If you own a small business and are looking for financing options, you might want to consider SBA loans. These loans are partially guaranteed by the U.S. Small Business Administration and are offered by participating lenders such as banks.
Despite having strict lending standards, SBA loans can offer flexible terms and low-interest rates, making them an attractive option for small businesses.
We’re writing this post to help you understand how SBA loans work, what are the different types of SBA loans available, what each can be used for, and how you can obtain SBA financing for your small business.
What is the SBA Loan Program?
The Small Business Administration (SBA) is a government agency that partners with lenders to provide financing solutions for small businesses. Through its loan programs, the SBA offers financial assistance to help small business owners grow and expand their businesses.
The SBA's largest loan programs include the SBA 7(a), 504, and microloan programs and disaster loans that provide funding for businesses suffering an economic injury, such as during the COVID-19 pandemic. Additionally, the SBA introduced the Paycheck Protection Program (PPP) in 2020, providing financial relief to small businesses affected by the pandemic.
SBA loans offer terms and limits of up to 30 years and $5 million or more, making them an attractive option for small business owners seeking funding from banks and commercial lenders.
SBA-approved lenders typically offer these loans, backed by guarantees of up to 85% of the loan amount, which means the government pays the lender the guaranteed amount if the borrower defaults on the loan.
However, the SBA requires a personal guarantee as collateral from everyone with at least 20% ownership in a company, which puts their personal assets at risk in the event of default.
In addition to traditional SBA loans, the SBA also administers PPP loans, which provide financial relief to small businesses affected by the pandemic. The PPP reopened in 2021, with exclusive access provided to businesses with fewer than 20 employees for a 14-day application window.
Several other SBA loan programs are also available to small business owners even when PPP loans are no longer available.
This article will provide an overview of each program, help you identify which program is right for you, and guide you through the process of obtaining an SBA loan.
How Does the SBA Loan Program Work?
If you're looking for financing, you can apply for an SBA loan through a lending institution such as a bank or credit union. The lender then applies to the SBA for a loan guarantee, meaning that if you default, the government will pay the lender the guaranteed amount.
To minimize the risk for lenders, the SBA requires an unconditional personal guarantee from anyone with at least 20% ownership in the company. This guarantee makes you and your personal assets responsible for payments if your business cannot make them.
The government and personal guarantees reduce the risk for lenders, making them more willing to work with small businesses. Once approved for an SBA loan, your lender is responsible for closing the loan and disbursing the loan proceeds. You repay the lender directly, usually every month.
Types of SBA Loans, Loan Terms & Qualification Requirements!
The SBA provides a range of loan programs, such as SBA 7(a), 504, CAPLines, Export, Microloan, and Disaster loans. While the 7(a) and 504 programs are the most favored, the SBA's principal lending scheme is the former.
These SBA loan programs can be utilized for various business purposes, including working capital, equipment purchase, debt restructuring, ownership transition, and real estate acquisition.
To choose the most suitable program for your needs, it is recommended that you explore the specifics of each program.
SBA 7(a) Loan
Up to $5 million
To cover working capital, equipment purchases and business expansion expenses
SBA 504 Loan
Up to $5 million
To finance fixed assets, such as land or machinery
Up to $50,000
To fund working capital, inventory, supplies, and equipment
SBA Disaster Loans
Up to $2 million
To help businesses affected by declared disasters
Up to $5 million
To meet short-term and cyclical working capital needs
1. SBA 7(a) Loan
The SBA 7(a) loan is the SBA's primary lending program. These loans can be used for business expansion, working capital, and equipment purchases.
Loan amount: $25,000 to $5 million
Interest rates: 2.25% to 4.75% plus a base rate (Prime, LIBOR, or the SBA Peg Rate)
Repayment terms: Up to 10 years for working capital or up to 25 years for commercial real estate
Down payment: Approximately 10% of the loan amount
Operate as a for-profit company in the U.S. or its territories
Have reasonable owner equity to invest
Use alternative financial resources, such as personal assets, before seeking financial assistance.
2. SBA 504 Loan
SBA 504 loans are designed for real estate and equipment purchases, facility improvements, and modernization projects.
Loan amount: Up to $5 million
Interest rates: Pegged to the 5- or 10-year U.S. Treasury and total approximately 3% of the loan financing amount
Repayment terms: 10, 20, or 25 years
Down payment: Usually, 10% to 30%, varies upon the age of the business and use of funds
Operates as a for-profit company in the U.S.
