Monday, January 25, 2016

SBA Loans: Myth vs. Reality

If you’re a small business owner looking for working capital to grow your business, you’ve probably come across information on SBA loans.  A quick Google search shows some of the most widely-held beliefs about this funding option.

The typical SBA loan process is cumbersome and often disappointing.

SBA loans are expensive, and it’s like pulling teeth to get one.

Some of it’s true—but some is just plain fantasy. In order to clear things up, we’ve collected some common myths, and solid realities, about SBA loans. Don’t be fooled by Internet fairy tales!

Myth #1

The Small Business Administration (SBA) is a United States government agency that gives small businesses loans.

Reality #1

The SBA doesn’t make direct loans. The agency guarantees loans that approved financial institutions issue to qualified small businesses, instead.  A guaranteed SBA loan lessens the risk to lenders in an effort to encourage increased lending to small businesses.

Myth #2

I have a successful small business. I don’t need an SBA loan.

Reality #2

Proceeds from an SBA loan can strengthen an already-thriving small business. For example, because SBA loans have low rates and long terms, monthly payments are very low. Small business owners can refinance more expensive debt and dramatically lower their monthly payments. SBA loans provide working capital small business owners can use to purchase or lease equipment, bring on new employees, increase marketing and more. Do you have a busy time coming up? Use SBA loan funds to increase inventory and advertising. Take a look at your business plan to discover how additional low-cost working capital can help you reach long and short-term goals. Learn how an SBA loan helped a small business owner with a thriving business save over $15,000 on the SmartBiz Small Business Blog.

Myth #3

Without stellar business credit, I can’t get an SBA loan.

Reality #3

Business credit scores are important, but it is possible to obtain financing with less-than-perfect numbers. While most lenders consider credit scores, some lenders also look at the overall health of a small business including the ability to meet the SBA’s underwriting requirements. If your scores are low and your business is less-than-healthy, you can still obtain financing from an alternative lender but it might cost you more.  Free financial advice is available to small business owners looking to improve their credit scores. Check with your local SCORE office or an SBA Small Business Development Centers (SBDC).

Myth #4

SBA interest rates are too high.

Reality #4

The SBA sets the same maximum interest rates that banks can charge.  The January 2016 maximum interest rate on an SBA 7(a) loan is the Prime Rate (currently 3.25%) plus 4.75%, for a total variable rate of 8.25%.  Lower rates are available depending on the size of the loan.  As the Prime Rate changes, so will the interest rates on these loans.


It’s important to do your homework when shopping for affordable funds.  In addition to the interest rate, some lenders charge sky-high fees and closing costs.  The loan constant is an excellent way to determine the true cost of a loan. Learn more about the loan constant here.

The bottom line? An SBA loan is the best bet for qualified small business owners with much lower rates and fees than other types of loans. Find out if you qualify for an SBA loan first, before trying other options.

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