SBA loans are without a doubt, the best source of financing for small business organizations. By acquiring a small business administration loan, a proprietor will be able to fulfill all the short term requirements of the small business. This type of financing is the most prominent traditional form of financing, but it is challenging to acquire SBA finance. Even so, SBA programs are considered as one of the smartest ways of financing a small business. Here are some of the things that you must know about SBA finance.
What is a Small Business Administration loan?
This is a type of loan assistance that is provided by the banks. Small business administration guarantees to offer a loan of 75 percent in case of an amount that is more than 150,000 dollars. The agency mentioned that it offered loan worth more than 375,000 dollars in the year 2016. The maximum amount of loan that can be offered under this program is 5 million dollars. If you are thinking of expanding your business, refinancing the current loan or hiring more employees, then SBA finance is the perfect choice for you.
SBA loan is a funding option for meeting up with your working capital requirements. Working capital has a broad meaning as it includes capital investment, hiring, advertising, and marketing. The participating banks can underwrite, originate, and offer money under the SBA program.
Qualification criteria to obtain SBA finance
A small firm can become eligible for an SBA loan if it fulfills specific requirements. A company needs to be in operation for the past two years to get an SBA loan. Minimum two tax returns of the company must display profit. Plus, the credit score should not go below 690 for every business owner. Additionally, the company is required to submit the collateral in order to obtain the loan. Basically, SBA programs have a very stringent lending criterion.
Disadvantages of acquiring SBA finance
1) Loan approval takes a lot of time
Even though this option has a few advantages, people give more preference to loan options like merchant cash advance and other traditional sources of financing. This is because there are specific cons associated with this program. The fee charged by the SBA lenders is very high. Plus, the providers of SBA finance give a lot of preference to the credit score of the business. Other than that, acquiring an SBA loan can take way much more time in comparison to conventional loans.
2) Personal liability
The providers of SBA loans will not provide you with any financial assistance if you do not have any individual or business asset to give them in the form of collateral security. Therefore, if you are considering taking financial assistance from SBA finance providers, then you will have to put your assets on the line. SBA lenders demand collateral security from the business owners so that they can recover the amount and interest of the loan that they offered through the sale of your assets in the event of the default.
Repayment tenure of SBA finance
The period for the repayment of loans that you obtain from the SBA programs is a lot more than various other programs that offer financial assistance. The terms of repayment are dependent on how you are planning to use the money:
- If you are acquiring such a loan for daily operations or working capital, then the repayment term is seven years.
- If you took the loan for buying equipment, then the repayment term is ten years.
- The term for SBA loans can be 25 years in case of real estate purchases.
If the period for repaying an SBA loan is extended, then the rate of interest is also going to be less, which means that you will be able to fulfill other business requirements by using the money rather than using them for repayment.
Documents required while applying for SBA finance
These are some of the documents that you will be required to submit prior to applying for an SBA loan.
- Information of the borrower
- Statement related to personal history
- Financial statement of the business owner who is applying for SBA loan
- Income tax return of the past three financial years
- History of loan application
- Business Lease
After that, a person is required to visit the district office of SBA where he will ask for the names of the lenders that have been approved to provide lending facility under the Small Business Administration program. Banks adhere to the instructions given by the SBA, but they set their criterion for underwriting.
How is merchant cash advance better than SBA finance?
MCA or Merchant Cash Advance is a better source of financing in comparison to SBA loans as it has a very flexible eligibility criterion. Moreover, applying for an MCA from its providers is also an easy thing to do. Plus, the loan gets approved quickly. Unlike SBA loans, Merchant Cash Advance providers don’t create a stipulation of perfect credit.
Plus, if you take an MCA, you will not be compelled to submit collateral security. Unlike conventional source of finance like SBA finance, an MCA has very flexible terms of repayment. Therefore, a business owner must go for an MCA instead of SBA loans as then he or she will be able to enjoy a lot of benefits that are not available under SBA program. As far as it is concerned about the repayment terms, SBA finance may offer a longer term, but still, you will be required to pay a fixed sum every month.
Merchant Cash Advance considers the situation of the business owner, which is why the amount of monthly repayment is based on the sales volume of the small business so that a business owner can conveniently repay during the highs and lows of the season.
SBA finance is a great option for conventional financing but taking an MCA from MCA providers is a better option anyway. So, if your small business is in the need of money, then it is advisable for you to approach MCA providers.