The Small Business Administration (SBA) is an important resource for small businesses, especially in terms of funding. There are several SBA loans intended to help small businesses grow and expand.
The SBA offers several business funding programs to help small business owners with starting, managing and growing their small businesses. In US, thousands of small businesses are turning to SBA because financing remains a difficult challenge. However, there are many common myths about these government-guaranteed SBA loans that can keep the small business owners from getting the most out of their connection with the SBA.
Myth #1: The SBA Lends Money to Small Businesses
One of the most common myths about the SBA loans seems insignificant but is actually important to our understanding of how they work. Most of the times, the SBA does not provide the funding that makes up its loan programs, nor does it acquire repayment or interest from the borrowers.
Rather, the SBA works with local financial institutions to guarantee a part of its small business loans. With a guarantee to recover some of the losses if a borrower can’t make loan payments, banks and other alternative lenders lend to SBA borrowers with greater confidence. Of course, this guarantee from the SBA only applies to borrowers and financiers that meet its lending qualifications and approval process.
Myth #2: There is Only One Type of SBA Loan
The SBA works with banks and other lenders to guarantee loans with a variety of terms to suit business’ requirements. The most common and popular SBA funding program is the 7(a) loan program, which small businesses use to fund major capital expenses.
There are some other types of SBA funding programs, which include CDC/504 loan program, also known as Certified Development Companies finance equipment and real estate purchase.
The disaster loan is another type loans provided by the SBA given to US businesses in need of funding to repair after experiencing a natural disaster.
Myth #3: SBA Loans Are Only Available At Banks
The SBA guarantees loans issued through both national and local banks, but additionally credit unions, micro lenders and nonprofit organizations. SBA also provide search tool to help small business owners to find SBA lender in their area.
Myth #4: The SBA Determines If a Borrower Is Ultimately Approved for an SBA loan
The SBA sets eligibility criteria for the loans it guarantees, but in the end the lender decides whether a borrower is approved for a loan or not. Lenders make the selection based on the SBA eligibility requirements as well as the five C’s of credit, which include
Character: Does the lender consider the small business owner is reliable, responsible and capable of success? The lenders only want to invest their money into businesses they believe in.
Capital: How much has the small business owner already invested in the business? Lenders like to see that business owners have their personal money invested in the business.
Capacity: Can the business have the ability to repay the loan? Lenders take a look at metrics together with the business cash flow and credit history for proof of this.
Condition: What are the financial market conditions? Lenders need assurance that the business will flourish in its industry.
Collateral: Lenders want to see what type of business or personal property that business owner can pledge as collateral against the borrowing amount. Lenders need to know that if a borrower fail to pay back their money, they will get repaid through collateral.
Myth #5: SBA Only Guarantees Loans
Financing isn’t the only thing SBA offers. It also connects small businesses to other sort of programs that boost its mission to support small business owners. These program consist of resources and tools for businesses looking for federal grants or publicly funded contracts.
The SBA also help local small businesses through various instructions, meetings, seminars and different events geared toward financing and business management topics. Along with business counseling services. These services make the SBA a unique business resource for small businesses.
An experienced, expert SBA lender will help you in deciding which of the SBA resources you can choose to help maximize the odds of your business success.
Myth #6: SBA Offers Grants to Small Businesses
The SBA offers grants only to nonprofit organizations, but not to small businesses. However, small business owners can look for federal grants at grants.gov, state and local grants by using the financing search tool.
Myth #7: No Need for Personal Credit for an SBA Loan
Banks don’t just require your small business statistics when considering whether to fund SBA loans. They also require a comprehensive personal finance history, such as personal tax returns and how you manage with your own finances.