Have a tangible net worth of less than $15 million
Have an average net income of less than $5 million after federal income taxes for the two years preceding your application
3. SBA Microloan Program
SBA Microloans provide up to $50,000 to small businesses for working capital, inventory, and equipment needs.
Loan amount: Up to $50,000
Interest rates: Vary by lender but are usually between 8% and 13%
Repayment terms: Up to six years
Administered by intermediary lenders, such as not-for-profit community-based lending organizations
Lenders typically require collateral and a personal guarantee from the business owner.
4. SBA Disaster Loans
SBA Disaster Loans offer financial assistance to small businesses affected by declared disasters, such as civil unrest and natural disasters.
Loan amount: Up to $2 million
Interest rates: Up to 4%
Repayment terms: Up to 30 years
Vary depending on the specific disaster loan type (Physical Damage, Mitigation Assistance, Military Reservist, or Economic Injury Disaster Loans)
Collateral and real estate requirements differ for each loan type
5. SBA CAPLines
SBA CAPLines provide a line of credit for small businesses to address short-term and cyclical working capital needs.
Loan amount: Up to $5 million
Interest rates: 2.25% to 4.75% plus a base rate (Prime, LIBOR, or the SBA Peg Rate)
Repayment terms: Up to 10 years
Must meet SBA 7(a) Loan requirements (operate for profit, have reasonable owner equity, use alternative financial resources)
Additional specific requirements for each CAPLine program
How to Apply for an SBA Loan?
Here are some tips to apply for the SBA loan in order to maximize the approval chances;
Ensure your business qualifies
For eligibility for an SBA loan, most lenders look for a minimum of two years in operation, robust annual revenue, and a decent credit score, typically starting at 690.
If your business is experiencing difficulties, an SBA loan may not be suitable. Certain ineligible entities, such as charitable and religious organizations, should not apply.
Select a lender
The SBA provides a useful Lender Match tool that connects prospective borrowers with lenders within 48 hours.
When applying through a conventional bank, it's advantageous to collaborate with one experienced in handling SBA loans. Inquire with potential lenders about the following:
The number of SBA loans they grant
How frequently do they fund SBA loans
Their staff's expertise in the process
The monetary range of the loans they offer
A bank with several years of SBA lending experience can better assist you, including estimating your likelihood of approval. However, banks adhere to SBA guidelines but utilize their underwriting standards when evaluating loan applications.
For instance, Live Oak Bank in Wilmington, North Carolina, held the title of the most active SBA 7(a) lender in the United States by lending volume during the 2022 fiscal year.
To be eligible for their SBA loan, you must demonstrate good financial health and provide both personal and business tax returns for the previous three years.
Assemble your application materials
Required documentation for SBA loan applications can vary depending on the loan type, but your lender should assist you in organizing the necessary paperwork.
Some documents you may need include:
SBA borrower information form
Personal history statement
Personal financial statement
Personal income tax returns
Business tax returns
Lease agreement, if applicable
One-year cash flow projection
The SBA loan approval process duration depends on the lender you select. With a traditional bank, the entire procedure—from funding approval—may take anywhere from 30 days to several months.
In a time crunch? The SBA offers another loan option called SBA Express, which aims to respond to loan applications within 36 hours. The maximum financing amount for this type of loan is $500,000, with the SBA guaranteeing up to 50%.
Pros and Cons of SBA Loan Program
Small Business Administration (SBA) loans are popular for small business owners who need financing to grow their businesses. However, like any financing option, SBA loans have advantages and disadvantages. Here are the pros and cons of SBA loans that small business owners should be aware of:
Pros of SBA loans
SBA loans offer competitive interest rates that are often lower than those of traditional loans. These rates are determined by the prime rate plus a markup rate and vary among SBA lenders.
Using NerdWallet's SBA loan calculator, you can estimate your monthly payments and determine how much you'll spend on interest based on different rates.
SBA loans have lower fees than many other financing options. These fees include an upfront guarantee fee and a yearly service fee based on the guaranteed portion of the outstanding balance.
There are no upfront guarantees or annual service fees for SBA 7(a) loans of $500,000 or less through September 2023. Additionally, there are no upfront guarantee fees on SBA Express loans to any veteran-owned businesses.
SBA loans have longer repayment terms than most other loans, giving you more time to repay the loan and freeing up more money for other business needs. You plan to use the money for real estate loans with a maximum maturity of 25 years.
