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How Do Small Business Loans Work?

Small Business Loan Form Concept

With changing and developing living conditions, loans have become indispensable in our lives. A lot of people get credit to keep their lives and improve their living conditions. One of them is business loans. Those who want to do their own business and who want to start a new business receive business loans. In addition, small businesses receive small business loans to grow and develop further.

There are five main business loan types for beginners. These types of business loans;

  • SBA Small Business Loans,
  • Credit cards,
  • Short-Term Loans,
  • Equipment Financing,
  • Merchant Cash Advance.

SBA Small Business Loans;

It is a type of credit supported by the Small Business Administration (founded in 1953). Small Business Administration is a federal government program that provides small businesses with support in the form of workshops, small business loans, mentorship and counseling. While the loans are backed by the SBA, they don’t come directly from the SBA. You’ll have to find a local lender who provides SBA loans in order to access to the funding.

Who can get SBA small business loans?

Although each of the SBA small business loans requires different features, in general, people with the following characteristics can receive SBA small business loans;

  • To be a non-profit business,
  • Operate within the United States,
  • Not having other financing options (like your own wealth),
  • Have good personal and business credit.

There are three main types of SBA small business loans;

  • 504 Loan Program
  • 7(m) Microloan Program
  • 7(a) Loan Program.

The upper limit of SBA small business loans is $ 5 million. Therefore, it is more suitable for beginners and small businesses rather than large businesses that need millions of dollars in money.

The process for applying for SBA small business loans may take from a few weeks to six weeks. You can receive your funds one week after you qualify for SBA small business loans.

As of May 2018, interest rates on SBA small business loans range between 7% and 9.5%.

What are the advantages and disadvantages of SBA small business loans?

The advantages of SBA small business loans are;

  • The equity requirement is relatively low compared to other loans.
  • The loan is backed by the federal government. That means banks are more likely to loan to riskier companies — like startups — than they might otherwise.
  • SBA loans have a floating interest rate that’s tied to the Prime Rate. The maximum interest rate for SBA small business loans is Prime Rate plus 2.25 percent for loans maturing in 10 years or less, and Prime Rate plus 2.75 percent for loans maturing in 25 years.
  • People and companies who don’t have access to other forms of capital might find it easier to qualify for a microloan than for a larger or more traditional loan type.

The disadvantages of SBA small business loans are;

  • These loans may require more paperwork than a traditional loan.
  • SBA small business loans are relatively small. They have an upper limit of $5 million.

Startups or founders with poor credit are unlikely to qualify.


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