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Published November 01st, 2016 by

What Makes SBA Loan Programs Different From Other Funding Sources

What Makes SBA Loan Programs Different From Other Funding Sources

There’s a lot of misconception about budding entrepreneurs. Because they are starting or running a business, many people assume they have all the money that they need. Hence, they don’t need any kind of financial support.

The truth is that not everyone has a budget to start a firm. Some only have a few grand to start a business. Thus, they find ways to support their growing establishments. Either they look for an investor or get the assistance of financial institutions that will give them cash.

There are several establishments where you can get money for your business. You can go to merchant cash advance services, business startup loans, business acquisitions, credit business lines, or small business loans. Out of all these funding sources, the small business administration (SBA) is the best choice.

So what is SBA loan program? TheBalance.com defined SBA loan programs as the borrowed cash from a financial institution by an entrepreneur. The purpose of this amount is to help the business owner to start, expand, or run a small firm.

Because of this definition, many people assume that all small business lending sources are the same. However, there’s a big difference between these financing companies, especially when it comes to rates and applications. To help you choose the best financial assistance for your business, we will discuss the different funding sources for enterprises. We will also compare it with SBA loans, helping you to make the right decision.

Small Business Loans vs. Merchant Cash Advances

Many people thought that a merchant cash advance (MCA) is another form of a loan. The truth is that this financial assistance is not a loan but an act of buying. The MCA provider buys the future sales of the borrower. He gives the amount of money that the debtor asks for and gets his payment through credit card sales. Therefore, the borrower must use the credit card machine provided by the business cash advance service.

There are several pros and cons that you can only get from this service. First is the renewable contract. Once you’ve repaid at least 60% of your advance, you can resell your future sales. Furthermore, you can do this as many times as you wish, which you cannot do with small business administration loans.

The second advantage is the minimal requirement. SBA financing requires tedious paperwork and a collateral, depending on the amount of cash you want to borrow. With MCA, you only need to gather a few details. You only need to give proof that you are running a business, and you’re capable of giving back the funds.

Lastly, cash advance services offer flexible repayment. Meaning, your payment is based on the number of sales you make. This method will still allow you to gain profits, despite having debts.

However, this form of financial assistance is exclusively for those who have existing businesses. Because they are buying your future sales, you can’t use it for startup businesses. Hence, if you want to take advantage of this service, your business must exist for a year or so.

But if your company is still a concept, then you should go for government loans for small business. This financial support helps both start-ups and established enterprises. However, you have to wait for months until you get the borrowed funds.

Business Start-up Loans vs. Small Enterprise Loans

Many people thought that small business and start-up loans are the same. It could be because of the requirements and the process of both funding services. Both use collateral which serves as a guaranty for the loan provider. In that way, the lender can still get something from you if you fail to pay your debts on time.

The second similarity of these two financial institutions is your investments. To qualify for this loan, you need to be the principal stockholder of the firm. Meaning, you need to own at least 51% shares of the company. If not, then you should ask your co-owner who has invested more money in your business.

Third is the credit history. Both lending firms give a hefty amount of cash to their borrowers. Thus, they want to know the credibility of their debtors. To know this information, the lending service will ask for the borrower’s credit history. In that way, they can decide on whether or not they should approve the loan.

Lastly, both services take time before you can get the funds. It usually takes 2 to 6 months before you get their approval. However, the waiting time depends on the amount you want to borrow. Hence, if you loaned a small amount of cash, the process will be quicker.

Despite having similarities, these services differ from the people they serve and the ruler of the funds. As the name suggests, start-up loans are exclusively for start-ups, while small business loans are for established and start-up enterprises.

As for the ruler, it’s the Federal Government that provides rules to SBA-backed lenders. Hence, the state puts limits on interest rates, helping borrowers to pay their debts.

Small Business Loans vs. Secured Business Acquisitions

Small business and business acquisition loans are somewhat related because you must have an SBA guarantee to secure the lender. Moreover, you need to provide the same requirements that SBA lenders ask for. Nevertheless, this financial institution helps entrepreneurs to refinance and to buy a franchise.

Despite being under the SBA 7a loan program, their pros and cons are different. First are the expenses. Both funding sources require a collateral, but the business acquisition is cheaper than top SBA loan programs. Hence, you can save money on this credit. Furthermore, you can pay your debt on time.

The second advantage is the interest rate. Because it is one of the least expensive funding sources, you should expect that the interest rate is also low. You may ask, why do they offer a low-interest rate? The answer lies in your sales.

The lender understands that the business sales are unpredictable. So if the interest rate is low, chances are, you can pay your credit on time.

Third is the collateral. Generally speaking, your entity serves as the security of the lender. The lending company takes away your collateral in exchange for the unpaid fees.

With the business acquisition, your collateral is more than just a guaranty. It also allows you to negotiate with the lender, as long as it is a good entity.

Lastly, you can get this loan, regardless of your credit score. Let’s face it! Not everyone has a good credit record. Some borrowers have bad credit while others have no credit history at all. Therefore, if you have a low or no credit score, your chances of getting your loan approved is low.

With the business acquisition loan, you don’t have to deal with this issue. Like the MCA, enterprise acquisition loans don’t care about your credit record. What matters to them are your experience and the performance and the value of your business.

Despite the advantages being offered by this funding firm, there are also disadvantages associated with it. First is the status of your business. As mentioned earlier, business sales are unpredictable. There are days when your business purchase is good, and there are times when it’s not. If the sales go sour, and you still have credit to pay, the company will take away your entity.

Lastly, the amount you can borrow is limited. You can only get a particular amount of cash based on your asset worth. Hence, you need to know the value of your asset first so you can enjoy the benefits of this loan.

Business Lines of Credit vs. Small Business Loans

The business line of credit and the merchant cash advance are almost the same as they both use credit cards. The only difference lies in the usage. For MCA, debtors use credit cards to repay the provider. The line of credit, on the other hand, gives credit cards to approved applicants to refinance their companies. In other words, we use it as a regular credit card, but we use it for our businesses.

Because you are using a card to finance your small firm, you can access cash instantly and repeatedly. It’s a great advantage because you can borrow a few bucks using this service. Furthermore, you can get the funds whenever you need it. However, you must watch out for your expenses because  you might spend more than your budget.

Hence, if you have no control, then it’s best if you just get a small enterprise loan. With traditional funding, you can only spend what you borrowed.

When applying for this financial support, make sure you understand the rules and regulations of the provider. In that way, you don’t have to deal with future problems that may occur.

According to Forbes.com, there were 80% of entrepreneurs who sought after small business loans in 2015. Forty-five percent of the applicants were approved. This survey shows how easy and safe it is to get this loan. You only need to read SBA loan program reviews to know the credibility and requirements of the provider.

Do you want to know which SBA loan program is best for your business? Visit our website, CrowdReviews.com, and read our reviews on small business loans.

Our rankings are completely independent, transparent, and community driven; they are based on user reviews and client sentiment. These small business loans companies had to earn their way up and didn't just pay their way up.

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