Glossary of Business Credit Terms

# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

SBA Loan

What Is SBA Loan?

An SBA loan is a commercial loan issued by banks and other lenders such as credit unions to small business owners. The Small Business Administration (SBA), a US federal government agency, offers entrepreneurs easier access to capital and reduces the risks involved in obtaining the funds.

How does SBA Loan Work?

The SBA partners with lenders to make the funds available to the entrepreneurs. It provides a guarantee to the banks and other lenders for the loans given to small businesses. The SBA undertakes to repay a portion of the issued loan if any entrepreneur fails to pay up.

Due to the SBA guarantee, lenders can give funds to small businesses without collateral or complete down payment. The qualified applicants of SBA loans also enjoy a longer period of repayment and lower interest rates compared to the terms for traditional loans.

What are the Qualifications for SBA Loans?

A small business must satisfy certain criteria to qualify for SBA loans. The enterprise must meet the following requirements.

  1. The business owner must have a good credit score of above 690 or higher if the SBA loan requested is for a start-up.
  2. The business must have been in existence for two years or more.
  3. Availability of collateral will increase your chances of being approved by a lender.
  4. Sufficient financial strength of the enterprise relative to the amount requested as a loan.
  5. Evidence such as a couple of your tax returns to show the worth of the business.
  6. SBA loans for purchase of equipment or commercial real estate requires a specified percentage of down payments.

Besides the SBA qualifications, the business should also meet the lender’s requirements.

How to Obtain SBA Loans for Your Small Business?

The SBA website or its district office is the right place to gather information regarding the loan application. You need to assemble the required documents before seeking SBA approved lenders that issue loans to small businesses in your industry. Your business financial report and credit history will enable a lender to determine your ability to repay the loan.

The Advantages and Disadvantages of SBA Loan

It is crucial to compare the pros and cons of available types of financing for your business before opting for any.

Advantages of SBA loans

  • They have a low-interest rate.
  • Most SBA loans are not associated with pre-payment penalties.
  • The SBA guarantee encourages lenders to issue loans to small business owners.

Disadvantages of SBA loans

  • Applying for the funds is time-consuming.
  • The need to keep your finances in good shape will discourage you from reducing your profit on tax returns.
  • An entrepreneur may lose personal assets used as collateral for securing a loan.
  • Your small business should be financially strong to qualify for the requested loan.

Despite the drawbacks, the SBA loan is a great financing option for small businesses. Entrepreneurs who may not qualify for conventional commercial loans can leverage on this lending opportunity to grow their businesses.

Types of SBA Loans

SBA loans are mostly funds for equipment purchase and working capital. Their major categories include:

  • 7 (a) loans which include export loan, special purpose loan, rural lender advantage, and express programs.
  • Microloans
  • CDC/SBA 504 loans
  • SBA disaster loans. They include SBA economic injury disaster loan, SBA business physical disaster loan, and SBA military reservist economic injury loans.

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