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Small Business Administration Loans

Small Business Administration Loans

When starting out, small businesses may face a myriad of issues. Among them is accessing funds. Small business administration loans are some of the best alternative forms of business financing for entrepreneurs finding it hard to access bank loans.


Small Business Administration Loans

In this article, read about everything you need to know about this alternative financing method. It’ll be easier for you to choose a suitable small business administration loan package for your business financial gaps.

What are Small Business Administration Loans

There is a common misconception when it comes to defining the term SBA loans. Many people tend to interchangeably use the term SBA and the loan lending firm, which it is not.

SBA is an agency that acts as a guarantor for banks and lenders for the money lent to small business owners.

The guarantee stated above protects both the small business firms and lenders by ensuring the loan is paid back as agreed. Typically, SBA loans act as a shield to protect small business owners that may not qualify for traditional loans, against the risk involved with loans. This type of credit facilities gives businesses an easy access to loan at their infant stages or those struggling with financial incapacitation.

SBA Loan Limits and Interest Rates

The flexibility of small business administration loans is one to be admired. You can easily borrow large amounts of money, provided it’s used domestically within the business. In fact, there are some loan packages that restrict a small business owner and direct them on how to use the money borrowed. This is an advantage in itself as it helps avert wastage of resources then reflected in the growth of that business.
Although the agency states that the average loan amount is $375,000, a business can still apply for a $5 million loan which is the maximum limit.

In terms of interest rate, the SBA is guided by the respective lender. The lender sets the interests rates based on the prime rate plus a markup rate (spread) at that period. Any loan exceeding $50,000 and its contract cover less than seven years, has a prime rate at that is combined with a maximum markup rate of 2.25%. The maximum interest rate, therefore, amounts to 6.75%, if the prime rate of December 2017 is held constant throughout 2018.

If the loan exceeds $50,000 and its contract active for more than seven years, the maximum markup rate is set at 2.75%. When combined with the December 2017 prime rate, the final interest rate is 7.25%.

Types of Loan Packages SBA offers

  1. 7(a) Loan Program
    Featuring a maximum borrowing limit of $5 million, the 7(a) is handled by a specialized lender like a bank, Sacco, credit unions etc right after the SBA gives the green light. The money given out is restricted to a number of uses which include:

    • Installing fixed assets such as furniture, land etc
    • Funding working capital
    • Business expansion
  2. Microloan Program/SBA Express
    The microloan program is quite the smooth one. It is split into two types; export express loans and SBA express loans. They are differentiated by the use and the fact that the export express loan package takes a longer application process and loan limits run up to $500,000 compared to SBA express loan package whose turnaround time is less than 3 hours and loan limits run up to $350,000.This package involves less paperwork compared to the 7(a) loan. In terms of the interest rates, it ranges between 4.5% – 6.5% above prime and has a 10 year contract period.

    There is no collateral required for loans below $25,000. After the SBA guarantee, the loan is processed by community-based non-profits firms. Funds lent can be used to sort any business financial needs.

  3. 504 Loan Program/Certified Development Company Program
    The SBA 504 program is purposely meant to fund the installation of fixed assets for a business such as land, building, furniture, just to name a few. SBA allows small businesses to apply for loans up to $5 million.Once SBA guarantees this loan, it is then processed by non-profit corporations set up specifically to promote economic growth in the area code funded.
  4. SBA Disaster Loans
    Comes in handy when an expensive and essential business asset gets wrecked by natural disasters or accident and isn’t insured. The loan amounts to the affected business can go up to $2 million, with low interests and give up to 30 years repayment plan.
    The loan is processed by SBA itself to ensure the business is back on course in the shortest time possible.

SBA Loan Eligibility Requirements

Each and every SBA loan program has its own unique application process. Even so, all of them are bound by the same requirements which must be met by every applicant. Here are the requirements for you to qualify for an SBA loan:

  1. Size Standard
    If a business exceeds a net worth of $15 million or experienced a net profit of $5 million two years consecutively, then the business is not eligible for an SBA loan program.Also, eligibility will depend on the number of employees. Since the size of a business firm is affected by the number of employees, the greater the number the lower the chances to get an SBA loan. Check the size of your business before applying.
  2. Occupancy
    SBA requires small business owners with land to at least occupy 51% of the property being bought within one year of SBA funding. If the business loan is for construction, it must occupy at least 60% of the property.NB: Most companies(if not all) can apply for the 504 loan program provided they make profits.
  3. Credit Score
    Another critical requirement in the application process for a small business loan is a good credit score. Generally, the applicant is expected to have a 660+ rating to qualify.

Repayment Terms

The main reason why SBA is one of the most successful loan agencies in the world is because of the friendly deals. Apart from the low annual percentage rates on loans, SBA gives small business owners enough time to repay back their loans. More time compared to other loan agencies helping them overcome cash flow turmoil in the short-run.

According to the SBA Constitution, a loan repayment plan depends on what the money was used for. Here are some examples:

  • A loan to fund the daily business operations is given a 7-year repayment scheme.
  • Short term loans to purchase business equipment or assets have a 10-year repayment plan.
  • Long-term loans to purchase fixed assets such as land are given up to 25 years to pay back.

Final Thoughts

SBA loans go a long way in ensuring that your small business start-up is well funded and have enough money to pay off your expenses without an exerting loan pressure. It’s possible especially when a business gets a long-term loan, they, in turn, payback in lower interest rates and installments. Although the loan application process is tedious and involves a lot of paperwork, the fruits are worthwhile once your application goes through.