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The easy access to information, resources, and technology has allowed aspiring entrepreneurs to set up and run their businesses. But every business, big or small, requires a significant amount of money to rent an office space, purchase equipment, pay overheads, disburse salaries to employees and manage everyday expenses.

Even if the business is established and running smoothly, it still needs money to sustain itself in a competitive market and efficiently use opportunities to enable growth. The success of running a startup or small business depends on how well you manage the finances, but the most crucial aspect is gathering the money upfront to launch a business.

What is Business Loan?

A loan specifically intended for establishing, running, or growing a business is called a ‘Business Loan.’ A startup or small business may require a business loan for the financial assistance necessary to start a business or manage the various expenses.

A business loan is a debt that a company has to pay according to the loan terms and conditions. Some business owners may require a loan to pay wages and salaries, while entrepreneurs may need a loan to fund office supplies, inventory, and renting an office space.

There are different types of business loans depending on the purpose and include Bank Loans, Micro Loans, Asset-based Financing, Cash Flow Loans, and Invoice Financing. However, the traditional commercial loan is the most common option for financing a business.

Business loans are offered by banks, credit unions, private investors, and public funds. But loans are not provided at random, and there are strict rules and guidelines that you have to fulfill to get the necessary financial assistance. Banks, in particular, have stringent policies and will like to review the business plan and analyze financial projections of a startup before providing the loan.

Getting a Small Business Loan

The US SBA (United States Small Business Administration) is a government-backed agency that provides assistance and support to small businesses and startups. The purpose of SBA is summarized with three C’s (Capital, Contracts, Counseling), and the goal is to enable small businesses to play their part in strengthening the country’s economy.

SBA itself does not issue loans but assures them. To get an SBA loan you need to find potential lenders such as banks and credit unions. The different types of SBA loans include

  • SBA 7 (a); common loan type for small businesses with special requirements
  • 504 loans; long-term financing up to $5 million for fixed assets such as real estate, and equipment
  • Microloans; small size loans with an average amount of $13,000 and a maximum amount of $50,000

SBA reduces the risk of lenders, making it easier for them to finance small businesses and startups. SBA guarantees to repay a portion of the loan if the business defaults and fails to make the scheduled repayments. The advantages you get from SBA loans include

  • Competitive Terms

SBA guarantees loans with rates and terms that easy to fulfill as compared to other non-guaranteed loans

  • Counseling

The SBA loans come with all the support an entrepreneur may need to start and run a business. SBA not only provides monetary assistance but may also help with drafting a business plan and helping to export goods overseas.

  • Unique Benefits

The numerous benefits of an SBA loan include exclusion of collateral, low down payment, and flexible overhead payment. Currently, due to Covid-19, the fees for both 7(a) loan and 504 loan has been waived

After viewing the business plan, the lender will advise you to get an SBA loan to start a business. The SBA loans are ideal for women, veteran-owned, or minority-owned businesses. SBA loans can also be taken by companies having lower incomes or operating in rural areas.

How to get a Small Business Loan

SBA uses the employee size and annual sale receipt to determine which businesses may be classified as small. The criteria set by SBA defines a small business as having 500 employees; however, according to some businesses, employees may be from 750 to 1000. A business may also be called ‘small’ if it has annual sales receipts from $750,000 to $5,500,000.

The government defines a small business as a company having 500 employees and its revenue per year anywhere from $750,000 to $28 million. There are dozens of brands we see today that started small and managed to succeed and sustain with the help of SBA loans.

To get a small business loan, you must first determine if you qualify for the loan or not. The first step is to determine your credit score, which is the main factor that a potential lender looks at. You can get your credit report from Experian, Equifax, or Transunion.

Banks have strict rules and only offer business loans if the credit score is 680 or above. If your score fell below the minimum criteria, then you can apply for an SBA loan or other government-backed business loans.

Your business should be operational for at least a year to qualify for a small business loan and almost 2 years to get loans from a bank. The lenders may also require minimum annual revenue ranging from $50,000 to $250,000 to provide the loan.

Before you search and apply for a loan, you must evaluate your financials and cash flow statement to determine how much loan you require and amount of repayment you may have to pay each month. To secure a loan, one of the essential elements is having collateral such as land or equipment that a lender can take hold of if you fail to repay the loan amount.

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What is an SBA 7(a) Loan?

