The Small Business and Rural Investment Lending Program (SBA) is a government lending program that offers low-interest loans to small businesses. The program is aimed at supporting small businesses with limited access to capital, who might not qualify for traditional financing or find it difficult to get a loan. SBA loans are also known as SBA guaranteed loans or SBA loans.
SBA loans come with low interest rates and high eligibility standards. Applicants must have a sound business plan and a track record of successful operations. However, the loan processing time is relatively short. If you are planning to finance your small business, it is important to know what types of risks you face with an SBA loan. In this blog post, we’ll explain the different types of risk that come with an SBA loan, and what you can do to lower these risks.
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What is an SBA Loan?
SBA loans are federally guaranteed, low-interest loans for businesses with less than $10 million in annual revenue. The borrowers of an SBA loan are private companies, and not banks or other financial institutions. This means that SBA loans are backed by the full faith and credit of the United States government.
The primary aim of the SBA loan program is to provide capital to businesses that might otherwise go under. SBA loans come with special government guidelines, which include eligibility criteria, loan processing time, and loan conditions.
Types of Risk with SBA Loans
Like any loan, the SBA loan carries certain types of risk. To understand the risks, you can look at the three areas of an SBA loan that need to be strong for the loan to be approved: Company, Market, and SBA.
- Company Risk: A concern with company risk is if the assets of the business don’t match the liabilities. For example, if the business has more assets than it is contractually obligated to pay back, then the SBA might not approve the loan.
- Market Risk: With market risk, we’re looking at the general health of the economy. If the economy is doing well, businesses are likely to get approved for loans. However, if the economy is struggling, then the number of loans approved will also likely drop.
- SBA Risk: The SBA is the government agency that guarantees the loan. The SBA will only guarantee the loan if it is confident that the loan will be repaid. If the loan is not repaid, the SBA will have to pay the lender back. So, the less risk that the SBA sees, the less the SBA will guarantee.
These three areas of risk can be lowered with the right credit and business plan. We’ll look at how below.
How to Lower Risk with an SBA Loan
If you want to lower the risk of getting an SBA loan, then the easiest way is to have a strong business plan. A strong business plan not only has a clear plan for the company’s operations, but also explains why the business is worth investing in. A good business plan will make sure that the company meets the SBA’s requirements, has a sound business plan, and makes sure that the company has a good track record of success.
If you don’t already have a business plan, that’s okay. You can create one. Business plans are detailed documents that explain your business idea and how you plan to make it successful. In a business plan, you will explain your business idea, the market you plan on serving, your product or service offerings, your cost structure, products or services you offer, how you plan on making money, and how you plan on staying profitable.
You can use a simple business plan template to outline your plan. Once you have your business plan in place, you can start to explain the risk involved with your SBA loan. Having a custom business plan will help you explain the risks better, and show the lender that you have thought about them.
How to Apply for an SBA Loan?
Applications for SBA loans are made through the SBA’s website. To apply for an SBA loan, you will need to create an account on the website. You will then get an application package, which you can download and start filling out.
The application will ask you for information on your business, your financials, your tax returns, and more. Once you submit your application, it will go through a review process. Depending on your application, this process could take anywhere between 30 days and 6 months.
Do SBA Loans Require Hazard Insurance?
Yes, when you apply for an SBA loan, you will be required to provide proof of hazard insurance. The SBA, like all other lenders, wants proof that your business and business assets are protected. In some cases, you may have up to 12 months to acquire hazard insurance, but many lenders that partner with the SBA will want to see proof of insurance upfront.
What is Hazard Insurance?
Business hazard insurance is insurance that covers physical damage to your business or assets in the event of a “hazard.” Ironically, there is no such thing as “hazard insurance,” at least by name. It’s a term for the type of coverage the SBA requires you to have. Here are some common examples of hazards that can be covered by hazard insurance:
- Theft. When somebody steals business assets from your property, hazard insurance can cover the cost of replacing them.
- Vandalism. If your business property is vandalized, your hazard insurance will cover the cost to clean, repair, or replace the vandalized items.
- Fire damage. Hazard insurance will cover the cost of replacing or repairing property damaged by fire. This may or may not come standard, so ask about this coverage.
- Water damage. Generally, most policies will cover accidental water damage — like a burst pipe, water heater leak, overflowing sink, washing machine failure, etc.
- Storm damage. Depending on the fine print in your policy, your coverage may also include damages from natural disasters like floods, hurricanes, lightning storms, and earthquakes. Every policy is different so be sure you know what yours covers and what it doesn’t.
Conclusion
If you want to finance your small business, then you can consider applying for an SBA loan. The website is a good place to start. We’ve explained the different types of risk with an SBA loan and how you can lower those risks with a strong business plan and strong financials. Good luck!
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