Small Business Administration loans are a lot like “regular” bank loans with comparable rates and fees. So why get one?
The SBA loan usually requires a smaller down payment. Since the loan is guaranteed by the SBA, the financial institution will more readily award the loan. The payback term for a working capital loan can be up to 10 years. If you’re purchasing real estate, the term can be up to 25 years. Interest rates are reasonable. Longer terms translate into smaller payments. You can write off money paid on interest.
And of course, you’ve heard that time is money. That’s particularly true with your SBA loan application. Don’t have a lot of money in the equity of your small business? The SBA may look at the amount of time you’ve invested in your business, and consider your time to be equity.
Small business owners would be wise to get with the program. By the end of August 2019, the most common SBA loan program for small business owners (the three options in the SBA 7 (a) loan program, see below) had doled out $20.9 billion. The CAPLine financing program had loaned $255 million (for exporters, see below).
Want some of that loan money? Here’s what you need to know about the loans.
What is an SBA Loan?
It’s a common misconception the loan comes directly from the SBA. Not true. The loan comes from a bank that participates in the SBA loan program. A participating bank will often have specific loan officers who work with the program.
SBA loans are loans made to small businesses and guaranteed by the SBA. An SBA loan is issued by a participating lender approved by the U.S. Small Business Administration — and not by the SBA itself. So if you want to apply for an SBA loan, you have to find an SBA-approved lender.
Remember the SBA wants to help business owners. In fact, the SBA is dedicated to helping small business owners grow and improve their operations – and their bottom lines.
The SBA guarantees a percentage of the loans for the bank. That gives the lenders an important reason to favorably consider a loan application. It is because of this guarantee that SBA participating banks are more apt to loan money. You can get a loan even if you don’t fit the standard criteria for a loan.
Many banks, from large chains to neighborhood banks, are SBA-approved lenders. You can find out if your bank participates in the SBA loan program via a search on the SBA website.
Go to www.sba.gov. Search for approved lenders. You’ll also find a handy loan application checklist so you’ll be prepared when you sit down with lenders and ask for financing.
What are the Different Types of SBA Loans?
Before you begin the application process, find out about the various loan types that the SBA offers. There are many options. Among them, you should find one that is the best fit for your company. Research the various programs and determine which one fits your needs.
You can get a lump sum loan or a line of credit. The most popular types are the SBA 7 (a) loans. There are 3: the standard 7 (a) loans, the 7 (a) small loan, and the SBA express loan. The 7 (a) loan offerings are lump-sum loans. The SBA Express is a line of credit. A CAPLines loan is a line of credit, and one of the two most popular loans. The line of credit loan is used by small businesses that are seasonal, such as a contractor business or builder business.
However, the SBA has a number of programs. The full list of SBA loan types is:
Types of SBA Loans
Standard 7(a) Loan
Standard 7 (a) Loan has no minimum amount and can provide a maximum loan amount of $5 million. A business owner can use it for a variety of purchases, such as equipment upgrades. If you’re borrowing less than $25,000 for your business, you won’t need to provide collateral.
When the loan is higher than $25,000, the lenders require an amount of collateral by percentage comparable to the loan amount. If the loan is higher than $350,000, lenders must collateralize the amount.
In addition to your business financial records, you’ll be asked to complete paperwork specific to the SBA loan program. It’s worth it. Since the lenders know the loan is backed up to 85% by the SBA, there’s built-in security to providing the loan.
7(a) Small Loan
As it sounds, the SBA 7 (a) loan has a smaller maximum loan amount. The maximum in this 7 (a) loan program is $350,000. For loans up to $150,000 the SBA guarantees the loan up to 85%. For more than $150,000 the SBA guarantees the loan up to 75%.
The collateral requirements are the same as they are with the SBA Standard 7 (a) loans. Business owners report a slower application process but better repayment terms
Need a loan in a day and a half? The SBA Export Express is a line of credit up to a $350,000 loan. Small business owners can get the loan in 36 hours.
The SBA guarantee amount is lower at 50%. The loan is a revolving line of credit which most commonly must be repaid in 7 years. Borrowers may be able to get an extension.
Of all types of SBA loans, this one is the fastest with a turn around within 24 hours. Small businesses specifically dealing with exports can get up to $500,000.
The money can be used for a variety of purchases, such as equipment, real estate and inventory.
Export Working Capital
This SBA loan is tailored for small businesses that need funds specifically related to exporting. The loan program will provide up to $5 million of working capital. The repayment terms are strict, payback in one year or less.
The SBA International Trade Loan is a term loan specifically for financing assets and working capital for export business. The financing for this loan program is provided by GBC International Bank. The SBA guarantees the loan for 90% up to $5 million.
This SBA offering is basically a 7 (a) loan for Veterans and Veterans’ families. The business must be at least 51% owned by a Veteran, which includes active service members, spouses, widows and widowers of Veterans, active reservists and members of the National Guard.
