize their ROI.

What Are The Disadvantages of SBA Loans?

Anyone shopping for business loans knows that convenience comes with a cost. Since SBA Loans are as convenient and advantageous as it gets, they must, therefore, carry the strictest requirements.

Aspiring borrowers might assume that since the SBA guarantees a large percentage of the loan, SBA Loans should logistically be easier to access than Business Term Loans. From a rational standpoint, this should be true. But 85% is not 100%. The financial institution still stands to lose some money in the event of a default. Thus, they are only slightly more generous with SBA Loan applications. If you don’t think you’ll be approved for a traditional Business Term Loan, your chances of being approved for an SBA Loan are slim.

Another significant disadvantage of SBA Loans is the lack of concrete, universal requirements. And remember, each institution creates its criteria for approval. Individual institutions might favor specific industries or types of businesses. For example, banks are notoriously biased towards established companies with massive bank balances.

Aspiring borrowers must be warned that applying for SBA Loans requires tremendous patience. Significant paperwork is often involved; it could be at least three months before you learn whether or not you’ve been approved. Applicants might have to meet with multiple institutions before being accepted and may even be told to come back in a year when their finances have improved. The point is SBA Loans usually aren’t as simple as filing one application to one institution and then getting your money a few days later.

PROS

• Lowest interest rates

• Longest repayment terms

• Use for a variety of business purposes

CONS

• Lengthy approval process

• Large amount of paperwork

• Might require collateral

• Good-excellent credit required

Who Qualifies For SBA Business Loans?

Approved businesses generally met the following criteria:

ANNUAL REVENUE
$360K+

CREDIT SCORE
650+

TIME IN BUSINESS
2 years+