Financing a business is more than choosing the highest loan amount and the most appealing rate. Business owners should also consider what they want to achieve with the loan and how long they need the money. An SBA business loan could be a good option for some businesses that qualify. However, you must understand different aspects of business loans before choosing the right program.
Business owners looking to expand or buy major assets like equipment and commercial property need to consider several factors. These include the loan’s purpose, repayment period, qualification criteria, and SBA loan rates.
Start With Your Financing Purpose
The first question is straightforward: What will you use the loan for? SBA loans can fund many qualified business needs, but some programs work better than others depending on the intended purpose.
A business seeking working capital will have different financing needs than a business buying commercial property or investing in new equipment. Some typical needs that businesses may need financing for include:
- Working capital
- Equipment purchases
- Expanding business
- Commercial real estate
- Acquiring businesses
- Debt refinancing
Consider an SBA 7(a) Loan
One of the most common SBA loan programs is the 7(a) loan program, which can be used for various eligible purposes. In certain transactions, a business may take out a 7(a) loan for working capital, equipment, real estate, business acquisition, and more.
Thus, the SBA 7(a) loan may be considered by business owners if they have multiple financing purposes. However, each transaction and its lender will dictate the appropriate structure, size, duration, and price of the 7(a) loan.
When Does an SBA Commercial Real Estate Loan Make Sense?
Businesses looking to buy or upgrade qualifying commercial real estate could consider an SBA commercial real estate loan. This financing option might be useful in owner-occupied commercial real estate deals that qualify under the SBA loan program. Financing options vary by program and lender and may include buying, constructing, improving, or other costs associated with real estate that qualifies under the program.
Business owners should consider factors beyond the cost of purchasing the property. They include location, usage, cash flow, eligibility, down payments, and repayment. For business owners who plan to occupy and operate from their commercial property, an SBA loan could be an option.
How Do SBA Loan Rates Affect Your Decision?
SBA loan rates are an important factor when considering funding, but they shouldn’t be the only factor. The rate that will be charged to the borrower will depend on various factors, such as:
- SBA loan program
- Size of loan
- Repayment period
- Banker
- Qualifications of business
- Market situation
- Funding structure
A business needs to consider the total cost of financing, not just the fees and repayment terms. A loan with an apparently low rate doesn’t have to be the best choice for the borrower.
Look Beyond the Interest Rate
The interest rate is what comes to mind first when comparing loans, but it’s not the only factor in the financing process. Business owners need to consider:
Length of Repayment
A longer repayment period can lower individual payments.
Down Payments
Depending on the financing process, some transactions may require down payments.
Purpose of Loan
The intended use of the borrowed money determines whether you should apply for an SBA program.
Collateral
Collateral requirements depend on many factors, including the program, lender, loan amount, and transaction type. Business owners need to learn what kind of collateral may be required.
Financials of Business
Business financials include revenue, credit, debt, and cash flow.
How Can Businesses Choose the Right SBA Option?
No SBA financing solution fits every business. The best approach is to consider different financing solutions based on the business’s needs. Some questions a business owner needs to ask himself include:
What is the financing for?
Identify the purpose of the loan or the project/purchase the money will be used for.
How much financing do you actually need?
It isn’t wise to borrow what can be borrowed without estimating how much capital you actually need.
How well will the payment schedule fit into your cash flow?
Consider your current financial obligations and anticipated income before you borrow any extra money.
How flexible are you?
Some companies need financing for a specific purchase, while others need capital for multiple purposes.
What will be the total cost of financing?
Consider interest rates, fees, repayment period, and all other relevant costs.
Make the Financing Decision With Confidence
Selecting the right SBA loan starts with understanding the business’s needs. If the objective is working capital, expansion, equipment, or commercial real estate, the right financing structure should match the business’s needs.
Comparing loan purposes, repayment terms, eligibility criteria, overall cost, and SBA loan rates makes it easier to choose the right loan.
Speak With a Specialist
We at Dream Star Capital know that choosing the right financing isn’t easy, since it depends on your business’s purpose and financial situation. We will help you explore the SBA financing options available through our lending network and understand the requirements of different programs.
We will help you assess your options based on your financing purpose, financial position, and plans. This will help you make an informed decision by ensuring you fully understand your finances.