The Small Business Administration (SBA) is a federal agency with the sole purpose of helping small businesses find ways to succeed. The organization works with lenders to provide affordable loans to small businesses.
These small business loans help companies with their growth strategies, making them a valuable tool for entrepreneurs. Understanding how SBA loans work helps entrepreneurs develop small business success strategies.
Loans come from approved lenders
The SBA is not a lending organization. Instead, the SBA serves as an administrative guarantor that protects you and the lender. SBA-approved lenders can give small businesses loans because the SBA takes on some of the risks.
Because the SBA has so many lenders, borrowers can take advantage of several lending programs. SBA-approved lenders have products for start-ups and established companies needing large loans.
Your business might not be approved
Before applying for an SBA loan, know that it might deny your loan. Despite the SBA taking some of the risks, small businesses still have to provide financial statements and credit reports. You have to prove to the lenders that you will repay the business loan. If you have bad credit, you might have to look elsewhere for funding.
The SBA has products for borrowers with bad credit
Business owners with bad credit have options with the SBA. The organization offers the Microloan Program to provide credit to small businesses with limited credit history. If you do not qualify for a traditional loan, you might qualify for this one.
The SBA has low-interest refinance programs
Small businesses can take advantage of low-interest refinance programs through the SBA. These products have low rates, long terms, and low monthly payments, so small businesses can focus on building cash flow rather than paying back high-interest loans.
Pay attention to the different loan fees
All SBA loans include interest, and some have other costs like the guarantee fee. Not all SBA lenders charge this fee but look at your agreement for that cost and additional fees that increase the final value of your loan. The lender will tell you the Annual Percentage Rate (APR) with the costs and fees added to the loan principal.
The SBA protects the lender by limiting interest rates
When you get an SBA loan, you can trust that the organization is there to support you and your lender. It protects the lender by backing a portion of the loan. The SBA helps borrowers by limiting the interest a lender can charge. The limit is usually the Prime Rate plus an allowable spread.
The SBA loan application process is lengthy
Applying for an SBA loan takes more time than a typical bank loan. You’ll have to complete the forms, share financial statements, and explain how you will use the loan. Then, the SBA and lenders have to approve the application.
The SBA works with lenders and small businesses to help both groups succeed. Small businesses that need funding can rely on the SBA for loans and information to help with company growth.