You may pay extra fees, such as a guarantee fee and a servicing fee, both based as a percentage of loan proceeds, on top of interest costs.
In addition to loan programs, the SBA offers the Surety Bond Guarantee SBG program, which helps small business contractors who cannot obtain surety bonds through regular commercial channels. A surety bond is a three-party instrument among a surety someone who agrees to be responsible for the debt or obligation of another , a contractor, and a project owner. Finally, the SBA supports a venture capital program. The SBA does not invest directly in small businesses, relying instead on the expertise of qualified private investment funds.
The SBA licenses these funds as SBICs and supplements the capital they raise from private investors with access to low-cost, government-guaranteed debt. SBICs are similar to other investment funds in terms of how they operate and their pursuit of high returns.
All rights reserved. Think of loans as funding tangible assets. In most cases, SBA loans are structured in a model. Loan terms : The interest rate varies depending upon the lending institution. No outside collateral is required. Non-preferred lenders must submit loans into the SBA for approval which can slow down the process.
Conventional loans are exactly what you might expect — fairly standard and formularized. They are often predictable and typically have fixed or floating interest rates and repayment terms. In general, these loans are better suited for businesses with an established operating history, so projection-based and startup companies will typically face more of a challenge getting a conventional loan.
Conventional loans can be used for the construction, purchase or improvement of real estate or a business. Loan terms: Conventional loans can be structured in a variety of ways, with different terms and either floating or fixed rates. Financial covenants: Conventional small business loans must adhere to covenants throughout the life of the loan.
Be sure you have a full understanding of all covenants to avoid any surprises. Choosing the right lender: If you have good credit and are seeking a higher amount of funding, seek out either an online lender or a bank for your conventional loan.
Typically, online lenders can provide funding much faster than banks. Terms and costs can vary. A line of credit allows you flexible access to a pool of money when you need it most. You can use it to cover business expenses, buy inventory and ultimately, enjoy improved cash flow month-to-month. Just remember that the amount of funding available and repayment terms will depend upon the health and history of your small business. Generally speaking, business lines of credit often work better for owners who have cash flow issues, where an SBA or conventional loan make more sense for one-off purchases or investments.
Ultimately, the flexible nature of a line of credit is the most attractive feature for small business owners.
Loan terms: While there are several different types of business lines of credit short-, medium- or long-term , the exact terms will depend on the revenue, credit score and general history of your small business.
If you cannot qualify for a long-term line of credit, a short-term line of credit is a great place to start and establish a good credit score. Secured lines of credit require collateral while unsecured lines of credit do not. Financial covenants: Specific covenants can vary across different lending scenarios, but several examples of financial covenants include net worth, interest ratio, debt ratio and material change covenants.
Be sure to ask your lender any questions you may have regarding financial covenants required for your business line of credit. Repayment terms vary according to several factors that include the amount of the loan, what the loan proceeds will be used for, the requirements of the intermediary lender, and the needs of the borrower.
The maximum allowable repayment term is six years. The interest rates vary, depending upon the lender and the costs to the lender from the U. Rates are normally between 8 percent and 13 percent. The Economic Injury Disaster Loan EIDL Program is designed to provide low-interest loans to businesses of all sizes, private non-profit organizations, homeowners, and renters to repair or replace real estate, personal property, machinery, or equipment that was damaged or destroyed resulting from a declared disaster.
You can apply online or in-person for SBA disaster assistance. The SBA suggests the online application is the fastest way to receive a decision about your eligibility, but you also have the option of submitting an application by mail. SBA loan guarantee programs may not be the biggest source of funds for small business owners, but they do fill an important niche within the small business lending landscape for those that qualify.
Depending upon loan purpose, qualification criteria, and how quickly a business needs to access funds, the SBA may be a good option for many small business owners. Borrowers should be prepared, however, to meet many of the same criteria required for a traditional loan approval at the bank including some additional requirements set in place by the SBA. And, although recent efforts by the SBA to streamline the application process have reduced the time it takes for many business owners, qualified potential borrowers should expect a weeks- or sometimes even months-long process to apply, gain approval, and access funds.
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