If you’re in the process of starting your own company or need to add funds to your existing business, acquiring a loan is most likely your top priority. While there are many business loan options, loans that are guaranteed by the Small Business Administration are by far the most popular. Their popularity is largely due to the acceptance of small businesses that may not be able to meet all of the requirements needed for a traditional business loan. Since there’s a high demand for these loans, the application process can be quite lengthy. So, before applying for a Small Business Administration loan, make sure to review all of the programs the SBA has to offer and choose the right option for your business.
The option most people are familiar with is the SBA 7(a) loan. You can use the funds from SBA loans for a variety of purposes. This can include working capital, debt refinancing, marketing and advertising, hiring expenses, tools, equipment and resources for the business, franchises, and new construction – just to name a few.
Borrowers can take out SBA 7(a) loans up to $5 million, but must put down 10% and collateral. Loan terms can be as long as 10 years for general purposes. For commercial real estate purchases, they can be as long as 25 years for commercial real estate purchases. An SBA 7(a) loan is subject to fees that range anywhere between 3%-3.75% in addition to the interest rate. Rates typically range anywhere between 5.75%-8.25%.
You must use an SBA 504 loan, or CDC loan, strictly for real estate and equipment purchases. This program is unique because it pairs a Community Development Corporation (CDC) with a lender. They come up with the full loan amount together. The pair will cover 90% (50% coming from the lender and 40% coming from a CDC). The borrower then only has to pay the remaining 10% in the form of a down payment. While this loan may not sound as beneficial as the SBA 7(a) loan, there is one advantage: the interest rate on 504 loans are fixed and lower.
Borrowers can take up to $5.5 million and have anywhere between 10-20 years to pay off the business loan. Similar to the SBA 7(a) loans, there are fees that come with the 504 loans. Another huge advantage to these Small Business Administration loans is that they do not require any collateral as the 10% down payment satisfies this requisite.
SBA Microloans are a great option for startups, companies with a couple of employees, and individuals who are self-employed. The SBA provides funds to nonprofit organizations with experience in lending who, in turn, lend the money to businesses. These intermediary lenders will loan up to $50,000. However, the average amount for this type of SBA loan is about $13,000. Since the amount is so low, these small business loans are considered short term. Borrowers can have up to 6 years to pay off their microloans.
Since the amount on these short term business loans tend to be low, the interest rate associated with microloans are typically higher than the other two Small Business Administration loan options. One advantage to the SBA’s microloan program is that the intermediary lenders are a bit more flexible with who they approve. However, they have a tendency to be thorough in their approval process. This means there’s a lot of paperwork and a long approval time.