As an entrepreneur operating a cash-strapped start-up, you have probably stumbled on the word SBA loans. They are the easiest route towards financing your small business as they are typically underwritten by the Federal agency, allowing lenders to float them with low interest rates and flexible terms. Getting such a short-term loan can help grow your business without necessarily taking on a largely exaggerated and possibly crippling debt.
Exciting as they may sound, these small business loans aren’t particularly the easiest to access. However, with the right factors, a little bit of preparation, and the mental dexterity to navigate the loan application process, you may just hit the jackpot.
The SBA’s traces roots in the 1930s, when President Herbert Hoover came up with a ploy to lift distressed businesses from the Great Depression.
Reconstruction Finance Corporation, as it was known back then, was a lending program spearheaded by the Federal Government to give failing businesses a lifeline. Due to its success, the program was later adopted by President Franklin D. Roosevelt after Hoover vacated office.
When World War II broke out, the production side of the US economy experienced disastrous tremors, leading to a deficit in the supply of miscellaneous warfare equipment. To bump production, the Federal Government created Smaller War Plants Corporation to aid small businesses to support the large firms in production. The SWPC was later to abolished to resuscitate in form of Small Defense Plants Administration although the lending arm still remained RFC.
In 1952, RFC was also abolished which led to the formation of SBA as we know it today. The program has significantly grown in terms of providing small businesses with a wide array of programs, including procurement and management assistance just to mention a few.
In most scenarios, traditional banks always consider small businesses as risky. However, instead of having to cope with the less-than-ideal terms form these banks, small businesses can leverage on the up to 85% guarantee of the loan amount that comes with the SBA loans.
The sole reason why there are these favorable terms is because of the involvement of a government entity. However, if you are looking to access this business line of credit, you have to brace yourself for a notoriously and lengthy application process which is often restrictive.
However, there are few other thresholds that your business needs to fulfill.
In line with the SBA rules and regulations, participating business lenders are supposed to set their lending rates in consonance with prime rate plus an additional markup rate commonly referred to as the spread.
For instance, if you borrow a loan exceeding $50,000 with a repayment period of less than seven years, your interest rate will incorporate the prime rate amount and a 2.25 percentage points maximum spread. This will total to an average of 6.75% interest rate.
Using the same figures but altering the repayment period to exceed seven years, the maximum spread is set at 2.75 percentage points with the overall maximum interest rate clocking 7.25%.
On top of affording businesses with low APRs, another impressive perk of SBA business financing is the extended repayment period. The longer repayment periods rounded off with low-interest rates translates into having sufficient cash flow money for your business needs.
This is contrary to the credit card, online lenders and merchant cash advances which slap you with ridiculously brief repayment periods some requiring you to repay within 24 hours.
Depending on the project you are financing, here are the latest terms of SBA loan repayment terms:
As a small business owner, it’s mandatory for you to offer the personal guarantee if you hold at least a 20% ownership stake in your business. Additionally, individuals holding a top management position in your small business administration are also required to be part of the signatories to this guarantee. This personal guarantee commits you and your assets to personal liability should the business fail to hold up to the end of the bargain.
Since it’s hard to convince your loved ones to lender you money due to the risk involved in the name of love. Make sure you over communicate the benefits of your small business if it gets the money you are asking and make sure you involve the friends or family in the business.
In relation to all the types of small business loans available today, SBA loans are the best. They allow businesses access large credit facilities at lower interest rates and extended repayment periods. If you meet the above listed thresholds, it won’t matter if it’s an SBA loan or a working capital loan topping your list when looking to finance your business.
However, if you don’t meet the requirements, all is not lost. Gradually try to improve your personal credit and with time, you will be able to improve your business loans requirements position.
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.