While poor management is often cited most frequently as the reason businesses fail, inadequate financing is a close second. Whether you’re starting a business or expanding one, sufficient capital is essential. But you must also have the knowledge and planning required to manage the financing correctly. Some of the commons mistakes to avoid include: securing the wrong type of financing, miscalculating the amount required, or underestimating the cost of borrowing money.
If you work through your local Small Business Development Centers (SBDC), the advisers there help you in your SBA loan application as well as help you avoid some of those mistakes. The SBA loan programs are operated through private-sector lenders that provide loans which are, in turn, guaranteed by the SBA. Most private lenders (banks, credit unions, etc.) are familiar with SBA loan programs. Working with the SBCD can help facilitate your applications because they are a government agency that have experience helping to get money for small business and they have existing relationships with local banks.
WHAT ARE SOME OF THE POSSIBLE LOANS AVAILABLE FROM SBA
The loan guaranty which SBA provides transfers the risk of borrower non-payment, up to the amount of the guaranty, from the lender to SBA. Therefore, when a business applies for an SBA Loan, they are actually applying for a commercial loan, structured according to SBA requirements, which receives an SBA guaranty.
7(a) Loan Guaranty Program – One of the SBA’s primary loan programs is called 7(a) and offers loans of up to $1,000,000. (the maximum dollar amount the SBA will guaranty is generally $1 million.)
Certified Development Company (CDC), a 504 Loan Program – Provides long-term, fixed-rate financing to small businesses to acquire real estate or machinery or equipment for expansion or modernization. Typically a 504 project includes a loan secured from a private-sector lender (local bank) with a senior lien, a loan secured from a CDC (funded by a 100 percent SBA-guaranteed debenture) with a junior lien covering up to 40 percent of the total cost, and a contribution of at least 10 percent equity from the borrower.
SBA loan financing is provided for a wide range of businesses. Some examples of the types of businesses that can apply for a small business loan through the SBA include: Assisted living facilities, Auto businesses, Business supplies, Chiropractors, Construction loans, Convenience stores, Day care centers, Franchises, Funeral homes, Gas stations, Hotels/motels, Nursing homes, Restaurants, and Women-owned businesses. SBA loans are also available for professional service businesses like Doctors, Dentists and Veterinarians.
WHAT ARE SOME OF THE BENEFITS OF SBA LOANS
Less Money Down – You can leverage your personal or investment capital harder with an SBA-guaranteed loan, which means you can get more done with less up-front investment.
Longer Payback Terms – You can improve your cash flow with lower monthly payments. And where possible, you can fix a better match between loan terms and the longer-term rates of depreciation for capitalized equipment or real estate.
Lower Interest Rates -Because the SBA absorbs a significant percentage of the lending bank’s loan risk, the bank can lend at a lower interest rate
No Balloon Payment Required -You can establish terms that minimize your monthly payment without attaching a large pay out at the end of the loan.
WHAT ARE SOME OF THE QUALIFICATIONS NECESSARY TO SECURE AN SBA LOAN ?
• Business Plan – you must not only know how to make a business plan, but make sure it includes some of the following essentials: The unique marketing strategy and advantage of the product or service you are offering; the strength and experience of the small business management team; and the purpose of the loan
• Cash Flow Statement – this cash flow statement must show the revenue stream and income available to pay back the loan in 5-7 years time.
• Credit History – to have both acceptable personal and business credit history
• Personal Equity Investment – the SBA and lenders want to know that you have personally invested money in your small business – which is usually between 10-20% of what is needed.
• Security and Guarantee for Loan – the SBA will require you to pledge available business assets, and in some cases, personal assets to secure your loan.
Whether you are a start up or if you have a successful small business and need money for expansion and growth, the SBA is a very reasonable and easy way to get the business financing you need.
How To Get A Small Business Loan
To get a small business loan, a firm requires submitting an appropriate application form. There are different types of application forms for different categories of loans. The information furnished in the application covers, inter alia, the following: the name and address of the borrower and his establishment; the details of the borrowers business; and the nature and amount of security offered.
The application form has to be supported by various ancillary statements like the financial statements and financial projections of the firm. The application is then processed. This primarily involves an examination of the factors like ability, integrity and experience of the borrower in the particular business. General prospects of the borrower’s business, purpose of grant, requirement of the borrower and its reasonableness are also taken into perspective when granting loan.
Once the application is duly processed, it is put up for sanction to the appropriate authority. If the sanction is given by the appropriate authority along with the sanction of loan, the bank specifies the terms and conditions applicable to the loan. These usually cover the amount of loan or the maximum limit of the grant, the nature of the grant, the period for which the grant will be valid, the rate of interest applicable to the grant, the primary security to be charged, the insurance of the security, the details of collateral security, if any, to be provided, and the margin to be maintained.
Working capital advances are provided by commercial banks in three primary ways: cash credits/overdrafts, loans, and purchase/discount of bills. In addition to these forms of direct finance, commercial banks help their customers in obtaining credit from other sources through the letter of credit arrangement. Under a cash credit arrangement, a predetermined limit for borrowing is specified by the bank. The borrower can draw as often as required provided the outstandings do not exceed the cash credit limit.
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