The terms of fees and rates change annually in response to the health of the business climate. For example, in 2018, under the program, a borrower could get from $700,000 to $5 million, with a 3.5% guarantee fee. In the same year, for a loan up to $125,000, the SBA guarantee was 85% with no fees.
SBA CapLines loans are lines of credit. These types of loans are mainly used by a business that needs some working capital for a specific time of year.
The SBA has four kinds of CAPLiines loans: Seasonal, Contract, Builders and Working Capital.
The Seasonal loan is primarily used by a business that needs to bolster accounts receivable and inventory during a specific time of the year. An example could be a small ski lodge which needs to upgrade rental equipment and pay for snowmaking before the ski season begins.
The Contract loan, just as it sounds, is a loan typically used by a business that has been awarded a contract, but will need to pay for labor and material during the life of the contract. The business needs some funds to pay employees and buy materials until the business is paid. A Contract CAPLines loan could be used by a road paving company, which has been awarded a contract by a town or county. The road paving company won’t be paid for the work until it is completed, and needs a loan.
The Builders loan is another one that is aptly named. The loan is tailored for the independent general contractor or builder who needs to pay employees and buy material upfront. Think of a house builder who needs to buy drywall and pay drywall finishers as part of a house project.
The Working Capital loan is tied to the assets of the business. The business needs a loan until assets are converted into cash. The business repays the loan by selling those assets. An example could be an artisan who creates a product, such as paintings or artwork.
Microloans are very small loans from $500 to $50,000. An SBA microloan is obtained through an intermediary organization approved by the SBA, often called microlenders.
Who are these microlenders? Under this SBA loan program, the microlender can be an individual or private entity. The individual or entity receives the repayment of the loan principal plus interest.
The SBA microloans are structured and were created to assist a small business that is owned by women, veterans or minorities.
In one facet of the loan program, the SBA provides loans and grants directly to eligible non-profit microlenders. The non-profit microlender then provides SBA loans to a business that needs funds for start-up costs, training of employees or technical assistance.
The 504 Loan was also known as the Certified Development Company program loans. The loans are for financing the purchase of fixed assets. Fixed assets include real estate, buildings and machinery. The maximum loan amount is $5 million.
The Small Business Administration and lenders cooperate to keep the borrower’s costs as low as possible. The buyer needs a 10% down payment. The SBA kicks in 40% and the lender provides 50%.
As has been said, it takes money to earn money. In order to qualify for a 504 loan, the applicant must have a net worth of $15 million.
A business may qualify for a second 504 loan for manufacturing projects, especially energy-efficient projects.
Special SBA Loans
In addition to regular SBA loans outlined above, the SBA also has other types of loan programs for unique situations. These include Disaster Loans, Economic Injury Disaster Loan.
As the COVID-19 pandemic continues to unfold, a business looking for financing might opt for one of the SBA disaster loans. The loan amount is up to $25,000 and is designed to have quick turnarounds. A disaster loan is a solution to financing problems while you’re waiting to get a separate loan.
For more information, check out:
- Your Guide to the Economic Injury Disaster Loan
- FAQ: Paycheck Protection Program (PPP) Loans for Small Businesses
SBA Loan Type Comparison
|Loan Type||Maximum Amount||Description||Qualification|
|SBA 7(a) Loan||$5 million||Standard, for business purchases||Standard plus SBA forms|
|7(a) Small Loan||$350,000||Like the Standard, lesser amount||Standard plus SBA forms|
|SBA Express||$350,000||For a business in 36 hours||Standard plus SBA forms|
|Export Express||$500,000||For exporters need in 24 hours||In business for 12 months|
|Export Working Capital||$5 Million||For exporters, one-year term||Guarantee from owners|
|International Trade||$5 million||For fixed assets, working capital||Prove to create markets|
|Veterans Advantage||$5 million||The 7 (a) loan for Veterans||Biz 51% owned by Veterans|
|CAPLines||$5 million||Short term lines of credit||Signed contracts, assets|
|SBA Microloans||$50,000||For Women, Veterans, Minorities||Vets, women, minorities|
|504 Loan||$5 million||Financing purchase of fixed assets including include real estate, buildings and machinery||$15 million net worth|
Pros and Cons of SBA Loans
There are many types of SBA loans and that in itself lands on the Pro side. As a business owner, you’ve got a menu of choices for types of loans, the loan amount and lenders to approach.
Although the Small Business Administration actively promotes and supports its business loan program, some in the business world have a negative opinion about the SBA loans program. They say the path to financing is clogged with too many hoops.
Is that con unjust? Let’s take a look at the pros and cons of SBA loans.
The SBA 7 (a) loan program is the most common SBA financing tool. Since the SBA backs the SBA 7 (a) loans, lenders may more favorably consider financing the business application. The SBA 7 (a) loans have 3 forms, based on the amount sought from lenders and how fast the business wants to get the money.
Exporters have similar choices in types of loans and the speed in getting the money. With the CAPLines loans, the lenders provide a line of credit for a type of business that has peak times of operation. A business with a peak time could be a seasonal business or a business that depends on contract work.
