There is a well-known adage that says, “You need money to make money.” Small business owners understand that if their business is going to get off the ground and grow, they need funding.
Getting funding is one of the first financial decisions business owners make. The amount of funding a small business owner can get, the source of the funding, and the repayment agreement will impact the business structure and how it is run.
According to Lantern Credit, a leader in small business funding, “Often, an SBA loan is an affordable financing option that can give you the capital needed to grow your business.” What an SBA loan is? What can it be used for?
What Is an SBA Loan?
In simple terms, this is a small business loan that is partially guaranteed by the US government. This removes some risk financial institutions face when giving small businesses loans.
It is important to understand that the loan does not come from the Small Business Association. The Small Business Association works with a group of pre-approved financial institutions that loan money to small businesses. The SBA partially guarantees the loan, giving the bank more surety that the money will get repaid.
Without this partial government guarantee, most banks would see small businesses as too risky to loan money to. If a bank loaned money to a small business without the SBA guarantee, the interest rate would be so high that it would be counterproductive.
All of this might sound great to a small business. However, it is important to remember that since the government is involved, there is going to be paperwork and bureaucracy. Applying for and qualifying for a small business loan of this sort can be time-consuming and difficult. You will need to prepare documentation and show extreme patience.
What Can You Use an SBA Loan For?
An SBA loan can be for as little as $500 or for as much as $5.5 million. This includes the business loan prime rate.” The SBA loan interest rate is typically between 6.5 percent and eight percent. Of course, this number fluctuates.
SBA loans offer repayment ranges from as little as five years to as long as 25 years. However, 10 years is the average SBA loan repayment term. Some more common reasons for getting an SBA loan include the following.
• Start up Costs. This is the primary reason people get an SBA loan. Startup costs includes advertising costs, research, employees, advertising, and other expenses. Unless a person is super wealthy, they will need some help to get their venture off the ground. If your business qualifies for an SBA loan and your credit is good, you shouldn’t have a problem getting a loan to cover startup costs.
• Purchasing a Business. Some people want to purchase an existing business. To get an SBA loan, a person will have to show that they have an aptitude for their industry, they have excellent credit, and they are willing to invest their own money or have capital. A person would need to show that they were buying a business that has the potential to be lucrative. A person with solid industry expertise could benefit from this loan.
• Equipment. From time to time, businesses needed to invest in machinery, vehicles, furniture, etc. There may be a need for smaller equipment purchases, like raw materials. In order to apply for an SBA loan, you would need to show that the equipment you want to purchase is essential to the growth and success of your business.
Others may apply for this loan if they need working capital, want to repair existing equipment, are looking to refinance debt, or want to purchase land or real estate for their business. Besides the criteria provided by the SBA, the lender may also have criteria. If your business meets the criteria, an SBA loan could be a good way to get it off the ground and invest in your future.