SBA stands for Small Business Administration of the United States of America. It has its own type of business loan termed an SBA loan. It primarily uses federal reserves to guarantee or insure up to eighty-five percent of loans by small businesses. This means lenders will have a low risk of granting loans through SBA. And because of this, it will also be beneficial to borrowers because, the lower the risk is to lenders, the lower the interest rates will be and the more flexible the terms and agreements may become. This means every loan is unique. It caters to the needs and capabilities of the borrower so they have an opportunity for business expansion, refinancing of a current loan, acquisition of valuable assets, and establishing capital for their business. There are also similar concepts to the SBA loans in other countries. It just varies in title and terms but the end-point is that it’s one of the most sought out loans by borrowers, especially new and small businesses.
Advantages Of SBA Loans For Small Businesses
Low-Interest Rate And Flexible Repayment Terms
SBA loans can provide low-interest rates because of their guarantee of financial security. It can also be flexible with repayment terms. This will all be based on the amount that the borrower wishes to finance and how much the borrower is capable of repaying. Interest rates though will also vary from day to day because of the daily prime rate.
Down Payments
Like flexible rates and terms, down payments for this loan can be at a minimum. Typically, the down payment for an SBA loan is ten percent of the total amount financed. This can also mean collateral may also be needed or used.
Flexible Funding
Funding this type of business loan has fewer restrictions. You can easily redirect your proceeds to whatever you intend.
Fewer Fees
Excessive fees required by regular loans may affect your net proceeds. These fees may cut the amount that you can get ahold of. SBA loans may lessen the burden of fees and can take away unnecessary deductions from your net proceeds.
Disadvantages Of SBA Loans For Small Business
Along with lots of benefits, there are few drawbacks to this type of loan.
Proper Qualification
An easy to comply loan term and repayment amount does not mean loan application will be just a “walk in the park”. You might find meeting the requirements quite challenging. The most common of the SBA loan requirement is a high credit score and the borrower’s company must meet the minimum annual net income that this loan requires. This includes tax reports, business balance sheets, and a statement of profit and loss.
Long Funding Process
Generally, from loan application to funding takes a very long waiting time for SBA loans. You may have to wait for as long as three months before you can get ahold of the proceeds. So, if you plan to take this loan, apply as early as you can or prepare a contingency plan for your expenditures while still waiting for the loan to be funded.
Personal Guarantees
Lenders ask for personal assets as a guarantee to seize and get their money back in case of default. SBA may need you to put up some collateral. But small SBA 7(a) loan does not need collateral. This loan requires personal security if the owner holds more than 20% interest in their business.
