Running a small business is not an inexpensive endeavor. Whether it’s money to invest in a second business location or extra cash to invest in new equipment, it’s likely that at some point you’re going to need more capital than you have saved in the bank.
Luckily for small businesses, there is no shortage of places to turn when you need money. Small businesses have a variety of options including government-backed loans, bank loans, merchant service providers, as well as many alternative lenders which include many online lending options.
One of the first places a small business will look for funding is the Small Business Administration (SBA) for a government-backed loan. Fortunately, the SBA has several options aimed at meeting key financing needs for loan seekers.
The key thing to remember when seeking an SBA loan is that the government isn’t lending directly to small businesses. Instead, banks and other developmental authorities lend on the government’s behalf using set guidelines and stipulations.
One of the biggest advantages of SBA loans is the fact that banks are more likely to extend credit to borrowers that they would have otherwise declined. The reasoning behind this is the government guarantees between 75 and 90 percent of the loan, minimizing the risk for the lender.
Additionally, terms for SBA tend to be more favorable for borrowers. This translates to lending more to the borrower than they would otherwise be eligible for with other financing options, or a reduction in the necessary collateral to secure the loan. Repayment plans are also generally longer than non-government backed lending options, making it easier for small businesses to pay their loan back.
Unfortunately, there are also downsides to borrowing through the Small Business Administration. By involving the government, the loan process tends to be longer and more complicated than traditional small business bank loans. With extra paperwork, the length of time it receive approval or a denial of the loan application can be much longer.
In preparation of applying for an SBA loan, small business owners will need to collect several pieces of information. Among them: personal background and financial documents, business financial documents, profit and loss statements, projected financial documents, ownership and affiliations, business licenses, past loan applications, tax returns, business history documents, business leases.
Additionally, small business owners should prepare to answer several questions regarding their intent for the money received through the loan as well as what existing debts are owed by the business.
The cost of the SBA loan will depend on the program you decide to pursue. Fees, interest, and repayment options all vary for the 7(a) loan program, 504 loan program, and Microloan program.
The 7(a) loan program includes a guaranty fee based on the loan amount and usually ranges between 0 and 3.5 percent. There is also an additional .25 percent fee on any guaranteed portion above $1 million. Interest rates can come in variable and fixed form for the 7(a) loan program, between 2.25 and 2.75 percent. Repayment depends on the use of the funds, 25 years for real estate, 10 for equipment, and around 7 for working capital.
504 loan program fees are around 3 percent of the debenture and can be financed with the loan. Interest rates are regulated to an increment above current market rates for 5 and 10 year Treasury issues. Repayment options include 10 and 20 year maturity terms.
Lastly, microloan programs are fee free, but have a higher interest rate between 8 and 13 percent. Repayment depends on loan amount, use, and other criteria. The maximum time allowed for repayment of an SBA microloan is 6 years.
For more information about small business financing and other options available to meet your needs, contact us today.