What is a SBA Loan?

The Small Business Administration (SBA) is a federal agency dedicated to helping entrepreneurs improve their small businesses, take advantage of contracting opportunities, and gain access to small business loans. However, one common misconception is that SBA lends money to businesses. For the most part, that’s not true. The agency does not directly lend money to businesses. You actually get an SBA loan from a bank that participates in SBA financing. The SBA guarantees a percentage of those loans to the banks, so financial institutions have more incentive to lend money to small businesses because of this guarantee, bankers may be more willing to lend you money even if you don’t fit their strict credit criteria. But at many major banks, getting an SBA loan can still often be a complex and lengthy process that can take several months. Lenders will want to review your credit and financial statements and expect you to have collateral to secure the loan. So even with the government guarantee, many small businesses may not qualify for SBA financing.

If you would like to apply for an SBA loan, expect to complete an extensive loan application, plus provide documents such as financial statements, information on your collateral, a description of your business, and a statement of how you’ll use the loan proceeds. They will look for applicants with good credit, a solid business plan, collateral, and a demonstrated ability to repay the loan. You’ll also have to choose which SBA loan program you’d like to apply to. The most popular programs are the SBA loan which can be used for many general business purposes and the CDC/504 loan, which is most often used to purchase major fixed assets such as equipment and commercial real estate. If you are unsure which program is right for you, Fundera can walk you through your options and help you quickly determine if you might qualify for an SBA loan.

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Forms of Loan Programs

Secured and unsecured loans:

Loans can be secured or unsecured. An unsecured loan has no collateral pledged as a secondary payment source should you default on the loan. The lender provides you with an unsecured loan because it considers you a low risk. A secured loan requires some kind of collateral but generally has a lower interest rate than an unsecured loan. The collateral is usually related to the purpose of the loan. For instance, if you are borrowing to buy a printing press, the press itself will likely serve as collateral. Loans secured with receivables are often used to finance growth, with the banker lending up to 75 percent of the amount due. Inventory used to secure a loan is usually valued at up to 50 percent of its sale price. Although the SBA doesn’t actually loan money itself, it does provide loan guarantees to entrepreneurs, promising the bank to pay back a certain percentage of your loan if you’re unable to. Banks participate in the SBA program as regular, certified or preferred lenders. The most basic eligibility requirement for SBA loans is the ability to repay the loan from cash flow, but the SBA also looks at personal credit history, industry experience or other evidence of management ability, collateral and owner’s equity contributions. If you own 20 percent or more equity in the business, the SBA asks that you personally guarantee the loan. After all, you can’t ask the government to back you if you’re not willing to back yourself.

The Loan Guaranty Program. This is the primary SBA loan program. The SBA guarantees up to $750,000 or 75 percent of the total loan amount, whichever is less. For loans of less than $100,000, the guarantee usually tops out at 80 percent of the total loan. A Loan Guaranty Program loan can be used for many business purposes, including real estate, expansion, equipment, working capital or inventory. The money can be paid back over as many as 25 years for real estate and 10 years for working capital. Interest rates are a maximum of 2.75 percent if over seven years.

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Types of Loan

General Definition:

Money borrowed that is usually repaid with interest

Types of Loan:

The most common type of loans come from banks, which exist to lend money, so it’s no surprise that banks offer a wide variety of ways to fund a business’s growth. Here’s a look at how lenders generally structure loans, with some common variations:

Line-of-credit loans – the most useful type of loan for a small business is the line-of-credit loan. This is a short-term loan that extends the cash available in your business’s checking account to the upper limit of the loan contract. You pay interest on the actual amount advanced from the time it is advanced until it is paid back. Line-of-credit loans are intended for purchases of inventory and payment of operating costs for working capital and business cycle needs. They are not intended for purchases of equipment or real estate.

Installment loans – these bank loans are paid back with equal monthly payments covering both principal and interest. Installment loans may be written to meet all types of business needs. You receive the full amount when the contract is signed, and interest is calculated from that date to the final day of the loan. If you repay an installment loan before its final date, there will be no penalty and an appropriate adjustment of interest.

Balloon loans – these loans require only the interest to be paid off during the life of the loan, with a final balloon payment of the principal due on the last day. Balloon loans are often used in situations when a business has to wait until a specific date before receiving payment from a client for its product or services.

Interim loans – interim financing is often used by contractors building new facilities. When the building is finished, a mortgage on the property will be used to pay off the interim loan.

