Today’s article is directed toward small business owners. If you are a small business owner, at some point you will need to raise additional capital in order to grow your business. This can be done by either contacting venture capitalists, angel investors, or by borrowing money from a major lending institution. Borrowing money from banks has become increasingly difficult for small companies. Many have turned to SBA loans for assistance with this. What are Small Business Administration loans, and how do they work? We will deal with this topic, in today’s article.
SBA loans refer to a wide category of loans that are all in some way financed or guaranteed by the Small Business Administration. The amount of involvement by the SBA depends on the type of funding you are seeking and the purpose for which you are seeking it.
For example, there are certain types of companies that are deemed to be useful for the community, especially those working in underprivileged areas. Those companies can typically get direct funding from the Small Business Administration, whereas most other companies will get loan guarantees only.
So, how do loan guarantees affect SBA loans? Banks can have a percentage of each loan guaranteed and protected from default by the Small Business Administration. What this means is, if you do not pay your loan back in full, they can collect this percentage automatically from the SBA. Typically, banks will guarantee about 10% of each loan in order to offset their risk somewhat. The reason they do not guarantee all of it is that they want to build interest to leverage this money to lend out additional funds.