Loans from the Small Business Administration can be a fantastic way to get the money you need to start, expand or buy a small business or obtain working capital. At Tilted Concepts, we have been around the block a time or two having scaled several brands to over 150 locations and have helped franchisees secure over fifty SBA loans to get started.
In our 20+ years experience, we've seen a lot of misinformation surrounding SBA loan programs. So we wanted to share 5 common misconceptions and offer some clarity as you navigate your way finding the best route to take your business venture.
MYTH #1 - The SBA loans money directly to small business owners
Fact: In most cases, the SBA does not directly lend any money. Third-party lenders and banks issue the actual loans. The SBA sets the program requirements and guarantees a percentage of the loan. Through the program, the SBA offers three different loan options.
MYTH #2 - SBA loans are expensive
Fact: SBA loans are designed to be borrower-friendly. To keep the financing affordable, the SBA sets maximum interest rates on loans provided through the program. While there is a guarantee fee that can vary with the loan amount, it can be rolled into the closing cost and funded as part of the loan. Other closing costs such as appraisals, title searches, attorney fees, etc. are the same as a comparable conventional loans and can also be funded within the loan.
MYTH #3 - SBA loans are difficult to do and can take forever
Fact: The SBA loan process is no more difficult than a conventional loan and a similar closing time-frame, assuming the applicant's responsive to the bank's needs throughout.
MYTH #4 - SBA loans are for people with low credit scores
Fact: SBA loans are for business owners who are seeking lower a down payment and longer repayment terms as compared to conventional lending, for startup capital, debt refinancing to better terms, capital for expansion, etc.. A reasonable credit score of no less than 650 is a requirement.
MYTH #5 - SBA is a subsidy and costs the taxpayers money
Fact: The SBA budget is approved by Congress every year, but is typically a zero subsidy, self-funding program.
Now that we have addressed 3 common misconceptions that circle SBA Loans, we wanted to offer a little more insight to the types of loans the SBA offers small business owners and entrepreneurs.
As you determine which option is best for you in terms of gaining available capital to take your idea to the next step, whether that be an investor, conventional or SBA loan, this will shed some light on what options are offered.
The 3 types of SBA loans made available to small business owners.
> 7(a) loan - The 7(a) Loan Program, SBA’s most common loan program, includes financial help for small businesses with special requirements. This is the best option when real estate is part of a business purchase. (To learn more the 7(a) loan - CLICK HERE)
> The CDC/504 - This loan program provides long-term, fixed rate financing of up to $5 million for major fixed assets that promote business growth and job creation.
504 loans are available through Certified Development Companies (CDCs), SBA's community-based partners who regulate non-profits and promote economic development within their communities. CDCs are certified and regulated by SBA.
(To learn more the CDC/504 loan - CLICK HERE)
> Microloans - The microloan program provides loans up to $50,000 to help small businesses and certain not-for-profit childcare centers start up and expand. The average microloan is about $13,000. (To learn more about the SBA Microloans - CLICK HERE)
Like any smart business owner, you want to gain as much knowledge you can as you make strategic decisions that set your venture up to succeed. When looking for lenders that participate in the various SBA loan programs, they offer a great tool (HERE) that will take much of the guesswork out of your journey of discovery.
We hope this information has been helpful. We remember our Day 1 like it was yesterday and figuring all of this out on our own.
That being said, we had a handful of generous experts who helped along the way. If you would like to speak to one of our internal experts, feel free to send us an email and we would be glad to answer any questions you have.
Who knows, maybe one of our proven & profitable concepts would be the perfect match for you longterm financial plan. (click here for our proven concepts)
All the best as you live the American dream and make it your own!