Large loan amounts
SBA loans offer larger loan maximums than most other financing options, with the SBA 7(a) loan program offering a maximum loan amount of $5 million and the 504/CDC program offering a maximum loan amount of $5.5 million.
Cons of SBA loans
Hard to qualify
While the government guarantee reduces the risk for lenders, SBA loans are still difficult to qualify for. You must meet strict eligibility criteria, including having several years in business, strong business finances, and good credit history.
Slow to fund
Depending on the lender and SBA loan type you applied for, you apply for; it can take one to three months to access funds. The loan application process is detailed and requires extensive documentation, so if you need capital quickly, you may want to consider a faster small-business loan alternative.
Personal guarantee required
SBA loans typically require an unlimited personal guarantee from anyone who owns 20% or more of the business. Other business owners may also be required to provide a limited or unlimited personal guarantee. Additionally, you may need to put up physical collateral or offer a down payment to secure your SBA loan.
Small Business Administration (SBA) loans serve as a critical lifeline for small businesses, providing essential financial support to help them navigate the challenges of starting, growing, and sustaining their operations.
The SBA's various loan programs cater to diverse business needs, offering competitive interest rates, longer repayment terms, and lower down payments than traditional financing options.
While the application process may be rigorous, securing an SBA loan can be a game-changer for small business owners, unlocking opportunities for expansion, innovation, and economic growth.
By leveraging these loans, entrepreneurs contribute to the economic vitality of their communities, create jobs, and enhance the overall quality of life, ultimately strengthening the backbone of the American economy.
Frequently Asked Questions
Q: Can SBA loans be forgiven?
A: Only Paycheck Protection Program (PPP) loans from the SBA are eligible for forgiveness. PPP loans were designed to help businesses retain employees during the COVID-19 pandemic. The program ended on August 8th, and PPP loans are no longer available. Forgiveness depends on maintaining payroll and salary levels. The SBA offers resources to help business owners determine how much their PPP loan may be forgiven.
Q: What are the benefits of the SBA 7(a) loan program?
A: The SBA 7(a) loan program offers several advantages over traditional financing options:
Lower down payments to retain more cash in your business
Loan terms up to 10 years for working capital, ten years for equipment, and 25 years for real estate
Lower monthly payments
Long-term, fully amortizing terms with no balloon payments
Flexible collateral requirements
Loan amounts up to $5 million
Q: What are the benefits of the SBA 504 loan program?
A: The SBA 504 loan program offers:
Up to 90% financing, compared to 75%-80% for conventional loans
Competitive, fixed interest rates
Long-term repayment options
Bank partnerships with Certified Development Companies (CDCs) to simplify the application process
Q: Why is selecting an SBA loan lending partner crucial?
A: The right financial institution is essential for building a strong financial foundation and ensuring your business's future success. Select a partner that offers objective advice, customized solutions, and reliable guidance.
Q: What are the advantages of working with an SBA Preferred Lender?
A: Benefits of partnering with an SBA Preferred Lender include:
In-house approval for faster loan processing
A history of serving small to midsize businesses
Expertise and a diverse range of financial tools
Q: How do I choose between a conventional or SBA loan?
A: Consult with a Business Banking Lending team member to evaluate your options. Generally, SBA loans are better suited for businesses seeking loans under $500,000 and lacking significant cash reserves. SBA loans can include working capital and typically offer a 10-year amortization.
Q: What are the eligibility criteria for an SBA Loan?
A: Not all businesses can secure SBA financing. Ineligible businesses include financial institutions, life insurance providers, passive businesses, and speculative businesses.
To qualify, your business must:
Operate in the U.S.
Meet SBA size standards
Have a reasonable amount of investment equity
Demonstrate the ability to repay the loan
Q: What information is required to apply for an SBA loan?
A: To apply for an SBA loan, you typically need to provide the following:
Personal Financial Statement
Personal & Business Federal Tax Returns (last 3 years) for all guarantors and owners with 20% or more of the business
Year-to-Date Balance Sheet and Profit & Loss Statement (dated within 90 days of application for existing businesses)
2-Year Earnings Projection (if less than 3 years of historical statements are available)
Accounts Receivable and Accounts Payable Aging Reports (if required)
Financial information for any other businesses with borrower's controlling interest (last 3 years)
Uniform Franchise Offering Circular (UFOC) for franchise purchases
Purchase Agreement for real estate purchases
During the loan process, be prepared to provide additional information as needed. Your lender may request further documentation to clarify any gaps in the initial documentation.
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