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Why a Small Business Loan Provides Security During Periods of Inflation

Government support programs like the Paycheck Protection Program (PPP), Shuttered Venue Operators Grant (SVOG), and COVID-19 Economic Injury Disaster Loan (EIDL) ended in 2021, but small businesses are still looking for economic relief amid surging costs of borrowing. Many small business owners prefer local financing rather than working with national banks. Most small business owners have used their personal savings or borrowed from friends and family.

Annual inflation in the US broke a 40-year high to reach 9.1% in June 2022. For many small business owners, reopening post covid in an inflationary environment has not been smooth due to the twin pressures of increased costs and reduced sales.

According to Met life and the US Chamber of Commerce Small Business Index, inflation concerns are at an all-time high among business owners. Small businesses have listed rising costs, decreasing revenue, rising interest rates, supply chain disruptions, labor shortages, the burden of COVID-19 compliance, and technology disruptions as the top challenges for 2022.

If you are an existing business owner or an entrepreneur planning a start-up, a small business loan can provide funds with flexible repayment terms that suit your business needs.

What is a Small Business Loan?

Small business loans are sanctioned by credit unions, banks, finance companies, and Community-Based Financial Organizations (CBFOs). The US Small Business Administration, an agency within the federal government, guarantees a portion of these loans.

SBA Loan Programs

SBA provides different types of loan programs to cater to different business requirements. The most common type of SBA is the Standard 7 (a), which provides funds for the growth of businesses and emergency requirements.

Here is a list of all SBA loan programs:

  • Standard 7(a)
  • 7(a) Small Loan
  • SBA Express
  • Export Express
  • Export Working Capital
  • International Trade
  • Preferred Lenders
  • Veterans Advantage
  • CAPLines

How to Get an SBA Small Business Loan?

Whether you are buying a business, starting a business, or expanding your existing business, it is recommended to submit a business plan with your SBA loan application. The business plan should outline how you intend to use the borrowed funds. If you need help creating a business plan, you can approach the local Small Business Development Centers (SBDC) to develop a business plan in your area of expertise.

How to Choose a Lender for an SBA loan

There are two types of SBA loan providers; Preferred Lenders (PL) and General Lenders (GL). Preferred Lenders have the authority to underwrite the loan by themselves. General Lenders send loan applications to SBA for further processing, which may delay the funding timeline. Small business owners also tend to prefer local banks and credit unions for their funding requirements. Each region and industry has a top SBA loan provider.

The top 10 SBA lenders are Live Oak Banking Company (NC), Newtek Small Business Finance, Inc. (NY), The Huntington National Bank (OH), Celtic Bank Corporation (UT), Byline Bank (IL), Wells Fargo Bank, National Association (SD), Readycap Lending, LLC (NJ), Cadence Bank (MS), and Enterprise Bank & Trust (MO).

Types of SBA Loans

  • Term Loan: You can take a term loan for purchasing machinery and business equipment.
  • Line of Credit: You can avail a line of credit and pay interest only on the portion of funds you lend from your credit limit. Also known as working capital loans, SBA might verify the money trail to ensure proper end use of funds.
  • Invoice Financing: You can fill the cash flow gaps by pledging your pending bills as collateral for the short term.
  • Commercial Mortgage: You can also purchase a commercial property with an SBA loan.

Credit Rating for SBA Loans

SBA loans are disbursed to businesses-not individuals. Lenders look at your business’s FICO Small Business Scoring Service scores (SBSS Score) to evaluate your application’s creditworthiness. You can get an SBA loan with SBSS scores as low as:

  • 7(a) Small Loans: 155
  • Community Advantage: 140
  • Express Bridge Loan Pilot Program: 130

Pros of a Small Business Loan During Inflation

The Federal Reserve is likely to hike Interest rates to offset the impact of inflation. Under these circumstances, you can benefit from borrowing money at low rates. You can also make emergency payments with SBA loans. Some of the pros of a small business loan during inflation are-

Low-Interest Rate

Most SBA loan rates are linked with the Prime Rate, while some offer fixed rate loans. Loan programs under SBA have transparent interest rates that are usually lower than the industry average.

Increase your Business Equity

Inflation can be an excellent opportunity for business owners to increase their equity in their business. You may use the decreased purchasing power of the currency to buy out stakes from partners and shareholders at a cheap rate. You can also use funds from an SBA loan to buy a new business.

Collateral Requirements

The value of your business assets may increase during inflation. You can pledge your current book value as collateral for an SBA loan. Micro SBA loans up to $25,000 do not require any collateral. However, all assets created out of bank finance will be hypothecated to the lender.

Lower Down Payment

SBA loans require low down payment if you have good credit and strong cash flow. SBA 7(a) and 504 loans require a minimum downpayment of 10% while buying new assets for business purposes. You may need to pay a 30% down payment if you have bad credit or a stressed cash flow.

Easier qualification

Most commercial lending agencies require high cash flow or extensive business experience for lending to businesses. You can start quickly with an SBA microloan for up to $50,000 to build your credit profile. Once you have an SBA loan, it gets easier to scale up your line of credit.

Emergency Line of Credit

An SBA line of credit can cushion the negative impact of economic cycles. You can use it during peak inventory cycles, pay wages during low sales, make one-time payments, etc. SBA also provides low-interest Disaster Assistance loans and FEMA Grant Assistance for distressed businesses.

Nationwide availability

You can easily find a registered SBA loan provider in your locality. The loan underwriting process is standardized across the nation for all lending partners.

Cons of a Small Business Loan During Inflation

New business owners with no prior credit history may find it hard to get financed under SBA loan programs. Here are some of the drawbacks of SBA loans.

Personal Guarantees

Applicants may need to pledge all available collateral for getting an SBA loan. Lenders can offer up to an 80% discount rate on the fair market value of new equipment and 50% for used equipment. Lenders may also lien the personal assets of business guarantors who own more than a 20% stake in the business. Some SBA lenders may ask for personal guarantees, which can transfer liability to your personal assets in case of a default.

Extensive documentation

The application process for an SBA loan can be lengthy and stressful. You may need to prove your business viability and provide your lender with business tax returns, financial statements, income projections, and your personal details.

Lengthy Processing Time

An SBA loan can take several months to process depending on the lender, the loan amount, and your business plan. However, once you are funded under the SBA program, further loans can take less time. You can start with an SBA microloan and keep increasing your credit limits every year.

Alternatives to SBA Loans

Obtaining an SBA loan is not always easy. Because of this, business owners turn to alternative business lenders for their financing. Alternative lenders offer faster applications with less paperwork. Your loan application may be approved in as little as 24 hours.

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