SBA Loans and the Coronavirus Stimulus Bill – What to Consider vs Other Funding Options
The U.S. Small Business Administration (SBA) has been helping Americans launch and grow small businesses since 1953. One way they do this is through SBA loans. What is an SBA loan? It’s a regular business loan that the government partially guarantees so if the small business fails, the lender still gets some money back. Thanks to this guarantee, banks are willing to offer SBA business loans to business owners who might not be able to qualify on their own. While this might sound like a dream come true, there is a catch. The SBA loan requirements are strict and this program may not be a good fit or even a possibility for every small business.
SBA Loans During the Coronavirus (COVID-19) Pandemic
During these very challenging times for small businesses around the United States, the U.S. government announced a Coronavirus Stimulus Bill on March 25th that an almost $350 billion in emergency relief funding would become available via the Small Business Administration (SBA) to help small businesses stay afloat during the Coronavirus (COVID-19) pandemic. As small businesses start to struggle in particular industries such as hospitality, tourism, and childcare, This announcement of loan assistance offered some comfort for those whose bottom line has been affected by the economic slowdown. While the details around the availability of this new government funding are yet to emerge, there are some important considerations for small business owners to take when they are looking to apply for SBA loan funding. Here, we’ll look at how this program works, as well as the alternatives available at this state of the coronavirus pandemic – SBA loans vs online business loan options – so you can figure out the best way to get the capital you need.
What is an SBA Loan?
The SBA offers several different loans. A few of the most popular for small business owners include:
– According to the SBA, these loans go up to a maximum of $5 million. SBA 7(a) loans are all-purpose and can be used for working capital, buying equipment, refinancing existing debt, buying a building or land and constructing your own building. These loans are not available to launch a new business, however, as they are meant to expand existing businesses.
SBA Express loans
– For Express loans, the SBA tries to speed up the approval process, making their decision within 36 hours. You may still need to wait on the actual lender to approve the loan, however, which can take weeks or months. Express loans go up to a maximum of $350,000. They also typically charge a higher interest rate than 7(a) loans.
– These are smaller loans that max out at $50,000. These small loans are often offered only by community lenders and nonprofits. A smaller loan can often be processed faster than other types of SBA loans. Microloans can be used to start a new business, buy equipment, buy inventory and provide working capital for an existing business.
Additionally, the SBA offers a number of loans and resources for businesses including funds for businesses recovering from a natural disaster, businesses that work in exporting, women– and minority-owned businesses and businesses owned by veterans.
SBA Loan Requirements
The exact requirements for an SBA loan depend on the lender and type of loan you want, but the process is similar across the board. The application process is just like applying for a regular business loan. Remember, the SBA doesn’t actually lend the money. They just guarantee repayment of a loan from an SBA-approved lender.
You’ll need to submit a business plan explaining your product or service, your sales expectations, your current debts, your competitors and your plan for how you will use the loan. This application should also include up-to-date financial statements for your business.
An excellent credit score is often necessary to secure an SBA loan. While the SBA does not publish credit score minimums, both they and the lender will consider your score for the decision. The higher your credit score, the better your chances. If you’ve had any credit issues in the past, like a bankruptcy or a default on a loan, these could prevent you from qualifying.
The lender will also want to see your federal and state tax returns from the past three years, even if you weren’t running the business during all this time. Finally, you may need to put up collateral and personally guarantee payment of the loan, which means you would agree to repay the money even if your small business closes.
The SBA lender will review all of this information to make a decision, which can take several months.
Repayment Expectations for SBA Loans
You should investigate what the SBA application process is like and how the loan terms work. You also need to consider repayment expectations. If you’re unable to pay back Small Business Administration loans as you’re required, this option could prove to be more expensive and less appealing than you initially anticipated.
Repayment schedules for SBA loans are often longer than for other loan types. The schedule depends on how you intend to spend the money. Money spent on working capital or daily operations must be paid back in seven years. New equipment has a 10-year repayment schedule, and you can take up to 25 years to pay back real estate financing.
For cash-strapped small businesses, the opportunity to pay loans back over a longer period sounds enticing. Yet, it can be a double-edged sword. Taking years to settle the loan may mean you pay more over the lifetime of the loan. Even if you qualify for a low-interest rate on an SBA loan, you could wind up paying more in interest charges.
You also have the burden of loan repayments cutting into your monthly budget for years. For some businesses, it makes more sense to get a quick infusion of cash and to pay the lender back as soon as possible, so the debt is off the books quickly. Keep these considerations in mind as you dive into the details of SBA loan requirements.
Finding a Lender for SBA Loans
Not all lenders offer SBA business loans. Of those that do, not all offer the kind of financing partnership that business owners really need. In the same way that you need to evaluate your Small Business Administration loan options cautiously, you need to carefully scrutinize your options for a lender.
