In 2019, the Small Business Administration granted $23.2 billion worth of 7(a) loans. These figures account for the 51,907 approved SBA 7(a) loans that year.
That’s only for a single type of SBA loan. Together, all approved SBA loans — that’s over 63,000 applications — amounted to more than $28 billion.
Although that’s a very small increase in approval rates, it’s a welcome increase nonetheless. Especially since SBA loans aren’t as easy to qualify for.
Still, if you meet the SBA loan requirements, it should be your first choice in a business loan.
Ready to learn more about these loans and how to get one? Then be sure to keep reading!
What Are SBA Loans?
The SBA offers financial and educational support to small businesses and entrepreneurs. The US government runs and oversees all its operations and programs.
That said, SBA loans are small business funding programs backed by the US government. Meaning, the loans don’t come directly from the SBA. Instead, the agency guarantees a portion of the loan, which then reduces some of the risks for lenders.
The partial government guarantee can be up to 85% of the loan amount. This is the maximum for loans that don’t exceed $150,000. For loans between $150,001 and $500,000, the maximum SBA guarantee is up to 75%.
Without government backing, lenders are at risk of losing 100% of the money they lend. Considering that 80% of small businesses fail due to cash flow issues, lenders face quite a lot of risk.
With the SBA’s guarantee, however, lenders can still recoup up to 85% of their money in case of non-payment. That’s why they’re more willing to approve borrowers who apply for SBA loans.
How Do SBA Loans Work?
The SBA works with many types of lenders, including banks and micro-lending institutions. The agency has also partnered up with community development organizations.
That said, when you apply for SBA financing, you do so through these institutions. The loan money still comes from the lender and not the government agency. The lender, however, has to structure the SBA loan according to the SBA’s rules and terms.
Why Consider SBA Loans?
SBA loans should be your first option if you don’t have the means to take out a regular business loan. Here’s why.
Low-Interest Rates
SBA loans have some of the lowest interest rates among small business loans. Again, this is due to the security that the SBA provides on such loans. Moreover, the SBA regulates and caps the maximum lender spread on these loans.
The lower the interest rate on your loan, the easier it is to pay back your debts. Plus, a low rate means less of your money will go toward just paying back the interest.
Long Repayment Terms
Working capital loans have up to a seven-year repayment term. Most other SBA loans have repayment terms of up to 10 years. Real estate loans, on the other hand, have a maximum term of 25 years.
No Collateral Needed for Micro Loans
Unsecured SBA loans are also available for loan amounts that don’t exceed $25,000. In case you need to apply for a bigger amount, the SBA allows various forms of collateral. You can even pledge nonbusiness assets, such as a second mortgage.
What Are the General SBA Loan Requirements?
In an SBA loan, the government has the highest risk of losing money. The most that borrowers would need to pay in case they run into cash issues is 15% of the loan amount. Lenders, on the other hand, have the guarantee of getting back 85% of their money.
This is why SBA loans could also be difficult to qualify for. Still, the credit requirements are pretty much standard. If you can satisfy these requirements, then consider applying for an SBA loan.
Performance History or Detailed Cash Flow Projection
You need to prove that your business can cover all its expenses plus loan payments. You can do this through a well-written explanation of your business’ historical performance. If you’re only about to start a business, create a detailed cash flow projection.
Your Business Management Skills
For existing business owners, SBA partners will consider how you’ve run your business. For instance, they may regard an increase in the number of your employees as a sign of success.
For startups, lenders will factor in your experience in the type of business you want to start. Most lenders also require startup borrowers to have significant management experience.
Enough Equity
New business owners should have at least $1 of equity for every $3 of debt. The equity here is the amount of money you — as an owner — has at stake.
Let’s say you’re planning to take out a $100,000 SBA loan. For lenders to approve you, you need to have at least $33,333 worth of business equity.
For an established business, you shouldn’t owe more than $4 for every $1 of net worth. So, to get approved for a $100,000 SBA loan, you need a net worth of at least $25,000.
What About Credit Score and History?
For startups, lenders will consider the personal credit history of the business owner. For established firms, lenders will factor in both personal and business credit histories.
The good news is, the average 2019 personal FICO score has gone up to 703, which is an all-time high since 2010. If you’ve been paying back your loans on time, then your credit score has likely increased too. The higher your credit score is, the more favorable your loan application results will be.
Make sure, however, that your credit report isn’t part of the 20% that contains errors. This is why you should always check your credit report to make sure it’s 100% error-free. Besides, you can get this for free every year.
Explore Your SBA Loan Options Now
There you have it, your ultimate guide on what SBA loans are and why you should apply for one. In fact, if you can meet the general SBA loan requirements, you should talk to an SBA lender ASAP. This way, you can find out more about the different types of SBA loans and which one best suits your business.
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