If you own and operate a small business, you're probably familiar with the difficulties of getting approved for a traditional business loan. Your local bank may be unwilling to grant you a loan without subjecting you to a credit check or requiring you to hand over the rights to your most important company assets. In this situation, the thought of obtaining a low-interest loan from the Small Business Administration (SBA) can be quite attractive. However, receiving an SBA loan comes with its own set of requirements and conditions. It can also pose some real risks to your business in the long run, especially if you agree to the terms without examining them first.
What is an SBA loan?
Put simply, an SBA loan is a lending arrangement offered by the federal government. This agency offers business loans for self-employed entrepreneurs that typically carry low interest rates and generous credit requirements. These loans are often issued through local banks but without the same tightened credit standards that these institutions would normally impose. Since the government has a vested interest in seeing small businesses develop and succeed, it is willing to finance these loans in an attempt to stimulate the local economy.
What are the Benefits of an SBA loan?
As mentioned, an SBA business loan carries quite a few benefits for an entrepreneur. First, the loan is much easier to get than a traditional loan. If you have poor or no business credit, you can still qualify for financing. The government also offers unusually low interest rates on these loans, which makes it easier for company owners to repay them over time.
Yet another benefit of an SBA loan is that you don't have to worry about coming up with physical assets for collateral. Most banks require small business owners to sign away the rights to their important physical assets as collateral on the loan. If you operate a business that has very little physical assets, you may not be able to qualify for traditional asset-based loans to grow your business. An SBA loan does not usually require this kind of collateral.
Things to Consider Before Applying for an SBA Loan
However, these looser lending restrictions do come with a serious consideration. While you won't have to use physical assets as collateral for the loan, you may have to offer up every other kind of asset you have to guarantee it. For example, if you operate a resale business and want to get an SBA loan, the government may require that you agree to use all of your business assets as collateral, including your accounts receivables and your inventory. If you're uncomfortable with this kind of requirement, be sure to read the lending terms carefully to make sure you understand everything you’re signing up for.
Should you get an SBA loan? The answer depends on how much capital you need and how comfortable you are with the lending requirements of the Small Business Administration. Take the time to inquire about the lending terms so that you can find an SBA loan that will help you grow your business.
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