This is a guest post by Megan Totka of ChamberofCommerce.com.
These days, it’s pretty challenging to get a small business loan. According to the Federal Reserve Board of New York, small business lending is still just three-quarters of what it was in 2008. Does that mean you should give up on the idea of getting a loan?
Not so fast. A bank isn’t the only financing option for your business in town. You could try to get approved for a personal loan, but that can put your personal assets on the line. Another place to turn is the Small Business Association. This government agency has several different programs that can give you the financial help you need.
How Does an SBA Loan Work?
The SBA doesn’t actually lend money. Instead, it guarantees loans that are offered through partner banks and credit unions. Lenders have more relaxed lending terms for SBA business loans because of this guarantee. If you couldn’t get a bank loan, you could still qualify for an SBA loan.
The downside of SBA loans is that they charge a higher interest rate than the business loan interest rates that you would get from a bank. Since this program takes on riskier borrowers, the loans need to charge higher interest rates to make up for the extra risk. However, this extra charge is worth it if you can’t get money from the bank.
Types of SBA Loans
There are three types of SBA loans: (7a) Loans, Micro Loans, and CDC/504 Loans. 7(a) Loans are the most common type of SBA loans. These are all-purpose small business loans. You can use a 7(a) Loan to start-up a new business, buy land or equipment, refinance an existing debt, or expand your current business. You can’t use this money to pay your taxes or give yourself compensation though. 7(a) Loans are long-term loans that can last up to 25 years. You can borrow up to $5 million through this program.
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Micro Loans are short-term loans for small amounts of money. You can borrow from $100 to $50,000 through this program. Since these are short-term loans, you need to pay the money back within six years. You can use this money to buy equipment, inventory, and cover other short-term business expenses. However, you can’t use the money to buy land or a building because these commitments take too long to pay off.
CBC/504 Loans are the last type of SBA loans. This program is designed to provide small business financing while also accomplishing public community goals. To qualify, your business needs to meet some public service objective like growing manufacturing in your area or helping the environment. CBC/504 Loans are also available to minority and female business owners. These loans charge below market interest rates as the SBA wants to encourage businesses that help their communities.
Qualifying for an SBA Loan
To qualify for an SBA loan, you need to meet a few criteria. First of all, since these are small business loans, your business can’t be over the small business size standards. Your business must have no more than 500 employees and must earn less than $7 million in revenues a year. In addition, you also need to show that you tried to apply for a regular bank loan but were rejected.
SBA loans also have an application process that is fairly similar to getting a loan from a bank. You’ll need to submit your business plan, your credit history, your financial records and, evidence of enough business income to repay the loan. You may also have to put up collateral to back up your loan. This is a little more extensive than getting a loan through a P2P lender like LendingClub, but if you have the right mix, you can get through it very easily.
The SBA’s mission is to support small businesses just like yours. This is a good place to start looking for financing before turning to more expense options like factoring or merchant cash advances. Hopefully, with the help of the SBA, you can get the money you need to take your company to the next level.
Megan Totka is the Chief Editor for ChamberofCommerce.com. She specializes on the topic of small business tips and resources. ChamberofCommerce.com helps small businesses grow their business on the web and facilitates connectivity between local businesses and more than 7,000 Chambers of Commerce worldwide.