The U.S. Small Business Administration (SBA), established in 1953, provides funding for small businesses.
Its mission is, “as an independent agency of the federal government to aid, counsel, assist and protect the interests of small business concerns, preserve free competitive enterprise and maintain and strengthen the overall economy of our nation.”
They support small businesses through their 504 and SBA 7(a) loans. Let’s discuss the advantages of each.
Advantages of SBA 504 Loans
An SBA 504 loan is intended for small businesses purchasing commercial real estate or equipment. Their appeal is that they are long-term, fixed-rate loans.
They are funded by non-profit corporations- Certified Development Companies (CDCs) – that focus on promoting economic development within their communities.
The following are the benefits of SBA 504 loans.
1. SBA 504 loans grant access to 90% financing
SBA 504 loans allow small businesses to make large purchases that may otherwise not be possible. In most cases, the lender will cover 50% of the loan, SBA will cover 40%, and the business is responsible for the remaining 10%.
This is one of the most competitive opportunities available for small businesses.
2. Access to longer loan terms
These loans are amortized over a 10 to 20-year term. This grants small businesses more time to pay off the loan with smaller monthly payments and allows them to use profits towards the business instead of paying off debt.
3. The loan is secured with fixed low-interest rates
Fixed low-interest rates are a significant benefit of 504 loans. Their longer repayment periods give borrowers peace of mind knowing their rate will not fluctuate throughout the years. This allows small businesses to use working capital to expand their business.
4. Take advantage of a real estate expense reduction
Purchasing commercial real estate for your building with an SBA 504 loan instead of leasing the space out can save your business up to 40% in real estate expenses.
5. Soft costs are included in the loan
Additional costs such as finance closing, etc. can be included in the loan amount paid over time.
Advantages of SBA 7(a) Loans
Another type of SBA loan is the 7(a) loan. It is the most common SBA loan program for small businesses and is ideal when real estate is part of the business purchase. Additional uses for 7(a) loans include:
- Purchase supplies or equipment for your business
- Refinance business debt
- Fund short and long term working capital
Last year, the 7(a) program established the Paycheck Protection Program (PPP) for small businesses throughout the COVID-19 pandemic.
In addition to PPP loans, 7(a) loans offer further benefits for small business owners seeking funding opportunities.
1. SBA 7(a) loans can be obtained with little to no collateral.
SBA does not require the same collateral agreement like many other types of alternative lending sources because SBA loans have a guarantee from the U.S. government.
Businesses who receive SBA loans of up to $25,000 do not have to place assets (i.e. real estate, vehicles, and more) on the line to secure this loan.
However, the administration requires, “loans in excess of $350,000, the SBA requires that the lender collateralize the loan to the maximum extent possible up to the loan amount. If business fixed assets do not “fully secure” the loan the lender may include trading assets (using 10% of current book value for the calculation), and must take available equity in the personal real estate (residential and investment) of the principals as collateral.”
2. Oftentimes, SBA 7(a) loans offer the lowest interest rates
SBA loans are known to have the lowest interest rates for borrowers. The rate fluctuates based on the Federal Reserve but can range between 5.5-8%.
At times, borrowers may seek funding from nontraditional banking institutions for quick funding- but these lenders can be associated with a higher interest rate than SBA loans.
SBA loans are beneficial for long-term financing planning to save businesses thousands of dollars over time.
3. Gain access to higher capital
Businesses that need large sums of funding can turn to an SBA 7(a) loan. The maximum loan amount a borrower can take is $5 million.
4. Finance working capital
There is more flexibility in how recipients use SBA funding. Once obtained, businesses can use the funding for:
- Business expansions
- Inventory purchases
- Payroll operations
- Overhead expenses
- Growth investments
5. Longer terms that preserve cash flow
SBA loans offer longer terms than most other lending institutions. This means monthly payments are lower. Lower monthly payments mean you have more access to cash flow to allocate towards actual business needs. This helps ensure that you have the resources your business needs to weather the storm as business ebbs and flows.
If your small business is seeking funding for your next business venture, use our business loan calculator to help you understand your monthly costs, and what you can realistically afford.
