How SBA Loans Work

how sba loans work

Every small business owner needs funding at one time or another. To begin with, over 80% of startups rely on the personal savings of their founders. Once a small business gets off the ground, the need for funding does not stop. The cost of equipment, inventory, office rent, materials, payroll, and countless other expenses can all add up, and fast. That is why close to half of all small business owners apply for loans each year.

If you have ever needed funding for your business, you have probably stumbled across the term “SBA loan” when researching the various options that are available. If you are wondering how SBA loans work, please read on. This blog article from Balboa Capital has all of the information you need.

History of the SBA.

The history of SBA loans dates back to July 1953, when the Small Business Act, which included the creation of the Small Business Administration (SBA) by Congress, was signed into law by president Dwight D. Eisenhower. The SBA is an independent agency of the federal government that, as outlined in its long-lasting mission statement, functions to “aid, counsel, assist and protect the interests of small businesses, to preserve free enterprise and to maintain and strengthen the economy.”

The SBA has offices throughout the United States and an annual budget of close to $1 billion. Small business owners can visit an SBA office in person or access the SBA website for assistance with just about everything that pertains to running a business. This includes business plan writing tips, budgeting strategies, and assistance with small business loans.

SBA loan programs.

SBA loan programs of up to $5 million are available, and the funds can be used to increase working capital, buy business equipment, hire new employees, and pay for expansion initiatives, among others. SBA loans typically have attractive interest rates and long repayment terms, which is why they are so popular among business owners.

Many business owners think the SBA provides the funding when it comes to loans. However, this is not the case, with the exception of disaster relief loans. Rather, the SBA works with approved banks, credit unions and micro lenders that issue the loans. The SBA offers several different loan programs for startups and existing businesses. These include SBA microloans, SBA 7(a) loans, SBA express loans, and SBA CDC/504 loans.

SBA loans are partially guaranteed by the SBA, which helps protect lenders from suffering significant losses in the event that loans are not repaid. The agency’s guarantee for loans up to $150,000 is 85%, and 75% for loans that exceed $150,000. Therefore, if you end up defaulting on your loan, the SBA will pay your lending company up to 85%, depending on the amount you borrowed.

How to get an SBA loan.

If you are thinking about applying for an SBA loan, it is a good idea to visit the SBA website and become familiar with the various loan programs that are available and the general eligibility requirements for each. This will help you select the best loan option for your needs. You will also need to meet the borrowing requirements of the bank, credit union, or micro lender that you choose.

Once you have selected an SBA lender, make sure you have all of the information and documents that are required for your loan application. Bank statements, profit and loss statements, business tax returns, personal tax returns, credit reports, and a business plan are some of the many documents you will need. It is worth noting that SBA loans have a lengthy application and underwriting process. It can take weeks or even months to find out if your loan application is approved.

SBA loan example.

Here is an example of how SBA loans work: Let us say that you own a restaurant that needs a $300,000 loan, and you decide to apply for an SBA loan. You would contact your bank, credit union or micro lender, and ask them if they offer SBA loans. If they do, you submit your loan application, and your lending company evaluates your information and attempts to get a loan guarantee from the SBA. Once your loan is approved, your lending company will provide the funds, and you will repay them over a set term.

Conclusion.

SBA loans are an excellent option for small business owners, but they are time-intensive and can be difficult to qualify for. And while SBA loans can be used for most business purposes, there are a few restrictions. If you are in need a fast business loan, or perhaps you do not meet the borrowing requirements of SBA loans, do not worry. Direct lenders like Balboa Capital offer unsecured business loans that enable you to secure funding in just a few days without needing collateral or a near-perfect credit score.