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Example of Long Term Financial Goals

One of your long-term financial goals is saving for your daughter’s college education, which is six years away. However, more recently your daughter decided she wants to attend a private high school, resulting in you tapping into your higher education savings. As long as you started saving when your daughter was young, you may have enough to cover both private high school and college or you could increase your savings now to pay for college. Experienced financial advisors can help you navigate unexpected events and tricky situations. Here are some other things to consider as you set your long-term goals.

Time value of money:

The time value of money is a key concept in finance and it is simply the increase in the amount of money as a result of interest earned over a period of time. Essentially, the earlier a person starts to invest, the greater the power of compounded interest over time.

Monitor your investments:

It’s important to check your investments regularly. We recommend personally reviewing your portfolio on a quarterly basis and meeting with your investment advisor at least twice a year. Manage your risks by making sure your chosen asset allocations are still in line with your overall goals. Make adjustments to your investments only when needed. One of the benefits of having an investment advisor is he or she can monitor your funds for you and recommend different investments when it’s necessary. Also, remember to revise your financial plan accordingly if your goals change or you identify new goals.

Withdrawing money from your retirement funds:

When you stop working and have reached your goal of retirement, you’ll need to figure out how much and when to withdraw money from your retirement accounts. There are some tax rules you need to follow as well. When you turn 59½ years old, you’re allowed to withdraw money from a tax-deferred retirement account like a IRA without a penalty.

The Ultimate Dream

The Ultimate Dream

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Establishing Long Term Loan Goals

There are short-term goals and long-term goals and some financial goals that fall in between. The distinction between the categories is usually related to the amount of time it takes to accomplish the goal and the financial commitment to achieve them. Short-term goals are achievable in the more immediate future and intermediate goals take slightly longer and more of a financial commitment. Long-term goals usually take more than five years to accomplish and require a disciplined saving and investing strategy over a long time period. The most important long-term financial goal for everyone is to save for retirement. For most people, this is the first priority over saving for any other goal. The first step is to develop good savings and investing habits and establish a financial plan when you’re young. If you start contributing to an employer’s plan or an IRA or Roth IRA as soon as you begin working, and consistently put money in those retirement accounts, you’ll be on the right track to accumulate enough money for your retirement years.

There are a few ways to become a disciplined saver and investor. Below we share a few long term goal examples:

1. Set up automatic investments to your retirement plans and investment portfolio to help you avoid spending your hard-earned money when you get a paycheck. When you don’t see money in your bank account, you won’t spend it. Instead, you’ll be saving for your goals and your investment account will grow in value over time.
2. Try not to be emotional about your investments and don’t jump in and out of your holdings when the market is volatile.
3. Monitor your investments and risk regularly, and make adjustments to your portfolio when needed.

Even the most disciplined investor can expect some bumps in the road like the loss of a job or a family member who becomes ill and requires care. Likewise, events that might seem far away initially can somehow sneak up on you.

Primary Obligation

Primary Obligation

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Your First Credit Card

Some are just too excited to turn of legal age, for it is when they are legally allowed to drink and party, be allowed to vote, and even be allowed of  finally getting a credit card.

Make sure you are ready for the responsibility of owning a credit card before you apply. Image taken from: Metroparent

Make sure you are ready for the responsibility of owning a credit card before you apply.
Image taken from: Metroparent

But how is that you are granted of a credit card without any credit loan, rating or whatsoever?

Well, there are companies who usually gives credit cards even to first-timers and these are the companies you should apply in.

Just because you are already of legal age would mean that you are already financially mature.  Credit cards when not used wisely tend to be a curse of evil for with just too many swipes, you are instantly in debt of so much money so you must prepare yourself with proper use and management.

Federal law requires that any young adult below 21 should have a verifiable income, and allowance from our parents are not considered.

Since it is your first time, you still do not have a credit history which will make it a bit hard for you to be approved right away because credit card issuers use credit history as basis of their judgement if you are to be approved of one.

Since Federal law would require you to have an income, it is best if you have a job, it doesn’t matter if it is a full-time or part-time job.  This way you have a stable and steady income coming in every month, assuring the credit card companies that you have money to pay whatever you are borrowing from them.  Without an income you could not be approved of your own independent credit card but they would suggest you having a joint application with someone who is earning like your parents.

