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Cash flow is critical for small businesses. To flourish, small businesses need funding that allows them to develop innovative new products and gets them to market.
Here is a run-down on the U.S. Small Business Administration’s (SBA) small business loans, including how they work, who is eligible, and how best to apply. We’ll also address the pros and cons of this type of loan, so you can make an informed decision about whether it’s the right option for your business.
We’ll also share with you how you can unlock a line of credit up to $50,000 through Credit Key on Thomasnet.com®, putting the power back in your hands to control your cash flow and get the parts you need for your small business.
What Is an SBA Small Business Loan?
Founded in 1953 as an independent agency of the federal government, SBA assists entrepreneurs and owners of small businesses to “pursue the American dream.” Business owners and entrepreneurs can leverage a loan like this to plan, start, and grow their businesses, whether it’s covering startup costs, investing in new real estate, or funding an expansion.
Small business loans are approved by participating lenders, most often banks, and partially guaranteed by the SBA. That means, if you were to default on a loan, the SBA would pay your lender a pre-determined amount.
There are various types of SBA loans available, each with its own terms and conditions:
7(a) Loans ー Up to $5 million
This is SBA’s most frequently used loan program, which supports small businesses with special requirements. Loans are commonly spent on the purchase of real estate but may be used for supplies, furniture, and fixtures; short- and long-term working capital; and to refinance current business debt.
504 Loans ー Up to $5 million
This type of loan is for long-term, fixed-rate financing for significant fixed assets that support business expansion and job creation. This might include the purchase or construction of existing buildings or land, new facilities, and long-term machinery and equipment.
Microloans ー Up to $50,000
This is the smallest program offered by SBA, with loans of up to $50,000 provided via SBA-funded intermediaries. This loan is available to small businesses as well as some not-for-profit childcare centers, helping them to start up or expand. These loans are typically used for things like inventory, supplies, furniture, and fixtures.
Click here to read more detailed information about the different types of SBA loans available.
Who Is Eligible for an SBA Small Business Loan?
The criteria for eligibility are dependent on your individual circumstances and what you plan to use the funding for. But broadly speaking, you must:
- Be a for-profit business registered, located, and operating legally within the United States.
- Have invested some form of equity, be it time, money, or assets, into the business.
- Clearly communicate the business need for financing.
- Be a “small business” as defined by the SBA.
- Have exhausted all other financing options.
How to Apply for an SBA Small Business Loan
After you’ve researched which SBA loan best meets your needs, you’ll need to apply for the loan directly via the lending institution, be it a bank or credit union. Once your application has been received and reviewed, the lender will submit it to the SBA for a loan guarantee.
Once fully approved by the SBA, it is the lender’s responsibility to close and disburse the loan. In addition, your regular repayments, whether weekly, monthly, or bi-monthly, will be paid directly to the lender.
What Are the Pros and Cons of an SBA Small Business Loan?
There are pros and cons to every business decision. What’s important is that you make the right choices for your business. Here are some important pros and cons to consider.
The Pros
1. Competitive Rates
In most instances, SBA loans have similar rates and fees to non-guaranteed loans.
2. Fees
SBA fees are usually pretty reasonable. You will pay an upfront fee ー an amount usually determined by the size of your loan ー and a yearly service fee.
3. Easy to Qualify
Because SBA loans provide some additional security for lenders, businesses that may not qualify for a typical loan ー perhaps due to a bad credit rating ー can still receive funding.
4. Long Repayment Terms
The added safety net of an SBA loan means lenders are often willing to implement longer repayment terms, which lowers monthly repayments and reduces financial strain on your business.
5. Multiple Types of Loans
Because SBA loans range from $500 to $5 million, it’s easy to find a loan that meets your unique business needs, for purchases large and small.
6. Ongoing Assistance
SBA has several resource centers, including small business development centers and women’s business centers, that can provide continued support to small businesses.
The Cons
1. Eligibility Criteria
Businesses that have struggled to secure funding can get approved for an SBA loan. However, the eligibility criteria, as discussed above, is strict and will exclude some business.
2. Slow Process
Because SBA loans involve a middle person and detailed documentation is required, it can take a little longer to secure the funding you need ー usually between one and three months.
3. Fees
As mentioned, SBA fees are typically very reasonable. But you will still be required to make a down payment, typically 10-20% of the total loan amount. Alternatively, you may be requested to pledge assets as collateral.
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Who Is Eligible for Credit Key?
While the application process is simple, there are a few requirements for eligibility. You must:
- Be a U.S. citizen or a permanent resident with a Social Security Number as well as of minimum age to sign in your state.
- Be the owner or the signatory of the business and apply under your personal name.
- Document the businesses’s state registration; a Federal IEN is not required if the business is a sole proprietorship.
- Earn a total annual business income of at least $40,000.
- Have a FICO® Score that is at least 600.
- Have a nominated debit card or bank account for repayments.
How to Apply for Credit Key on Thomasnet.com®
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