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An SBA loan is one of the most desired loans for business owners. The SBA which stands for the Small Business Administration is a government agency that was set up in 1953. Created to support businesses and entrepreneurs across the US. One of their top goals is to get more capital in the hands of entrepreneurs. Business owners who would otherwise be unable to access loans at reasonable rates.
Their main role is to connect business with lenders. Unlike a traditional loan where you would apply directly to the lender. Many people think that these loans are funded directly by the government. That is not the case for a traditional SBA loan. However more recently with the changes to EIDL Loans and the introduction of PPP, the funds for these loans do actually come straight from the US Treasury Department. The SBA has an essential role in supporting businesses across the US. In 2019, they facilitated over 63,000 loans for a total of $28 billion. These loans are in high demand because of their favorable terms and rates.
The SBA guarantees a large portion of the loan made by banks and other lenders, reducing the lenders risk. Normally 75%-85% of your loan is covered by the SBA in the event of default. As a result of this the lenders are much more willing to approve a business as they know they will get paid back even if they were to default. This has also made banks more willing to work with small businesses who historically would have had difficulty obtaining tradition financing because of their lower revenues and loan amounts. These loans are highly sought after because of their low fixed interest rates, monthly payments and long repayment terms. The SBA will also report your repayment to credit bureaus. It will increase your likelihood of obtaining financing in the future if you have good repayment history.
Although there is technically no minimum credit score requirement, the banks commonly require minimum credit scores for applicants which typically range from 640-680 depending on the product. It’s important to have built a strong credit score prior to applying for an SBA loan as the banks are a lot more focused on credit than other online lenders for example. Something else that’s important to keep in mind is that it’s challenging to receive an SBA loan as a startup. An applicant typically has to be in business for at least two years. The lender will also review recent Tax return, Profit and Loss and Balance sheet and commonly require the business to be profitable. One of the nice parts about an SBA loan is that the revenue requirements are relatively low at least $50,000 in revenue over the last year.
One of the drawbacks of an SBA loan is that there is a lot of paperwork involved and it is a long process to obtain the funding. Here is a list of the document commonly required for an SBA loan. To compare the process, some online lenders just require recent bank statements and a signed application to fund.
SBA loans can be as low as $10,000 and as high as $5,000,000. Unlike other types of financing the rates on SBA loans depend on the market prime rate. This is typically at 4%+ and the lender may charge additional interest. The SBA also charges a fixed fee which varies for each your loan but generally ranges from 2%-3.75%. The loan terms can be as long as 25 years.
Depending on the strength of your application and the lenders requirements, an SBA loan typically requires a 10%-20% down payment based on the loan amount. You’ll also need to provide collateral unless the loan amount is under $25,000. For loans over $350,000 there will be a lot of collateral required. If you don’t have enough business collateral it’s possible to use some personal collateral towards the financing. The SBA will also require any owner with over 20% ownership to personally guarantee the loan. This will allow the lender to go after personal assets in the event of default.
One of the main drawbacks of an SBA loan is how long it takes to get financing. If you’re short on time this may not be the best option for you. Typically, most SBA loans take 2-4 months for the financing to be received. An exception to this is the SBA Express loan which can be funded in less than 2 months in certain situations however these are smaller loan amounts. The larger the loan and longer the term that you apply for, typically extends the SBA loan timeline as the lender will require a more extensive review process. Having said that the most time-consuming part for you is the process of gathering all the documentation needed before you even apply.
If you have time on your hands and meet the requirements above it’s definitely worth applying for an SBA loan as they offer some of the largest loan amounts, lowest interest rates and best repayment terms. However, if you need financing fast, do not think that you will qualify or are simply overwhelmed with the application process it’s always worth considering other options. If you look at the opportunity cost and decide if your time is better spend working on your business and generating revenue instead of putting time and effort towards the long application process a shorter term working capital loan from an online lender may be a great option to get the funding within a few days.