Unless you’ve got a hefty stockpile somewhere, If you’re looking to strike out on your own with a business idea you're passionate about, you’re probably going to need some help getting things started.
As you probably know, one of the best ways to do so is to apply for an SBA loan (Small Business Administration). What you might not have heard quite so much about is how much you can borrow on an SBA agreement.
The maximum amount you can borrow from lenders as a small business loan is a whopping 5 million dollars. This figure tends to shock a lot of burgeoning business owners, and there’s no surprise really.
5 million is a heck of a lot of money. However, to secure a loan that large, you’d need to prove that it’s entirely necessary for business development.
Realistically, small business owners are hardly ever going to need such a large wad of cash to get things moving, but now that you know the sum you do need falls well within the parameters of the SBA system, you can breathe easy.
Another way in which SBA small business loans bring more peace of mind to the borrowing equation is that they’re easier to apply for, and the rates are almost always more reasonable than typical loans.
The reason SBA loan stipulations aren’t quite as stringent as traditional loans is that the SBA stands as a guarantor to the lenders.
Should the worst happen and your business tanks, the lenders will automatically receive at least 85% of their investment back on loans up to $150,000 and 75% of their investment on loans greater than $150,000.
With this kind of backup plan in place, lenders are far more likely to greenlight a payment.
You may be wondering why it’s technically possible to borrow 5 million dollars on a small business loan. It does seem like a lot, but it all depends on what the DBA defines as a small business.
The first thing to understand is that their definition doesn’t have set parameters, rather it shifts from industry to industry. This makes sense as different industries have different requirements. A small construction company, for example, will be a much larger outfit than a small coffee shop.
The construction companies’ equipment and materials would also cost more to purchase than coffee machines and coffee beans.
Although the term “small business” is a nebulous concept when it comes to lending, there are two factors of an applicant that cannot be exceeded if they’re to qualify for an SBA loan. These factors are staff count and annual receipts.
If your company has either more than 1500 employees or exceeds 38.5 million in average annual receipts, you are not eligible to borrow on a small business loan. Do bear in mind, though, that these are maximum capacities for the most expansive industries.
For smaller endeavors, the maximum figures for staff and receipts plummet significantly. Take wholesale trade for instance.
If you were in this line of work, your maximum number of employees would be 100 to 250, and in retail trade, your maximum receipts aren’t allowed to exceed $7.5 million.
Ultimately, the shifting definition of a small business in the eyes of the SBA and other lenders is to help the little guy compete with big names in any given industry.
The smaller the industry your business is a part of and the smaller your expansion plans are, the less you’ll be able to borrow.
Unless you’re trying to break out in an incredibly expensive and competitive industry, you won’t have an opportunity to apply for anything close to the full $5 million dollars.
The whole SBA loan system is based on a need basis. The money is to cover essentials that will help you grow your business and brand. The SBA isn’t going to be piling stacks of extra cash on you just in case you might at some point decide to increase expansion on a whim part way through the term.
If you’re just trying to establish your business as an entity and hire your first employees, it might be worth checking out what are known as SBA Microloans.
These loan agreements follow the exact same principles as the larger SBA lending model, but you can borrow smaller amounts of money.
When applying for a Microloan, you can request to borrow anything between $500 and $50,000. The lower end of the lending spectrum will help a small business owner replace faulty equipment, while the larger sums will help someone complete a full property renovation.
If neither the Standard or Micro SBA loans seem to fit your business’s requirements, you should look into an SBA Small Loan. You can think of a Small loan as a middle ground between the other two loans.
Should your business qualify for the full investment, you can borrow a maximum of $350,000, which is enough for minor expansion. If a store owner or restaurateur was trying to start a chain, this loan could be used to open another site in a different location.
Then there’s the SBA Express Loan. The maximum loan amount remains $350,000, but the whole application process is fast-tracked. The SBA guarantees a response to your Express Loan application within 36 hours of submission.
The Express Loan is a lifeline for business owners who find themselves in a time-sensitive bind, but as the SBA only guarantees 50% of the total borrowed sum, lenders aren’t as likely to approve them.
So, if you need cash quickly to reinvigorate your business, it’s best to make sure your application is airtight. You’ll need to have a strong credit score. Anything lower than 700 significantly lowers your chances of securing the agreement. Your business needs to have a decent cash flow.
If you can’t prove to the lender that you can afford the loan, it would be irresponsible of them to agree to the terms. Another absolute must is a solid business plan. You need to give the idea that money is the last piece of the puzzle that’s going to catapult your business to the next level.
Show them that everything else is in place. A final piece of advice is to illustrate to the lender that you’ve already sought out professional guidance. If you have arrived at their doorstep through the recommendation of professionals, it shows the SBA that you’re a suitable applicant.
Small Business Loans Outside the SBA
It’s quite possible that the best course of action for you is to try and secure a small business loan outside the SBA format. There are currently plenty of reputable lenders willing to help you out. It’s just a case of finding the one that’s right for your business.
Lendio is one of the most trusted names in business lending at the minute. They can offer between $5000 and $2,000,000 as a term loan repaid over one to five years at a listed rate of roughly 6%.
As Lendio partners with over 75 different lenders, the chances of securing a loan are much higher than with most other companies, and your application will be dealt with efficiently too.
Fundbox is another lending agency that’s been turning the heads of business owners over the last few years. They specialize in low credit, quick finance, so if you’re looking for anything up to $150,000, Fundbox may well be your best bet.
One of the best things about Fundbox is that you don’t have to fill out any applications. Their software hooks up directly to your accounting software and assesses your situation.
One last suggestion I'll make is to check out Funding Circle. A peer-to-peer lending agency, Funding Circle is similar in structure to the SBA, but you can expect a faster response.
They approve small business loans between $25,000 and $50,000 to be repaid over a 6 month to 5-year period with a listed rate of around 4.99%.
Funding Circle demands a two-year business history, so if you’re just starting out, it’s not the lender for you, but if you’ve got that two-year foundation under your belt, by all means, fill out an application.
Do bear in mind; however, that although they don’t have a minimal annual revenue requirement, most of their other terms are far stricter than competitors, so make sure you go in there ready to impress.