Is an SBA Loan Good for Your Business?
Small business owners (SBOs) tend to be cautious. If you take your time analyzing the pros and cons of big decisions, there’s nothing wrong with that. It’s better to be prepared for the future than be caught unawares.
One of the most common questions SBOs have is whether to apply for a small business loan. There are so many myths going around that many owners don’t know what to think. Getting the answers to your questions about SBA loans can make a huge difference. That’s the purpose of this quick guide.
What Are SBA Loans?
In simple terms, these loans are backed by the Small Business Administration. The government doesn’t provide financing directly, but it provides incentives to lenders that do. The SBA promises to cover the majority of the loan in case of default. This makes life much easier for SBOs looking to apply for a loan, reducing the requirements considerably.
What Are the Benefits of an SBA Loan?
The main difference between SBA financing and conventional loans is the qualifications lenders look for. With a conventional loan, the applicant’s credit rating is everything. A good credit score is necessary to get low-interest rates, long terms and favorable monthly payments. Any business with a less-than-attractive credit rating probably won’t get approved for a loan.
Small business loans are somewhat different. The SBA still expects to see good money management skills, but the credit rating threshold is much lower. Small business owners can qualify for amazingly low-interest rates, numbers that they would probably never get otherwise.
What Can an SBA Loan Cover?
There are several different options for SBA financing. Some are large-scale loans for big ticket items, including heavy machinery, construction equipment and buildings. Other loans cover purchases that aren’t quite as large, such as remodeling projects, working capital for business expansion and technology upgrades.
By including additional working capital, SBA loans really open up the possibilities for small business owners. This type of capital can go toward marketing, inventory purchases, emergencies and countless other needs.
What Types of SBA Loans Are Available?
Many business owners apply for two main SBA loans: 504 loans and 7(a) loans. An SBA 504 loan offers more funding, and it’s generally used for larger purchases.
Some companies start off applying for SBA microloans instead. That way, they can purchase some business essentials to get off the ground the right way. The best choice depends on the business's available capital, goals and time in business.
What type of information do I need to have ready to have a constructive conversation?
Some of the information you should have ready includes:
Personal resume and background information for the business owners;
Personal and business tax returns for at least 3 years and interim financial statements for the business that are no more than 90 days old;
Personal financial statements;
Information about your personal credit score and a detailed explanation for any derogatory items;
Business license and entity formation documents (such as Articles of Incorporation);
Business history with details about your borrowing need and how you will plan to use the loan proceeds.
