The Small Business Administration (SBA) was founded in July of 1953 with a mission to help small businesses grow and thrive. The SBA has its roots earlier than that when the Reconstruction Finance Corporation or RFC was created by then President Hoover in 1932 to help businesses survive effects of the Great Depression. The SBA Loan is one of many benefits that still exists today to help business owners.
The SBA Loan Explained
An SBA loan is one of the ways the SBA helps small businesses with a long-term, low-interest loan. The loans can be used for most any business purpose such as simply adding more capital to the company, buying inventory or needed business equipment, buying commercial real estate or acquiring an existing company.
SBA loans can range anywhere from $5,000 to $5 million with terms ranging from five to 25 years with competitive rates. Small business loans under $50,000 are often referred to as an SBA Microloan. SBA loans require very low down payments compared to traditional commercial loans which can ask for down payments of 30% or even more for a business loan.
SBA loans do ask for a good credit history and really aren’t the answer for someone who is struggling financially or looking for cash to save an owned business from trouble. Instead, the SBA loan is best applied to those with at least a two year history of successfully owning a business. This is documented with the last two years of income tax returns, both personal and business. Make copies of your business bank statements and prepare a year-to-date profit and loss statements as well. What will the purpose of the funds? While SBA loans can be used for a variety of business purposes you’ll still need to lay out your plans for how the funds will be used and when.
It’s also important to note here that the SBA does not issue the funds but instead uses federal funds to guarantee a percentage of the loan issued to the bank. For comparison purposes, other so-called government-backed loans such as VA, FHA and USDA programs also carry a government guarantee financed by various mortgage insurance programs. When you apply for an SBA loan, you’re applying with a lender who is approved by the Small Business Administration.
It should also be mentioned the SBA loan will take a bit longer compared to just a short term commercial loan collateralized against existing assets. Prepare for a bit more paperwork and documentation. In addition, the SBA requires a personal guarantee from each individual with at least a 20% ownership of the company. This personal guarantee means putting up your personal assets as part of your pledge.
If you’ve been thinking about a business loan or have commercial quotes from banks that seem a bit too expensive for you, the SBA program just might be your better option. I’m a qualified SBA loan expert so if you’re curious about your options, let’s talk over the phone. I’ll ask a few basic questions to see which direction is in your best interest.