SBA loans are a fantastic resource for American small businesses. These specialized loans are issued by U.S. Small Business Administration (SBA) through approved lenders to provide entrepreneurs and small businesses the capital they need to thrive. The SBA provides several different types of loans, each with distinct advantages. Some of the SBA’s loan programs also have restricted use cases, but the most popular program, the 7(a) loan, offers impressive versatility for covering business expenses. That means SBA loan funds can be allocated and applied in thousands of ways to fit the needs of each unique business.
To help give you an idea of how you can use an SBA loan, Visa Business Plans is taking a closer look at four fantastic options for U.S. small businesses looking to enhance their operations, accelerate growth, or compete effectively on the global market.
If you want to learn more about the different SBA loan programs, check out our in-depth reference guide here.
Hiring More Personnel
When small business owners consider hiring new employees, SBA business loans probably aren’t what comes to mind. But business loans are made to facilitate growth, and hiring employees is often an integral component of expansion. Unfortunately, hiring is also costly; approximately 65.3% of small businesses operating in the United States in 2022 are thriving and turning a profit, but the rest are breaking even or losing money. This makes it difficult for many to absorb the cost of hiring an employee without getting some additional cash influx. Even small businesses that have the cash on hand to hire may not want to risk tying up capital when other opportunities (or obstacles) may be on the horizon. For these reasons, 80% of U.S. small businesses have no employees at all, while 16% have 1 - 19 employees and only 4% have between 19 - 499 employees.
That’s why SBA loans can be of great use for small businesses looking to add new personnel. SBA loans are federally-backed and more accessible to the average small business because the U.S. government will cover a portion of the lender’s losses should a borrower fail to repay (default). This guarantee allows lenders to loan to borrowers who have riskier profiles and lower credit scores. In this way, small businesses that otherwise couldn’t afford to hire employees to expand operations can get access to the funding they need to grow their staff and thrive.
Even once staff is hired, training employees adds additional costs. The Society for Human Resources Management (SHRM) reports that the average cost per hire in 2022 was nearly $4,700. However, many employers estimate the total cost to hire a new employee can be up to three to four times the position's salary; that means a position paying $50,000/year could cost an employer up to $200,000 to fill! That kind of price tag makes hiring skilled employees prohibitively expensive for many American small businesses.
However, 60% of those hiring expenses are indirect “soft costs,” including time investments from management and employee training, along with other HR-related aspected of the hiring process. While these costs may be indirect, that doesn’t mean they aren’t essential to a company’s performance. Specifically, training is critical for building employee engagement, productivity, and retention. According to IBM, 84% of employees in best-performing organizations receive the training they need, whereas, at the lowest-performing organizations, only 16% of employees receive adequate training. Additionally, Gallup reports that companies making strategic investments in employee development have 11% greater profitability and are twice as likely to retain their staff members.
In 2021, small companies spent an average of $341,505 on training costs, while medium businesses spent about $1.3 million. Despite the cost, SBA loans make adequate training for both new and existing employees accessible to small business owners across the nation.
Purchasing Equipment and Supplies
Every company requires some sort of equipment or office supplies, some of which may be far outside of a business owner’s budget. As a small business example, the laundromats and dry cleaners industry is currently valued at $11.17 billion, and it employs over 50,000 workers throughout the nation. Yet, in order to function, laundromat and dry cleaning companies need commercial laundry machinery, equipment, and computer systems. According to NorthOne, each commercial washer and dryer costs between $800 and $2,600, and a typical laundromat has between 40 and 100 of these machines, leading to total equipment costs of $32,000 to $260,000. Commercial washers and dryers are designed for frequent use and typically last 10 to 15 years, but maintenance and repair can cost up to $500 per service call. In addition, while old-school coin-operated laundry is still around, this industry is updating to the modern era by utilizing card reader systems that increases convenience and access for customers. In order to stay competitive, small operators may want to add similar card reader functionality, an upgrade that can cost up to $80,000.
The term ‘heavy-equipment’ is most associated with sectors like manufacturing, agriculture, and construction, but SBA loans can help small businesses in several different industries to fund the purchase of necessary equipment, machinery, and supplies. From retail to restaurants to transportation, SBA loans help small businesses to not only source the equipment they need to function, but innovate and remain competitive.
Finally, an SBA loan can be used to purchase an existing business or open a franchise. Importantly, there are a few caveats.
When purchasing a business with an SBA loan, the SBA will thoroughly evaluate profitability and likelihood of loan default. In general, applicants should ensure any business they are purchasing with an SBA loan has been evaluated, is profitable, and has been established for at least two years. The SBA will also want to know what type of business the applicant will buy to determine if it’s likely to continue turning a profit. Additionally, an applicant must purchase 100% of the business. Partial equity, earn-outs, and employment arrangements are generally prohibited by the SBA.
SBA loans can also be used to open a franchise, however, applicants must meet certain requirements to receive the funding. First, the franchise must be SBA-Approved; to see which franchises are approved by the SBA, check out the SBA franchise directory. SBA loans are meant for small, independent businesses, so applicant franchisees must meet the correct size requirement. The SBA takes into account factors like revenue, number of employees, net worth, and income to determine the size of the franchise. The SBA will also thoroughly review both the applicant franchisee and franchisor, considering factors like the franchisor's industry experience, brand establishment, and financial strength.
Ultimately, while business acquisition is always a fairly intensive process, SBA loans make it more accessible to current and prospective small business owners.
The SBA knows that every business is unique, each greatly impacted by contextual factors like location, history, competition, and employees. That’s why the SBA provides versatile loans that can be used for a variety of purposes. But no matter what your intended use of SBA funding, every applicant must provide a comprehensive business plan that outlines what their company will do and why it will be profitable. Visa Business Plans is here to help create the solid business plan you need to see your SBA loan approved. Contact us today for your free consultation!
Visa Business Plans is led by Marco Scanu, a certified coach from the University of Miami with a globally-based practice coaching Fortune 1000 company executives, entrepreneurs, as well as professionals in four different continents. Mr. Scanu advises clients on turnaround strategies and crisis management.
Mr. Scanu received a bachelor’s degree in Business Administration (Cum Laude) from the University of Florida and an MBA in Management from Bocconi University in Milan, Italy. Mr. Scanu was also a Visiting Scholar at Michigan State University under the prestigious H. Humphrey Fellowship (Fulbright program) with a focus on Entrepreneurship, Venture Capital, and high-growth enterprises.
At present, Mr. Scanu is the managing partner and CEO at Visa Business Plans, a Miami-based boutique consulting firm providing attorneys and investors with business planning services in the areas of U.S. and Canadian immigration, SBA loans, and others.