SBA loans or Small Business Administration loans are government-supported loans for small businesses. These loans are designed to assist small and new business growth.
Compared to traditional loans, SBA loans have significant benefits which make them the ideal choice for small businesses and startups.
The Small Business Administration works in tandem with certified financial institutions to provide loans to thousands of businesses each year. Here are some major ways a SBA loan can benefit your business.
1.SBA Loans Are Government Backed
One of the key benefits of SBA loans is that they are government-backed. It gives small business owners peace of mind. Even if you fail to make a payment, the lender will still get some money back.
As a result, lenders are naturally incentivized to lend to small businesses. Whereas, if the lender had to take on all the risks, they would be much more hesitant to give you a loan.
Not only that, different types of SBA loans also have support systems in place for businesses. These systems can help businesses pay back loans. Additionally, the SBA will also advise you on how to run and manage your business efficiently.
2.Specialized Support for Women-owned and Veteran Owned Businesses
Traditional business loan eligibility requirements are quite rigorous, which makes it quite difficult for certain businesses- mainly women- and veteran-owned businesses- to qualify for loans.
SBA loans, on the other hand, have specific resources focused on helping these businesses. So, as long as you have a good business model and go-to-market strategy, getting a loan to grow your business becomes much easier.
Reputed SBA lenders can also provide valuable insight and counseling on how to manage your business.
3.Interest Rates Are Capped
SBA loans being backed by the government also come with additional perks like lower interest rates. You will not pay exorbitant amounts in interest. Add on the fact that SBA loans can range from as little as $500 to $5.5 million, it’s a great way to acquire funding.
The interest is also capped. You can either get a fixed rate or a variable rate. These rates are set on the LIBOR, Prime Rate, and SBA optional peg rate.
4.Long Repayment Terms
Loan repayment terms are also longer for SBA loans. This allows for much more flexibility when it comes to paying back the loan. Some SBA loans can have a repayment term of up to 25 years!
Which is much longer compared to traditional loans. Additionally, you can also adjust the term even more in some specific cases. As a business owner, the longer repayment terms relieve you of the burden of paying back the loan as soon as possible. You can focus on what matters – business growth!
However, there are some benefits to paying off your SBA loan quickly. It depends on a case-by-case basis, though. Paying your SBA loan early will leave your business with more cash flow in the long run, for example.
Keep in mind that some types of SBA loans enforce a penalty for early payments.
5.Less Collateral and Equity Requirements
Traditional loans require high collateral or equity for approval. SBA loans however have relaxed collateral and equity requirements.
Start-ups and small businesses typically do not have much collateral or equity. This means if you go to a bank for a loan, they might reject you because they want to have collateral as security.
With SBA loans, the lender will still make some of the money back even if you default. So, qualifying for a SBA loan is easier for small businesses.
6.Wide Variety of Loan Types
There are many different types of SBA loans you can take. As a result, you can choose a loan contract that suits your specific business needs. This adds a greater flexibility compared to traditional loans.
The most common type of SBA loan is the SBA 7(a) loan. It’s designed for businesses that need funding for growth and purchases. Additionally, the interest rates are also favorable, and loan limits can go as high as $5 million.
Another type is the SBA Express and SBA 504 loans. The former is designed for businesses that need fast funding for expansion, working capital, and more.
While the SBA 504 loan is designed for purchasing long-term assets like real estate and machinery, however, do keep in mind that the interest rate and conditions vary between the types of loans.
7.Access to Many SBA Resources
New business owners need to wear a lot of different hats. And getting a new business off the ground is challenging. It is not always just about cash flow and capital. Usual business administration tasks can bog down operations, too.
This is why SBA loans offer excellent resources for new businesses. These resources can help you with general business administration and other business functions.
The goal of SBA loans is to help small business owners succeed. This is why these mentorship and educational resources are invaluable for any new business that does not yet have a strong footing in the market.
Additionally, these resources are not exclusive to SBA loan holders. They are available for all small business owners!
SBA Vs. Traditional Loans
Compared to traditional loans, SBA loans stand out in many key areas with tons of benefits. Let’s take a deep dive into the key differences to help you make better business decisions.
Interest Rates
First up there is the interest rate. It is one of the major considerations for any loan. SBA loans have relatively lower interest rates compared to traditional loans.
In some cases, a traditional business loan interest might be lower. However, it will depend on the lender and also your business. SBA loan interest rates are generally favorable, and also capped at the base plus an additional 4.75%.
Fees
SBA loan fees are lower than traditional loans. There’s an upfront guarantee annual service fee for loans that exceed $500,000. However, this is better compared to traditional loans where the general fees can be higher.
Moreover, the fees for traditional loans also depend on the lender and your business. So, things can get quite complex when comparing these two types of loans.
Since SBA loans are designed for small businesses, they are better compared to traditional loans that typically have higher fees.
Funding Time
The longer repayment terms, amongst other benefits, however, mean that the funding time for SBA loans is longer. There is a formal application process with lots of paperwork and documentation.
Additionally, even after you qualify, it can take up to three months before the loan is released. Although the funding time is longer for SBA loans, the benefits outweigh traditional loans.
SBA loans are quite flexible. This means you have more time to pay off the loan compared to traditional or bank loans.
Depending on the type of business you have, longer repayment terms have tons of additional benefits. Firstly, there’s no stress to pay off the loan as fast as possible.
Secondly, you can plan ahead and strategize on how you will pay the loan off. SBA loans for working capital, and equipment purchases have a payback period of 10 years.
And if you are taking a SBA loan for real estate, the payment terms on those are 25 years! That is plenty of time to build a profitable business. Not to mention, you also get mentorship and business administration assistance.
Wrapping Up
Whether you are a small business or a startup, SBA loans are specifically designed to help small businesses grow. The myriad of benefits and educational resources make it the better choice compared to traditional loans.
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