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.
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.
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.
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%.
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.
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:
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:
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.
Joshua is a financial lawyer who plans on writing a book about his experience on debt collection laws and lending terms and conditions. He is currently one of the senior partners at his law firm but wants to take more time off for his writing.