Small Business Loans - Frequently Asked Questions
If you are an owner of a small business, you know how difficult it is to raise working capital for day to day expenses and expansion. In order to grow your business, you need to expand, and to expand, you need money. It is a vicious cycle - but if it works out, you can reap the rewards of a thriving company.
There are a lot of options available to business owners but knowing what are the good ones and which are the bad ones, can make or break your business. Below are some questions we have received from our readers - hopefully these will help you in your decision making for your business.
- What are the advantages of SBA financing for my business?
- Is my business eligible for SBA financing?
- How much can I borrow?
- What can the funds be used for?
- Aren't SBA guaranteed small business loans only for businesses that can't qualify with traditional banks?
- What else do I need to know?
- Will the government be looking over my shoulder for the duration of my loan?
- What are some common myths about SBA financing?
- Can SBA loans be used to refinance existing business debt?
- Can SBA financing be used for construction?/a>
- What costs are associated with an SBA loan?
What are the advantages of SBA financing for my
business?
Simply put, a longer term means lower
payments. Lower payments allow you to
retain and utilize more working capital,
which is essential for a growing
business. Additionally, there are no
prepayment penalties on SBA loans. All
SBA loans are fully amortized. Therefore,
your business will not be impacted with
renewal fees, interim appraisal costs or
untimely balloon payments.
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How much can I borrow?
The loan amount is basically limited
only by the capacity to repay it. The typical small business loan amounts go to about $5 million on Business & Industry and $1.5
million for SBA 7(a) financing
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What can the funds be used for?
Loans can be used for virtually any
legitimate business purpose. Examples
include: Purchase real estate, make
improvements to your business property,
purchase equipment, expand a business,
consolidate debts, purchase another
business, construct a new facility and
finance a franchise.
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Aren't SBA guaranteed small business loans only for businesses that are not creditworthy by
traditional banking standards?
On the contrary, SBA financing will
not be extended to any business that does
not demonstrate the ability to repay
debts. The longer terms allowed with SBA
financing can enable your company easier
debt qualification based on lower
payments.
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What else do I need to know?
- Debt to worth ratio should generally not exceed 4:1
- Sufficient cash flow to meet proposed debt service
- Personal guarantees are required
- Life and hazard insurance are required
- Current appraisals are required on real estate collateral
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Will the government be looking over my shoulder for the duration of my loan?
As with any commercial loan, your
lender, rather than the government,
monitors and services your loan. The
government’s involvement relates to
the guarantee only in the event of
default.
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What are some common myths about SBA financing?
- It does not take 6
to 9 months to get funded. On
average, it takes 45-60 days to
process an SBA loan from
submission to final funding.
- You do not have to
be "turned down" by a
bank prior to applying for a SBA
loan.
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Can SBA loans be used to refinance existing business debt?
Yes, in most cases.
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Can SBA financing be used for construction?
Yes, as long as the business will
occupy at least 67% of the new building.
The construction loan will convert to a
fully amortized loan at the end of the
construction. If an existing building is
financed or refinanced, your business
must occupy at least 51% of the facility.
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What costs are associated with an SBA loan?
By statute, the maximum rate charged
is 2.75% over the National Prime Rate for
loans with maturities of seven years or
more, and 2.25% over national prime rate
for loans with maturities of less than
seven years. The SBA itself charges a
guarantee fee based on the loan amount,
which is the only cost associated with
the benefits of long term SBA borrowing.
This fee can be financed as part of the
loan proceeds. In addition, as with any
other loan, the borrower will be
responsible for direct processing costs
such as title insurance, appraisals and
other closing costs.
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Do you have a question you feel we haven't answered?
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