If you are still in college then you might want to consider student credit cards.  Specifications of this type is right for you and you wouldn’t have the same problems with income, credit history and other demands of a normal credit card.

Student credit cards are available for teens who are still in college and would want to apply for a credit card.  Image taken from: Chegg Blog

Student credit cards are available for teens who are still in college and would want to apply for a credit card.
Image taken from: Chegg Blog

Do not be surprised or discouraged if you are denied of your application.  Even those people who already have establish credit scores and history are sometimes still denied of a credit card so what more of a first time applicant with no nothing.  Don’t take it personally, try to improve on the ways mentioned above and try applying again.  The right time, the right moment and the right preparation, you will be owning your own credit card.

Credit Card Options

There are a lot of different types of credit cards available for the different needs of a consumer.  Before you are to apply to any credit card company, make sure you know first what are your specific needs and which user you belong to.

There are three types of credit card user:

  1. General Consumer
  2. Small Business Owner
  3. Student

These 3 types of users are suitable for different types of credit card options.  Overall appearance may be the same for all three but terms, criteria and other specifications are different from each other.

General consumer categories are those who are for “normal credit cards”.  These are the basic types and the largest bracket in the market in terms of the available offers from credit card companies and issuers.

Student credit cards are obviously for people who are still enrolled in school.  This would mean that their income is limited and that availability of credit history is not sure.  Credit card companies give these students a chance for they see that these students are also prospect clients once they finish their degree and start working full time.

Student Credit Cards Image taken from: Credit Cards.Ca

Student Credit Cards
Image taken from: Credit Cards.Ca

Business credit cards is a unique type of credit card.  Business credit cards often have higher limit in credit lines for more expenses are done for it is used for capital, store renovations, purchasing an equipment and etc.  Unlike the General consumer type which is covered by the CARD act, Business credit cards are not.  This means that those who avail this type are not eligible in some consumer protections.

There are qualifications that are checked by the issuer if one wishes to apply for a credit card.

  • Credit History
  • Income & Assets
  • Debts & Liabilities

Credit history is checked by credit card companies when you want to apply for a credit card because this will be there basis on whether to approve you of one or not.  Credit history contains how you are in handling your expenses and payables.  If they see that you have made late payments then it will be harder for you to be approved of a credit card.  You are given a credit score from your credit track or record.  You can be graded of excellent, good, fair, limited or bad.

Credit history will be checked once you apply for a credit card.  Image taken from: Wall St. Cheat Sheet

Credit history will be checked once you apply for a credit card.
Image taken from: Wall St. Cheat Sheet

Income and assets are important because issuers sees these are sources of money you could use to pay off your debt.

Debts & Liabilities are also checked because these things affect your income and assets as well.  Even if you have a huge income and a great picture of assets, it is disregarded if the debts and liabilities are just of the same amount or even higher.

 

Revolving Loan

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Definition of a Revolving Credit. Image taken from: Dave Manual

If there is one word that can best describe the Revolving Loan, that word would be flexible.  A borrower has the power to decide when he or she wants to get money from the loan and even the time intervals which is not possible in other types of loans for they have fixed amounts and schedule of payment.

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Revolving Loan Fund is a flexible type of loan. Image taken from: Lincoln Electric

The greatest advantage of a Revolving loan is that you can access the account anytime you want.  You can withdraw from the loan at your own time and pace.  It does not have a fixed number of payments which is the total opposite of Instalment Loans.  A very popular example of a revolving loans is a credit card.  This type of loan allows it’s consumer to use the credit repeatedly like for a credit card, every month the card holder has a credit limit.  The borrower only pays the amount that he or she was able to use plus the interest of course.  Once you are approved of the loan you can re-borrow again and again without having to apply again.

The disadvantage of such is that it is only considered to be a short term type of loan so if you are searching for a loan that will give you ample time then this might not be the loan for you.

If you compare it to instalment loans, there are a number of points that Revolving Loan wins.

Your loan being able to be withdrawn in a manner you prefer is a big convenience because since it is pattered to you favour then you can easily set it up to where it is most convenient for you to settle the payment.

As mentioned earlier, the most famous example of this type of loan is a credit card.  You know how convenient a cash less transaction is and every month you just have to pay what ever amount you have purchased plus the banks interest and you don’t have to worry about going over board because you have a credit limit.

