Money, money, and money. The only thing which always becomes a wall between a startup idea and the actual implementation of it. Many young entrepreneurs never start their businesses just because they lack that initial investment which is required to start their business.
You would be thinking that how about going to a bank or the venture capitalist firm. This could help them, right. But the problem is when you are starting the business, you are not clear about the outcome and hence are scared of going towards loans from them because they want some guarantees like anything equal to the amount of loan you are borrowing or as a venture capitalist, shares in the equity. So what to do? Go for fast SBA loans.
So, what are SBA loans and how they can be a good choice for a small business owner or an entrepreneur? Let us see this in detail.
What are SBA loans?
SBA or Small Business Administration is an American government agency that helps local people start their own business. An agency acts as a guarantor between the lenders (mostly banks, credit unions, community development organizations, and micro-lending institutions.) and borrowers (the small business owner or entrepreneur). With this, a small business owner can have instant financing for his business. Well, let us see some importance of SBA loans for an Entrepreneur.
Importance of SBA loans for an Entrepreneur:
How great it will become if a small business owner, who do not have strong financial backing, get loans instantly for their business. Because banks are always reluctant in giving loans to small business owners due to lack of collateral, they have to offer to the bank against the borrowing. To find the importance of SBA loans for entrepreneurs below:
Easier to obtain:
When a small business applies for a loan in a conventional debt raising program, they have to submit many documents like Business credit history, Established revenue streams, time spent in the industry and enough down payment for capital. Due to this, the underwriters may deny your loan application and object that the investment is so risky, and the borrower might not be able to return the money.
Therefore, because of this, SBA helps the borrower to have that loan approval. Since SBA plays the role of a guarantor, this mitigates the risk for the lender, and hence the borrower can get the loan without having an established credit history or even a revenue stream.
Lower interest rates:
It is a universal formula that when the risk is high, return should be high as well. So, if we put ourselves in the shoes of a lender, we will also act very carefully in giving money to a startup owner because it has a high risk of becoming bankrupt.
Hence a lender always charges a high-interest rate when the risk is too high. However, when a borrower comes with a guarantee of SBA, the risk for a lender goes down, and this results in lower interest rates. Also, SBA itself makes sure that the lending rates are reasonable so that they could be viable for a small business to sustain.
Low down payment:
Imagine two people need $100,000 /- for your business. But you have only $20,000/-. You have to keep $10,000/- as safety money for rainy days. One applied for traditional borrowing and somehow got approved. Now the bank asks for a 20% down payment. Can he be able to do it? He might break his promise, but most of the time, he will not go for it.
However, on the other hand, you played smartly. You went for an SBA loan program. Now the down payment varies, but you can negotiate and pay $10,000/- which are 10% of the loan amount. By this, you will not run out of business cash in hand which you have saved for the rainy days.
Prolonged payment terms:
When you take a loan, the most important part of it is the monthly payments which a business owner has to make in order to have his business running. Now the major factor which impacts the monthly payments is the payment payback period.
You choose the payment period or sometimes lenders dictate the payback period, but the time you have to pay off the loan makes it either easier or harder for a small business. On the other hand, SBA loans have usually very long payment terms like 25 years, but this varies from the reason to borrow the loan. However, they are generally prolonged, and this helps a small business have small monthly payments as compared to the traditional debt program.
By this, at the end of every month, a small business owner or an entrepreneur has some more cash that he can use to keep his business running.
Can be used for many business avenues:
SBA loans can be used for many business avenues like a small business owner want to develop a new product and want to invest $100,000/- in research and development, it can obtain the loan for it easily. Since due to SBA all the important costs like interest rates, down payment are low and payment terms are prolonged, a small business can easily sustain the debt burden despite investing into something which might come out as a complete disaster. So this gives an entrepreneur a piece of mind when it comes to investing further into their business for expected growth in the future.
You know, it is very hard for a business to sustain if it constantly goes out of cash. This is one of the biggest fears of a business owner. Secondly, many businesses never start because they never qualify for the debt program offered by the banks. This results in making SBA loans. These are such loans that are guaranteed by Small Business Administration so that the lending firms or banks easily lend money to the entrepreneurs.
These loans are easy and fast to obtain as you do not have to go through a tough and rugged evaluation and underwriting process. You have a low-interest amount to pay on loan.
You have a low down payment, and you have prolonged payment terms. The one which we say perfect heaven for a small business owner. But the only thing I always want to say to you. No matter how easy and attractive a debt program may look like never go and opt for it without consulting with a financial expert and proper self-evaluation of your own business. Because this may lead you in getting into trouble in the long run.