Lending for small businesses has undergone some major changes in the past few years. Before the economic downturn of 2008, fiscally responsible small business owners had no problem finding startup or expansion capital but since then, things have changed.
Recent studies (PDF) by national and regional organizations show a 20 percent decrease in small business loans since the financial crisis, while loans to larger business are up by about 4 percent. Here’s an overview of the SBA impact on lending.
SBA Impact on Lending
Luckily for the 28 million small business owners in the U.S., there are alternatives to traditional bank loans. The SBA offers three distinct loan programs for small business owners and currently works with about 500 banks in the U.S. that lend to small businesses. The SBA doesn’t actually grant the loans, but guarantees them, which makes it safer for local banks to extend the credit. Last year, SBA loans amounted to an impressive $23.6 billion.
In addition to the most obvious impact of the SBA program — making loans more accessible to small business owners by guaranteeing them to banks — here are three more ways the organization is impacting the lending environment.
- Inner City Loans. According to the ICIC, inner city businesses received significantly more SBA backed loans than other areas. In fact, research shows that SBA loans are 35 percent higher in economically distressed areas. This opens up opportunities for small business owners in those areas that they may not have had otherwise.
- Better Loan Terms. The SBA-backed loans offer better terms than many other types of business loans. For example, its APRs are usually much lower than the alternative loans that are readily available online. In addition, you’ll typically have longer to pay back an SBA loan — between 7 and 25 years, depending on what the loan is for. This longer repayment period results in lower monthly payments, which helps borrowers maintain a healthy cash flow.
- Business Loans for Women. According to NerdWallet, by 2020, 50 percent of all small businesses will be owned by women, but until recently, women have had a disproportionately lower loan rate. For instance, in 2014, only 4.4 percent of business loans were granted to women, even though 27.7 percent of small businesses were owned by them. The Women’s Small Business Ownership Act of 2015 is currently being considered, which would increase lending to female business owners, but in the meantime, the SBA is actively providing loans and resources to women. For instance, it offers Women’s Business Centers, and the Office of Women’s Business Ownership.
The SBA’s services are highly targeted. They really do only cater to small business owners. In order to be eligible for an SBA loan, you usually have to fulfill these criteria:
- Your business is for-profit, and not a large company.
- You must be U.S.-based.
- You must have personally invested a substantial amount of equity into your business.
- It has to look like you’re trying. You must have tried other methods of funding your business (like using your own money) before applying.
- You must illustrate where and why you need the loan, and be able to put the funds to a good, business-related use.
- You cannot be behind on any government debt, such as owing back taxes.
The SBA is a great resource for all small business owners, and as the loan environment continues to grow and change, it will likely continue to play an important part in small business lending.