Find out how many SBA loan applications the lender receives in an average year, and how many of those applications they approve. You should also gauge the staff’s experience with SBA loans. Perhaps most importantly, find out the maximum and minimum amounts they’re willing to loan.
You have a lot of options for financing your business, so don’t feel like you have to partner with the first lender you contact.
Challenges with Qualifying for an SBA Loan
SBA loans can be a great source of financing if you qualify. Unfortunately, a lot of business owners apply for an SBA loan only to find out they don’t meet the requirements.
For new business owners, an SBA loan may not be the best option as some lenders are uncomfortable with offering money to those who don’t have years of history. The SBA credit score requirements can also block applicants, even those that are running a profitable business.
Another consideration is the tedious application process. You’ll need to spend time putting together the lengthy SBA application. After you submit your application, the lender may take additional weeks or months making a decision. If you need that money to cover costs or take advantage of time-sensitive growth opportunities, you may not be able to wait that long. Remember, there is a massive cost when you delay investing money in your business – the cost of doing nothing.
Many SBA loans also require some sort of personal guarantee of the money and collateral. This can mean putting up your car, your investment account or maybe even your house to back up your business loan, which can be a tough risk to stomach.
Alternatives to SBA Loans
The SBA loan program isn’t your only option to get business funding. There are many ways to get the cash you need to cover business expenses or take advantage of growth opportunities. Many of the alternatives to SBA loans give you fast access to capital. For business owners looking for financing quickly, consider some of the other options you have available. You may find that an SBA loan alternative is a better fit for your business.
Business Line of Credit
A business line of credit is similar to a regular business loan, except that it provides revolving credit. If you’re approved for a business line of credit, your lender allows you to borrow up to a certain amount. This amount is your credit limit. You don’t have to borrow up to the full amount of your credit limit.
The amount you borrow works like a business loan. You receive cash for your business expenses and are charged interest on the money you borrowed. The available credit on your credit limit decreases based on the amount you borrow.
For example, you qualify for a business line of credit with a $25,000 limit. You take $10,000 to use for business expenses. You now have $15,000 left of credit available to you. You pay back $5,000 of the loan, raising your available credit to $20,000.
A business line of credit generally has a higher credit limit than credit cards and you only pay interest on the money you borrow. However, you may have fees related to maintaining the line of credit, such as an annual fee, or a fee to withdraw funds.
Business Credit Card
Like a business line of credit, business credit cards give you access to revolving credit. You can use the credit card to pay for things your business needs up to a certain credit limit. As you use your card, you are sent a monthly bill with a statement of the current amount of money you’ve borrowed on the card. When you pay the bill, your available credit goes back up.
Credit cards come with some of the highest interest rates for borrowers, so they may not be a great option if you need to carry a balance. If you can pay back the entire amount of your credit card bill by the due date, you can avoid interest charges.
Business credit cards also often have fees for certain services. For example, you might get a card that charges you a percentage if you make a purchase in a foreign country.
Crowdfunding has become a popular source of funds for personal use and business funding. Using a crowdfunding platform, you can raise money for your business through individual investors. As a person comes across your crowdfunding campaign, they can choose to invest money into your business. Be aware, however, that you’ll need to give your investors something for their investment. For many crowdfunding campaigns, this means giving up part of the ownership of your business.
Crowdfunding is generally more popular for startups or brand-new businesses that need to raise capital to open. A crowdfunding campaign can take months to complete. In addition, some platforms require you to set a specific funding goal. If you don’t meet your fundraising goal, you may have to give back all the money you raised.
Online Business Loans
Need cash for your business quickly and don’t want to go through a complicated application process? An online business loan could be a good option. Online lenders, sometimes called alternative lenders, provide much simpler applications and a quick decision process.
For example, with a small business loan, you can potentially borrow up to $500,000. Your application could be processed and your loan funded in as soon as 24 hours, as opposed to days, weeks or months from an SBA loan.
The application is also much simpler. Most online lenders have straightforward requirements for borrowers. For example, you might only need one year of business history, $100,000 in annual gross sales and three months of bank statements proving your earnings. You don’t need to spend hours putting together a business plan or worry about whether your financial statements are up-to-date.
Paying off these loans will build your credit score and borrowing history. Taking out smaller online loans when you need them could lead to increased chances of securing SBA loans in the future. Alternatively, an online business loan could help fund your business while you go through the lengthy process of an SBA loan. Your online business loan can cover the immediate needs of your business.
SBA Loans vs Online Business Loan Options
Choosing SBA loans vs online business loan programs can be confusing. Use this chart to help you determine the pros and cons of each type of loan.