There are many types of small business loans. What all SBA loans have in common is that they’re backed by the government — the Small Business Administration to be specific. This helps business owners qualify for better terms and interest rates than normal. How can you decide what type of SBA loan to choose?
What Types of SBA Loans Can You Qualify For?
There are four main options for SBA funding:
- SBA 504 loans
- SBA 7(a) loans
- SBA disaster loans
Every type of SBA financing has its requirements. The most important one is that you own a small business. You also need to have a certain amount of annual revenue and monthly cash flow. These metrics show that you can afford to take on a loan and make the payments.
When Is an SBA 504 Loan a Good Choice?
The 504 loan program is related to long-term assets. These can include heavy machinery, construction equipment and other kinds of large-ticket items. Many small businesses turn to 504 loans when purchasing real estate properties.
The advantage of this SBA loan option is that you can get amazing interest rates and generous repayment terms. Often, 504 loans give you up to 25 years to pay back the funds. That helps break down large costs into managements amounts that your business can handle.
What Other Details Do You Need To Know About SBA Loans?
There are a few additional details that you need to be aware of before applying for 504 loans. One has to do with down payments. Usually, you need to provide a one-time payment of 10% of the purchase price of real estate or machinery. Also, you generally need a source of collateral for about 20% of the item’s value.
This can seem like a significant investment, but the benefits of having your own commercial property or heavy machinery are also considerable. With construction equipment such as loaders, for example, a contractor can perform more work and increase revenue by a large margin. An attractive retail store to call your own may help you sell more products or improve your business operations.
What Is a CDC?
As you apply for SBA 504 financing, you may come across a few unfamiliar terms. Many applicants wonder what a CDC is and how it’s involved in the process. Certified development companies are approved by the SBA for assisting with local economic development.
These nonprofits are different from banks. With a 504 loan, approximately 40% of the loan value comes from a CDC, and 50% from the bank.