A whopping 99.9 percent of businesses in the United States are small businesses—about 30.2 million—according to the Chamber of Commerce. Whether you’re already among this growing number or looking to join in with your own entrepreneurial venture, you may be considering a loan to help you achieve your business goals. But which small business loan is right for you, and how do you get started?
Whether applying for a traditional bank loan, line of credit or a Small Business Administration (SBA) loan, the premise is largely the same: you borrow money from a lender, which you will pay back over a certain time period with an interest rate applied. SBA loans are typically the ideal option for small businesses, however, as they have more flexible limits, interest rates and payments than a traditional loan.
How do these programs offer such flexibility?
SBA loans are government guaranteed. This enables an SBA-preferred lender to offer them to small businesses at low interest rates, because the government has promised to pay back 85 percent of the loan in the event of default. This mitigates risk to the lender—and ultimately opens up opportunities for small businesses in need of capital support.
If you qualify as a small business according to the SBA—your organization must be an independently owned and operated business that is not dominant in its field—read on to learn more about the small business loan options and processes available to you.
2 Types of Small Business Loan Programs
For government-assisted small business loan programs, the two most common are the SBA 504 and 7(a) loan programs.
- SBA 504 Loan Program: Designed to provide financing for the purchase of fixed assets for expansion or modernization—which usually means real estate, buildings and machinery—at below market rates.
- 7(a) Loan Program: The SBA’s primary program for providing financial assistance to small businesses for short-term or long-term working capital and to purchase an existing business, refinance current business debt, or purchase furniture, fixtures and supplies.
Ultimately, how these programs differ comes down to who they assist, loan amounts and in the terms of the agreement.
3 Steps to Prepare Your SBA Loan Application
Once you’ve established that your business qualifies for a small business loan, you will need to start the application process with a Certified Development Company (CDC).
These three steps can prepare you for the process.
- Create a business plan: Laying the foundation of your business, a solid business plan builds lender confidence—enabling them to better understand your vision and how you are going to achieve your goals.
- Check your credit score: Ideally, your credit score will 680 or higher. If your score is less than stellar, you may find assistance through the Community Advantage program. You can check your credit score at Credit Sesame or Free Credit Report.
- Have a down payment, collateral or both: Be prepared to put some money down. For example, a small business loan for commercial real estate generally requires a 10 percent minimum down payment. Collateral may also be required, providing some insurance to the lender.
3-Part SBA Loan Approval Process
Once you’ve started the application process, you can expect the process to possibly take upwards of eight weeks. The application alone can take up to three weeks.
Once the application is turned in, a successfully accepted loan will process in three parts, with additional steps needed on your end:
- Letter of Intent (LOI): Once your application has been reviewed, the lender will send you a letter or intent, stating the terms for your loan. If you agree and sign this LOI, you may be required to put down a small deposit at this point.
- Underwriting of loan: Your official loan agreement is written after the LOI is signed. This process can take between two to four weeks.
- Letter of Commitment: When you receive the letter of commitment from the lender and agree to the terms, you will sign and your loan agreement is official. You will likely be required to put down your deposit at this time.
Although the process of getting an SBA loan can seem like a daunting task, knowing what to expect can make your application easier. Once your loan agreement is complete, you will be able to follow through on your business’ vision of growth, upgrade and expansion—making the time and effort spent to secure the loan well worth it!
Ready to get started with the small business loan application process? Trust the experts at Certified Development Company (CDC) Growth Capital to assist your company and its needs throughout the process. Contact us today at (216) 592-2332 or online.