Small Business Administration loans can be a great option for new businesses or those who are having trouble getting a small business loan. Though they’re not an option for businesses with severe credit problems, they can help businesses with startup expenses or provide capital for expansion according to Laura Evans.
Small Business Administration Loans
The United States Small Business Administration does not actually offer loans itself. The SBA acts as a guarantor, or promises to pay back the lending institution should a small business default on a loan. However, your ability to pay back the loan is still a major factor in getting an SBA type loan.
1. One of the programs that the SBA offers is the Basic 7(a) Loan Guaranty.
This program is not only the most commonly used SBA program, it is also the most flexible program that the SBA offers.
Many start ups as well as existing small businesses take advantage of the Basic 7(a) program.
However, the Basic 7(a) program is not available to non-profit organizations, real estate investment firms or banks. The funds offered cannot be used to change ownership, to pay the owner any funds or salary or to pay delinquent taxes. Loan maturity periods range from up to ten years for working capital and twenty-five years for fixed assets.
2. The Certified Development Company, a 504 loan program
This loan is designed to provide long term financing at a fixed rate so that companies can expand or modernize their facilities. A business may qualify if the company has an average net income of less than $2.5 million after taxes during the last two years and if its net worth does not exceed $7.5 million. Funds can be used to purchase real estate and equipment, but cannot be used to pay off debt or as working capital.
3. Another program that the SBA offers is the Microloan, a 7(m) program.
Available in most of the United States, a 7(m) loan can be made up to $35,000 for use as working capital. Loans average $13,000. These short term loans come with business and technical assistance as part of the package. Small businesses as well as non-profit child care centers may be able to qualify for this program. You may have to have collateral in order to qualify for a Microloan.
The SBA Program Does Not Work For you.
Can’t Get a Bank Loan? The Alternatives Are Expanding!
A new crop of alternative lenders are offering a middle path between banks, which lend primarily to the most creditworthy small businesses, and cash advance lenders, which thrive on subprime candidates. These new alternative lenders focus on “mid-prime” businesses that “deserve a better product but don’t qualify for a bank.”
Alternative lending has filled a gap left by risk-averse banks: big banks approved less than a fifth of all requests for small-business loans they received in January, while small banks approved about half of such requests, according to a survey by Biz2Credit, an online platform that matches businesses and lenders. And that does not reflect the businesses that are too discouraged to apply.
By embracing technology to make small-business lending more efficient and profitable, the alternative lenders have opened opportunities for businesses. In January, according to Biz2Credit, alternative lenders approved roughly 64 percent of the loan requests they received.
The Internet is doing to this industry what it’s done to every other industry — creating efficiencies, competition and price transparency.
The first wave of tech-based alternative lenders used innovative software and data metrics, including social media interactions and Yelp reviews, to assess the health of a business.
But these loans typically are similar to a cash advance, with a fixed amount or percent of sales deducted daily from the borrower’s bank account over several months. Given the short loan terms, a small-business borrower can end up paying 50 percent or more on an annualized basis without realizing it.
Those rates, however, have made it easy for alternative lenders to line up institutional investors looking to supply capital and take a piece of the action.
That has opened the door for the latest lending upstarts, which combine digital innovation and efficiency with true term loans akin to bank loans. Their rates are higher than those charged by banks but lower than those charged by the short-term alternative lenders and the merchant cash advance providers.
Some alternative lending companies can offer lower rates by targeting mid-prime or near-prime borrowers and by lending larger amounts for longer terms.
Some alternative lending companies use a peer-to-peer model, meaning wealthy investors put up the capital for individual loans, which the lenders say lowers their cost of capital by freeing them from raising money.
To secure the loans, these platforms typically require a personal guarantee or business assets as collateral. Along with lower rates, the new lenders offer some transparency to what has been an opaque and confusing market.
The peer-to-peer model is already established in consumer lending, with two companies, Lending Club and Prosper, making more than $4 billion in consumer loans. Now the market for peer-to-peer small-business loans is heating up. The fresh competition is already forcing established players to adjust.
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