Small business owners, particularly those just starting out, often finance their own businesses. According to the U.S. Census Bureau 2007 Survey of Business Owners, many business owners dig into their own pockets to fund their startup company and some 20% use no startup capital at all. There are many reasons new businesses self-finance and we can only guess what they are. It may be that they can’t afford the interest rates, loan terms are too short, they don’t have collateral to back a loan, or they simply don’t meet the tough standards of lenders.
Those who do have good personal credit histories, who don’t need the cash right way, might want to consider applying for a Small Business Administration loans. The SBA (7a) Loan program is the main small business loan administered by the SBA. SBA does not issue the loan itself. Instead, the SBA guarantees the loans issued by participating lenders.
Flareapps.com small business tip #052Apply for an SBA 7 (a) Loan
To be eligible for an SBA 7 (a) loan you must:
- Operate a for-profit business.
- Meet SBA’s definition of “small business” size for your industry.
See “Table of Small Business Size Standards”.
- Must be engaged in business or do business in the USA.
- Have reasonably invested equity.
- Have sought or used personal assets or alternative financial resources before seeking an SBA loan.
- Use the funds for “sound” business purposes.
- Not have delinquent debts with U.S. government.
Why You’d Want to Apply for an SBA 7 (a) Loan
With all of the requirements and detailed qualification process, you might ask yourself why you’d want an SBA 7 (a) loan. The answer is: loan rates and term lengths. Because the SBA backs the loan, guaranteeing up to 85% on loans of $150,000 or less, interest rates are much lower. Loan terms can range from 7 to up to 25 years, depending on how the loan is used. If the loan is financing operations, the term is 7 years; if it is for equipment, the term is 10 years; and, if it’s for real estate, the term is up to 25 years. Rates are based on prime rate plus a fixed maximum or spread, set by SBA.
For example, if you have an SBA loan of more than $50,000 and a payment term <= 7 years, interest rates will be prime + 2.25%. With typical interest rates for bank loans for small business being somewhere between 6% and 13%, you can see what makes SBA 7 (a) loans so attractive. With today’s prime rate at 3.5% + the 2.25% spread, you’d pay 5.75% interest.
Personal Assets Okay as Collateral
Startups have it tough when it comes to qualifying for bank loans. Because they’ve just begun, a startup may not have much business collateral. Lenders look for collateral as a way to mitigate their risk and banks usually only accept business assets as collateral. With an SBA loan, you can use both personal and/or business assets as collateral.
Flareapps.com small business tip #53Need a Smaller Small Business Loan? Try the SBA MicroLoan
While the MicroLoan has higher interest rates, it may be attractive for small businesses for other reasons. As with the the 7 (a) loan, you can use personal assets to back the loan. An additional benefit is that your credit history doesn’t need to be pristine. The loan amounts are also smaller if you don’t need a substantial amount.
The MicroLoan program offers loans of up to $50,000 to help small businesses start and grow. According to SBA, the average microloan is $13,000. SBA MicroLoan funds are offered through designated, non-profit, community-based lenders.
An SBA microloan may be used for:
- Working capital
The maximum repayment term is 6 years and the interest rate is usually between 8 and 13%.
Why You’d Want to Apply for an SBA MicroLoan
The main reasons small businesses may want to apply for a microloan are:
- They don’t qualify for a bank loan.
- Shorter approval turnaround than the 7 (a) loan.
- Less stringent approval criteria than private lenders.
- More personal approach to eligibility assessment from SBA’s community-based lenders.
- Ability to use personal collateral to back the loan.
- Because the SBA requires community lenders to provide loan recipients business training as part of the eligibility criteria, you get some sound guidance to help your business get started on the right footing.
While you may have to jump through some hoops to qualify for an SBA 7 (a) loan or MicroLoan, you’d have to do similar, often equally strenuous hoop jumping when applying for bank loans. SBA loans give startups a chance to find financing they may not be eligible for through banks. Loans may have lower interest rates and longer terms, or, as is the case with the MicroLoan, higher interest but less stringent eligibility criteria than that of banks.
Happy loan hunting!
About Flare Accounting
Flare bookkeeping software was created to help small business owners more easily manage finances. Flare’s dashboard gives you valuable performance metrics that can help you make decisions that improve business performance. With Flare, you get other powerful tools, too, such as budgeting and automated bank reconciliation.
- SBA 7(a) and SBA MicroLoan