In a gist, remember that in a Revolving loan it is only suitable for short-term revolving.  If you compare it to a term loan, yes it may incur to a higher interest rate charge.  Interest rates could be fixed or variable.  Also, in Revolving Loan, loans can be tapped on after your payment has been made.  It does not have a fixed instalment payments and you can always repay ANYTIME.

 

 

Instalment Loan

An Instalment Loan can be summed up as a scheduled payment. It is a loan which is paid through a term like a set period of time.  Often times, the time frame of the loan is from a few months up to 30 years.

The benefit of an instalment loan is that you can do staggered payment.  Instead of having to pay back the money you borrowed for a short term, you can make installment payments which are lighter on the pocket.  This is more convenient that having to pay off a big amount of money one time big time.

The downside of the loan though is the interest rates.  You are allowed to pay it off little by little but a an additional payment caused by the interest rates added to your monthly payment.

Still, instalment loans are a big help to middle class families for example they want to purchase a house and they could only spent up to this much a month and the rest goes to their savings, then they could use that amount and pay monthly for the house until they get to pay the full amount of the house they bought.  This way, you are able to follow your budget and even put some money aside because you are not forced to use everything that you have just to be able to purchase.

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Amortization Schedule for Monthly Payments Image taken from: Echecktrac Loan Software

If you search it off the internet, you could find the long list of instalment loans you could avail depending on your needs.  There are types of instalment loans that will help you buy a house, or some that will support you when you buy your car.

Instalment Loans is also useful for emergency purposes.  Knock on wood but for example you got hospitalised and you do not have enough money to settle the hospital bill and fees then you can use your credit card to pay the bills and just repay it through time.  This is good because if you are need of instant money for emergency cases like such or other unexpected expenses then a credit card with an instalment loan feature can back you up.

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You can use a loan that can pay your purchases through a scheduled terms payment and not all at once. Image taken from: Sterling Finance Company

If you are interested in such, you can read further about the instalment loan requirements and where you can apply.  There are also a lot of banks that offer such program so all you have to do is choose the best deal there is.  Select from the wide range types and for sure there is one that will match your need.

Subprime Credit Cards

Some people may have inferior or substandard credit scores from their credit history and usually the type of credit card given to them is the Subprime credit card.  This type of credit card has usually extra fees and gives a relatively low credit margin.  Subprime credit card usually incurs a much higher interest rate compared to credit cards issued to primary clients.  There were some events that has happened in the past that made this type one of the most controversial type of credit cards.  There were instances wherein a borrower was not aware of all the fees he or she was required to pay.  This type is also not that friendly for at times, when late payment is made, this triggers the interest rate to boost really high making the cardholder exceed his/her credit limit.

 

Subprime credit cards are usually given to people with substandard credit scores.

Subprime credit cards are usually given to people with substandard credit scores.

Picture taken from: (http://www.lowcards.com/data-shows-consumers-subprime-credit-scores-7937)

 

There are factors to consider when you want to apply for a Subprime credit card.  You are qualified to being a subprime when, first, you have insufficient income.  Usually lenders will ask for a written document that will prove that the borrower will be able to afford the proposed loan although this will mean that the debt to income ratio may be adjusted higher.  Second factor is the borrower’s employment.  Having an unsteady employment will make one subprime because for most people income is dependent to the borrowers job or employment.  Third is the event of having insufficient collateral.  Some subprime lenders will allow unsecured credit borrowing.  Lastly, for many banks, the winning key factor is the borrower’s credit score.  Damaged credit history will hinder a borrower from obtaining a normal credit card but will more likely be approved of a subprime credit card.

Since subprime credit cards are for people with bad credit, usually the fees are higher as mentioned earlier as well the interest rate.  This is because having a bad credit will mean more risk for the bank or lender to be paid by the borrower for their assurance of being paid is based on a borrower’s credit score.

 

Credit Card Lenders Embrace More Subprime Consumers.

Credit Card Lenders Embrace More Subprime Consumers.

Picture taken from: (http://blog.equifax.com/credit/credit-card-lenders-embrace-more-subprime-consumers/)

 The banks that offer subprime credit cards are usually the smaller type of banks.  The list of banks that offer such type of credit line are Capitol One Visa, Monument Visa, Vanquis Visa, Aqua MasterCard, MBNA SubPrime Mastercard and many more.  The list is not limited to those banks that were mentioned.  You can easily search in the Internet the banks that are willing to give subprime credit cards.