You’ve probably come across the term “SBA loans” when searching for business financing or funding. It’s essential to understand everything about SBA loans, including what it is, SBA franchise failure rates, their application, and more.

An SBA loan (Small Business Administration Loan) is one of the best financing options for small businesses. SBA loans are better financing options for franchised firms because the government typically subsidizes them, although SBA franchise failure rates can vary by business and industry.

SBA Loans Explained

In simple terms, SBA loans are partially government-guaranteed loans given to small businesses or startups. It should be noted that the Small Business Administration does not provide SBA loans. The authority only guarantees such loans and collaborates with reputable lenders that lend money to small businesses on friendly terms–primarily banks.

“Partial guarantee” means that the SBA eliminates part of the risks for lenders if the loanee defaults or cannot repay a business loan. In other words, the SBA pays back a pre-agreed part of a loan if it’s defaulted. The SBA can guarantee up to 85% of the loaned amount, and that’s why such loans are not considered risky by lenders.

SBA loans expose the government to high financial risks. Hence, the application process is typically thorough, frustrating, and restrictive. Also, applying for an SBA loan involves a lot of documentation and patience.

Standard Features or Terms of SBA Loans

The terms of SBA loans can vary by business and the lender–meaning SBA loans come in different shapes and sizes. A one-size-fits-all approach doesn’t apply to these loans. However, the standard features of SBA loans include:

• Loan amounts can range from $500 to $5.5 million;
• The annual percentage rate can be as low as 6.5%;
• The repayment period can be between 5 to over 20 years;

Bureaucracy and frustrating paperwork can mess up applying for an SBA loan, and it might not be a feasible business financing option if you need quick cash.

Eligibility for SBA Loans

Considering the high risk, it’s typically challenging to qualify for SBA loans. The minimum requirements for SBA loans include:

• Your business must have been in operation for a minimum of 2 years;
• The business owner must have a credit score of 640 or more;
• Your annual business revenue must be $100,000 or more.

SBA loans are a popular business financing options thanks to competitive rates, long repayment periods, and low annual percentage rates (APR). However, qualifying for an SBA loan depends on other factors besides the ones listed above, like ordinary business loans. Consequently, this business financing option might not be accessible or ideal for many startups.

Improving your credit score, having more business operation history, and growing your business to achieve the minimum annual revenue can help you graduate and qualify for a Small Business Administration loan to expand your business in the future.