3 common Small Business Administration loans—and which type might be right for your business – KTVZ


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3 common Small Business Administration loans—and which type might be right for your business

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At more than 32.5 million strong, small businesses make up 99.9% of all American businesses. To help support these small but powerful drivers of America’s economy—which together employ more than 45% of the nation’s workforce—the Small Business Administration offers a variety of loans to help them grow and prosper.

Yes, small businesses have many options for financing beyond the SBA. From personal loans and business cards to a line of credit at a major bank, there is no shortage of options for providing cash. But when it comes to some of the most competitive loans and low interest rates for most borrowers, SBA loans are the most sought after.

The SBA, a government agency created to help stimulate small business, provides loans through partnerships with private financial institutions such as banks or credit unions. As collateral for the loan, it ranges from a portion to the entire loan amount. This allows corporate financiers to offer borrowers better financing options as there is less risk of losing their investment if the business fails.

In other words, by supporting the credit that is made by a small business, the SBA lowers the barriers that usually prevent approval for a bank loan.

Today, a small business can apply for one of the many SBA loan options, depending on their business situation and needs. Most for-profit businesses are eligible for SBA financing.

To better understand the funds available, Ruby using information from SBA, Congressional Research Service, and other industry sources compare the agency’s top three most popular microloan programs and their benefits. The analysis includes the level of loans, the number of loans and prices in the fiscal years of 2021 and 2022, examples of people receiving loans, common use of loans, and other notable factors.



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7(a) loan

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Named after its section number under the Small Business Act, the 7(a) loan is the SBA’s most popular loan program. In 2022, the agency issued 47,678 7(a) loans with a total of $25.7 billion. Historically, white male business owners have comprised the majority of loan recipients and, since 2017, small and women-owned businesses have been the only recipients. In 2022, 32% of 7(a) small business loans were approved (up from 30% five years ago), and women-owned businesses received 15 % (from 14% five years ago).

Limited to $5 million per borrower, 7(a) loans have interest rates between 6% to 10%. There are several requirements that a small business owner must meet for approval, including proof that you have secured other financing, construction relevant to the business, and have a good personal score.

In addition to providing capital for long-term and short-term businesses, the loan is primarily for owners who plan to make important purchases such as equipment, real estate, or land; expand or acquire another business; invest in the construction or renovation of an office building; or debt refinancing. The loan can finance all or one of these financing needs, a good choice for borrowers who need to finance many types of growth. On the other hand, borrowers do not need to apply for multiple loans at different rates for different purposes.

A 7(a) loan is an attractive option for homeowners who plan to buy real estate. The loan offers a long repayment period of up to 25 years, which can be good for home purchases, which usually take years, or even ten years, to pay off.



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504 loan

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The 504 loan program offers long-term financing at a reasonable rate for assets that generate business growth or create jobs. These loans are unique because they represent a partnership between a manufacturer Certified Development Company—a community-based business that manages nonprofit finances while promoting economic development—and a traditional brewery. The SBA regulates CDCs, which administer the SBA portion of a loan.

504s can be used to “purchase or renovate capital assets (land, buildings, equipment), and (r) financing (is) authorized,” according to the SBA. In general, eligibility for these loans is straightforward. An individual business can borrow up to $5 million in 504 loans (although some projects qualify for up to $5.5 million); fixed interest for 504 loans ranging from 6.47-6.54%, depending on the age of the loan.

Unlike 7(a) loans, businesses must obtain a 504 loan through the CDC and only use the funds to finance fixed assets, which are necessary to operate the business over time. , such as company cars, machinery, or a building. 504 loans often feature below-market interest rates.

In fiscal year 2022, the SBA approved 9,254 loans with a total value of $9.2 billion. Small businesses received 24% of 504 loans and 27% of loans; women owned businesses accounted for 12% of 504 loans and 10% of loans.



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Microloans

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Microloans represent some of the easiest SBA loans available for small businesses, but they are small loans offered with an investment of $50,000. The amount of microloan is $13,000and the purpose of these small financing packages is help a small business keep its doors open through “marketing, management, and technical assistance to small lenders and potential borrowers,” according to the SBA. Interest rates range from 8% to 13%.

A small loan may be suitable for the owner of a new or existing business that needs a boost to achieve short-term goals such as promotion or expansion of operations. Unlike other SBA offers, these microloans are very friendly to startups, because the applicant does not have to provide the financial history of the business – there are two years of experience in the industry, proof, and a solid business plan is in the instructions.

Another requirement for SBA microloans is “good character,” which measures whether the applicant has a history of theft and fraud, among other crimes. (However, a criminal record does not automatically disqualify someone—it may take a lot of work to win over lenders). Interestingly, research indicates that, contrary to popular belief about the characteristics of successful entrepreneurs, the presence of secretive or neurotic personality makes them unable to get an SBA microloan. The 2021 quantitative study the 177 small businesses found that there is no strong relationship between successful microloan approvals and characteristics such as communication, speaking, and motivation, which are often associated with successful leaders and business owners.

Although the loans are more popular compared to 7(a) or 504 loans, small loans make more money to women and small business owners. Data from 2022 was not available as published, but Congressional Research Service data shows that in 2021, the SBA approved 4,510 loans amounting to $74.6 million; 61% of loans and 41% of loans were given to minority-owned small businesses, and 48% of loans and 41% of loans were given to women’s businesses.

This article originally appeared on Ruby and was produced by
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