The most common and popular SBA loan is the 7(a) loan. The loan is best for a startup or small businesses facing difficulty to get financing from a lender wanting an SBA guarantee. The SBA 7(a) loan ideal for

  • The short and Long term capital
  • Purchasing office supplies, furniture, and fixtures
  • Construction costs
  • Refinancing existing debt
  • Inventory expansion
  • Opening new offices or retail stores
  • Partner buyouts

The maximum limit of an SBA loan is $5 million, but the higher amount of loan, the more stringent eligibility criteria to fulfill. The important factors that lenders analyze are the credit history, what the business is intended for, where the business operates, and its financial projection for the first year. A bank may also ask for collateral if the borrower fails to make monthly repayment on time. Some of the eligibility factors include

  • Business must be able to generate profit
  • The business must fall in the category of ‘small business’ as defined by SBA
  • The business must operate in the US
  • Alternative financing options must be considered, such as personal assets
  • The funds should be used for a practical and sound purpose
  • Have adequate equity to invest

To get a SBA 7a loan, you need to collect all the necessary documents and then apply for the SBA loan with your local lender. The two most important aspects of an SBA loan are interest rates to be applied and repayment method and period. However, the loan terms may vary from one lender to another and depend on the type of business. The factors to consider are

Repayment Conditions

  • Nearly all the SBA 7(a) loan are repaid monthly, and the payment includes both the principal amount and interest
  • The monthly payment remains the same for every month if a fixed interest rate is applied
  • In the case of variable interest rate, the borrower needs to pay the amount depending on the ongoing interest rate

Interest Rates

The three ways to know about the interest rates that will be applied to the loan are

  1. The prime interest rate published in the local newspaper every day
  2. SBA Peg Rate
  3. London Interbank One Month Prime plus 3%

Guaranty Percentage

SBA guarantees a business loan up to a certain amount, such as

  • 85% of a loan if the amount is nearly $150,000
  • 75% of a loan if the amount is greater than 150,000

How does the SBA loan work?

It would be best if you searched online to see the SBA loan application checklist. Some of the documents you need to submit to get an SBA loan as a startup are

  • SBA’s borrower information form
  • Personal Financial or Bank Statement
  • Annual income tax returns
  • Business license and tax returns
  • Lease agreement if available and applicable
  • Cash flow projection for first year

Once you fulfill all the requirements and submit the application, there is every likelihood of SBA loan approval. You can obtain 2% to 2.75% over the prime interest rate. SBA guarantees the lowest interest rates of all the financing options.

You will only have to pay one to two closing points along with the SBA’s approved 2.25% onetime fee for 7(a) loans. Any closing costs with SBA loans can be refinanced into the transaction

Once you are given the loan, some of the expenses you can meet with the loan include

  • Short term and long term working capital
  • Purchasing land or building
  • Purchasing equipment, supplies, furniture, machines, fixtures, and materials
  • Constructing a new building on land or renovating an old building
  • In some cases, refinancing current debt

To secure an SBA loan, you must have collateral equal to 50% of what loan you are borrowing. Most assets can act as collateral, such as cash, real estate, stocks, and bonds.

A small business must be in operation for 2 years to qualify for an SBA loan. Business owners who have more than 20% stake in the business must have personal credit scores of 620 or higher. The most important factor is that there should be no late debt payment in your credit report for the last 12 months.

The business partner’s credit history is also analyzed, and it should not have any outstanding recollection or debt payment. There should also be no bankruptcy on the credit report.

The SBA 7(a) loan is a documentation program, and the things you need to attach in the application form are

  • 2 years or more business tax returns
  • Personal and business financials
  • Personal and business credit reports
  • 12 months of bank statement

If you want to take your small business to new heights but not sure about the options you have then the best way is to get an SBA express loan. You may have the opportunity to secure nearly $350,000 of capital and that too in quick time rather than waiting for months for the loan application to be accepted. The SBA guarantees 50% of the loan amount which makes the Express loan ideal for those who find it difficult to meet the eligibility criteria and lack a good credit score.

Final Thoughts

The ongoing Covid-19 pandemic has led to an economic downturn, and the government is doing everything to help business companies to remain active and sustain in these uncertain times. In recent months, you can feel some semblance returning, and effective government measures are helping business companies to get back on their feet.

The recent relief bill in times of Coronavirus pandemic has redefined some of the features of SBA loans to ensure maximum support to borrowers and promote lending. Some of the benefits include an increase in the SBA Express loan limit from $350,000 to $1 million and no fees for 7(a) and 504 loans

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