Small Business Administration loans are among the most common ways to fund a startup. Though you still need to prove you are a good risk, these loans are often easier to qualify for than standard bank loans.
The Small Business Administration, also known as the SBA, doesn’t lend you the money. Instead, it guarantees a percentage of the loan amount, which makes it more likely a bank, community development organization, or micro-lending institution will approve a loan for your business.
There are several benefits of an SBA loan, including:
- Reasonable monthly payments
- Lower interest rates
- Fewer stringent standards in some regards
Types of Loans Available
The SBA has several types of loans available. The most popular are:
- 7(a) Loan Program
This is the most common loan for both startups and firms already in business. Companies can use the money for most business purposes, including purchases of equipment, new furnishings, remodeling expenses, debt refinancing and working capital. Loans run from 10 to 25-year terms.
- Microloan Program
These are relatively small loans, up to $50,000, for existing companies and startups. A network of nonprofits that have experience with lending and providing technical aid offer the loans. Use the loans for a variety of reasons, including everyday working capital, machinery, supplies, and furnishings. However, they cannot be used for debt repayment or to buy real estate.
- Certified Development Company (CDC)/504 Loan Program
These loans are large and directed toward major purchases like buildings, land, or expensive machinery. They have a maximum amount of $5 million. They cannot be used for working capital or for inventory. The SBA usually provides 40% of the costs for the big project, the lender 50% and you, the borrower, 10%. The business must be worth less than $15 million.
- Disaster Loans
If you have been affected by a government-declared disaster, you can apply for this low-interest loan to help you rebuild.
- Specialty Loans
The SBA also handles a variety of loans directed toward a particular purpose or for targeted groups of people. They include loans targeted towards export and trade, veteran loans, the pollution control industry, areas affected by NAFTA, and those related to the SBA's CAPLines program.
Qualifications for Loans
Many owners of a small business in trouble think these loans will bail them out. That is not true. You still need to have good credit, personal assets, a business plan, and proof that you are a going concern. This is not a program for companies that are failing.
The qualifications you need to meet to get an SBA loan are as follows:
- Must have been turned down by a bank, private lender or any financial institution.
- Must meet the requirements for size as defined by the SBA for each type of loan.
- Must meet the specific standards set by the SBA for each loan.
- Must meet the qualifications for the lender that handles the loan with the SBA.
Applying for Loans
These loans require much documentation. These include statements for:
- Your personal finances
- Your business finances
- Profit and loss
- Projected finances
- Business lease
- Income tax returns
- Business certificate or license
- Ownership and affiliations
- Business history and current overview
- Resumes for management
- History of your loan applications
The lender will ask a number of questions about your business to see if he thinks you are a good risk. These might include:
- How do you intend to use the money?
- Can you describe your management team?
- Who are your suppliers?
- What types of equipment and other assets do you plan to buy?
- What debt do you have, who are the lenders and why did you borrow the money?
- Why are you applying for the money?
The SBA is not a lender of last resort if you are teetering on bankruptcy, but it can lend a substantial financial hand if you need money for growth and to get over a slowdown. If you meet the standard requirements, this is an excellent way to get a low-interest loan with affordable monthly payments.
For additional information on Small Business Administration loans, visit the SBA Loan Program website.