How do SBA Loans Work
There is financing available to small business owners in the form of SBA loans. These loans are made by banks and private lenders that are then backed by the Small Business Administration. This guarantee by the Small Business Administration reduces the risk for the lender making more desirable to lend you and your small business money. There are many different types of loans designed for specific needs.
The point of these type of loans is to make financing more available to entrepreneurs that may not otherwise qualify for a loan. Especially with the negative economic climate of recent years, qualifying for a bank loan has become increasingly difficult. That is where the Small Business Administration comes in. Traditionally, the SBA has offered a guarantee to banks for these loans of anywhere from 50% to 85% of the loan's value. In the event that you default on the repayment of your loan, the SBA will pay the specified amount back to the bank. This safety net obviously means that the banks are far more likely to approve loans that have these guarantees.
There are several different types of loans offered by the Small Business Administration. The 7(a) General Loan Guarantee is intended for applicant's with bad credit scores. Micro-Loans are small loans targeted toward women, minorities, and low income entrepreneurs. U.S. Patriot Express Loans are available for active
duty serviceman, veterans, and their spouses and windows. A fairly new type of loan offered is the America 's Recovery Capital in which an entrepreneur can receive up to $35,000 with no payments for the first year. Generally with any SBA loan, an SBA loan guarantee was charged to the business, however the ARC loan has done away with this fee.
In order to demonstrate to a bank that your business is worthy of receiving the financing of an SBA loan, they will want to see that your business practices are sound. This includes having a quality product or service as well as a proper market in which your concept will be received. Your management experience will be considered as well. Most importantly, the bank will look at your financial statements to see that they portray profitability and are realistic. The most effective way to present yourself and your business in a favorable light is to have a professionally prepared business plan.
Though financing options for your small business may seem bleak in this difficult economy, the loan guarantees of the SBA are here to help. In fact, in 2009 the American Recovery and Reinvestment Act increased the amount that loans would be backed for from an average of 75% up to as much as 90%. In the instance of the ARC loan, 100% of loan is guaranteed by the Small Business Administration.