As a business owner searching for funds to start or grow your business, you’ve probably come across the U.S. government’s small business loan programs. These programs are administered by the Small Business Administration and were created to stimulate economic development in the country through business creation.
Though there are several programs offered by the Small Business Administration, with over $92 billion in loans outstanding, the most popular is the SBA 7(a) loan-guarantee program. The program’s popularity is due to three main benefits, including its collateral requirements, the amount of equity needed, and the ability to pay off the loan before it matures.
Collateral Coverage
One of the most stringent requirements of traditional bank financing is the collateral coverage requirement. The bank is going to determine how much collateral you have and how much money they think they’ll get if they need to sell it. Usually, they estimate the value of your property, equipment, inventory, and accounts receivable.
Unfortunately, many loans are turned down because there isn’t enough collateral.
Luckily, the Small Business Administration mandates that an applicant to the SBA 7(a) program can’t be turned away because they don’t have enough collateral. This is especially great for businesses without machinery or equipment, like service businesses.
Lower Equity Requirements
Business owners short on funds are also better off pursuing an SBA loan. You’re going to need to put some of your own money into the deal, but owners will only need to put up 10% to 20% of the project cost with the SBA 7(a) loan program. This beats traditional bank loans that generally require business owners to cover up to 25% of the project costs.
If you’re looking to start a business on a shoestring budget, or you want to keep as much money in your bank account as possible, the SBA 7(a) loan program is perfect for you.
Prepayment
Many of the loans we have in our personal lives allow us to pay more than the monthly amount if we’d like to pay it off earlier. Usually, car loans, home mortgages, and student loans can be paid off early without any penalty.
In the world of traditional business lending, this is not the case. If you want to pay a term loan off before the date you and the bank agreed to when you signed the loan documents, you’re going to pay a prepayment penalty.
The bank is going to calculate the interest you would have paid them and the interest you paid, then hit you with a bill for the difference. Though you can negotiate this upfront with traditional lending, you don’t need to worry about it with the SBA 7(a) loan program. You’re free to pay your loan off as early as you’d like.
Exploit The Benefits of the SBA 7(a) Loan Program
SBA loans were created to help small businesses get funded. These programs allow banks to lend to companies that usually wouldn’t meet their traditional underwriting standards and structure loans in a way that provides some added benefits.
By not having a minimum collateral requirement, small companies with little or no assets can get a loan. Owners can start or expand their businesses with less cash upfront. If the business begins generating serious cash flow, the owner can pay off the loan early.
If you capitalize on these three benefits of the SBA 7(a) loan program, you will be able to get the money you need and set your business up for success.
