If you’re an entrepreneur wondering how you can secure one of these loans, there are a few things you need to know first.
We’re going to walk you through all the essentials of Small Business Administration (SBA) loans so you can decide if applying for one is right for you and your business.
What is an SBA Loan?
You may think an SBA loan means borrowing money from the government, but that’s not the case. The SBA doesn’t loan you money but they do secure part of it.
The SBA has set guidelines that approved lenders have to follow. That means more paperwork on your end. The upside is that the government guarantees 75 to 90 percent, eliminating risk for the lender.
Some loan terms are 25 years with low-interest rates, making an SBA loan a less expensive option than a traditional loan. However, there are some important things to consider.
The application process takes longer, there are extra fees involved, and there are stricter requirements. Before you decide on which SBA loan you’ll apply for, ask yourself the following questions:
- How much money do I need?
- Why do I need the money?
- How long will it take me to pay it back?
- What is my current financial state?
- How much collateral do I have to secure the loan?
You’ll also need to know how long you’ve been in business, your general credit rating, and if you have any outstanding loans. Once you have all your answers, it’s time to find out which SBA loan works for you.
Types of SBA Loans
There are different types of SBA loans depending on what you’re looking for. The three most common types are:
SBA 7(a) Loans
These are the most common SBA loan. The most you can borrow is $5 million and the maturity depends on the ability to repay. For loans $150,000 or less, the SBA guarantees 85 percent. For loans greater than $150,000, the guarantee is 75 percent.
For loans with a term of seven years or less, the maximum interest rate is 4.25 percent. For loans with a longer maturity term, the maximum is 4.75 percent.
The guarantee fee for SBA 7(a) loans is between 3 to 3.5 percent. Loans less than $150,000 have no fee. These loans carry extra fees of referral, packaging fees, and closing costs.
CDC/SBA 504 Loans
A 504 Loan is best when a company is buying real estate and/or equipment. It’s a combined loan from a community development corporation and a bank. The most you can borrow is also $5 million, but special circumstances can bring the amount to $5.5 million.
The guarantee is much lower for 504 Loans but the terms are 10 to 20 years with a fixed interest rate. The fees on these loans vary but the down payment is low.
If a new business needs a small loan to get started, the SBA offers microloans. These loans are for working capital and startup costs like inventory, supplies, furniture or equipment. They can’t pay existing loans or used to buy real estate.
The most that you can borrow is $50,000. Repayment terms vary based on the loan amount, lender, and use of funds, but the longest term is six years. The interest rate ranges from 7.75 to 8.5 percent.
Types of Lenders
The SBA approves both conventional bank loans and alternative lenders or non-banks. It’s important to find the right lender who meets your needs.
SBA approved lenders know what you need to qualify for each SBA loan. They also will guide you to the loan that works best for your business. They know exact interest rates and terms at the time of your application, depending on which loan you choose.
Business Lending Made Simple
If you’re considering a business loan, Penn Commercial Capital is your one-stop shop for SBA loans and commercial lending. We provide financing with competitive rates and terms in New Jersey, New York, Maryland, Pennsylvania, and Florida.
Contact us today and find out how we can assist you in achieving your business goals.
Penn Commercial Capital can help you secure your next round of financing or business loan in an efficient and ethical manner. We’re proud to champion the small businessperson and can finance clients seeking loans from as little as $100,000 up to $100 million. We provide financing for companies in New Jersey, New York, Maryland, Pennsylvania, and Florida.