On the plus side, lenders which participate in the SBA loans program are familiar with all the steps in the process. It’s the lender who collects information about your credit and makes sure your application package is complete before sending it to the SBA.
There are two complaints about SBA loans: a large amount of paperwork and interest rates.
Yes, more paperwork is required for SBA loans. The SBA paperwork is in addition to the standard information about the business, such as income and expenses, existing credit obligations and assets, such as real estate.
Interest rates for a line of credit loans such as the CAPLines loans range from 6.75 to 9.25%. Those loans also include a one-time guarantee fee which can range from 2 to 3.75%.
The lump-sum loans interest rates are tied to the prime interest rates, which in March 2020 was 4.75%. In the SBA loans program, the lump sum loan interest rate is a fixed rate based on the amount borrowed, plus prime.
As of March 2020, the interest rate for SBA loans was 8% for up to $25,000, or 12.75% in total. For $25,001 to $50,000, the SBA loans interest rate was 7%. For $50,001 to $250,000, the SBA loans interest rate was 6%. More than $250,001, the interest rate of SBA loans was 5%.
If you feel those interest rates are high, you may not have tried for a personal loan lately. In 2019, the interest rate for personal loans ranged from 12 % to 36%. To get the lowest rates, the applicant needed a credit score of 750.
Of course, interest rates for loans vary. For up-to-date checks of the SBA interest rates for loans, go to www.ssbalenders.com.
Are SBA Loans Hard to Get?
SBA loans can be hard to get because of a major Catch-22. In order to get an SBA loan, you must have tried for another type of loan but been refused. You must have the paperwork to be able to prove that happened.
The credit score minimum is currently 680, which is not set by the SBA. It is a number SBA participating lenders set for prospective loan applicants. If your credit score is lower, don’t bother applying.
The SBA loan program is only for US businesses that have been established for 2 years. The business credit and your credit must be excellent. There can be no history of loan defaults.
You’ll have to fill out additional paperwork beyond a typical loan application. For example, SBA 7 (a) loans include SBA form 1919. SBA form 1919 must be completed by all owners of the business. An owner is defined as anyone with 20% or more interest in the business. SBA form 1919 must also be completed by all officers and directors, managing members, and any person who is hired to manage the operation of the business.
Additional paperwork required for an SBA 7 (a) loan program includes the SBA form 912, which is a statement of personal history. This is basically a resume of a person’s education and work history. If the business is a sole proprietor, the SBA also requires form 413, which is a financial analysis of the proprietor.
For loans associated with an export business, a business applying for the SBA loans program may have to prove ventures. To apply for Export Express or International Trade loans, the business must prove it is expanding into new markets. The Export Working Capital loan requires a personal guarantee from all owners of 20% of the loan amount.
What Does it Take to Qualify for an SBA Loan?
To qualify for any SBA loans, you must have a credit score of at least 680. Although requirements vary by type of loan, you may need to put up collateral.
You’ll need to complete lots of paperwork. But you already have the nuts and bolts. For starters, you’ll need the same basic documentation, such as proof of income or business profit, and a list of assets.
The center of the paperwork for SBA 7 (a) loans is that SBA form 1919. For any of the SBA loans, you can get a head start by going to the SBA website and downloading the forms you need. The 7 (a) loans are the most common.
If you put in the time to qualify for an SBA loan, you’ll get a “timely” reward. Payback terms can range from 10 to 25 years.
Where to Get an SBA Loan
To get an SBA loan, you must start with an SBA approved lender. Check with your current bank, as it may already be approved for SBA Loans. You can find a list of approved lenders at https://www.sba.gov/lendermatch].
You can find a list of private investors willing to lend microloans by checking at https://www.sba.gov/partners/lenders/microloan-program/list-lenders].
Let’s review the process, step by step:
- Determine your eligibility by setting up a meeting with a bank loan officer.
- Organize all your paperwork. The main documents you’ll need are business financials, projected financials, a business profile, tax returns, your loan application history, and information about leases (if it applies).
- Draft a cover letter. The cover letter should explain the company identity and what it does. It should also include the background of the owner or owners.
- Fill out the SBA forms. A checklist of required forms for each type of loan is on the SBA website. The basics are Form 4 (the application); exhibit A, the schedule of collateral; Form 912, the statement of personal history; Form 413, your personal financial statement; and Form 159, the fee disclosure and compensation agreement. Those are the basic forms of all the loans. There may be additional paperwork specific to the type of loan.
- You’ll hear from the bank once the lender determines you pre-qualify.
- If you pre-qualify, you’ll get a proposal from the bank.
- If you accept the proposal, your loan will move to the underwriting stage. During this stage, the go through your information. You should hear in 2 weeks if they approve or decline the loan.
- Closing – the lender finalizes the terms of the loan and you sign the documents.
Try an SBA Loan
After going through the process, you will either agree or disagree with the following statement. “Applying for an SBA loan is time-consuming and complex.” But you will disagree with that statement if you are well prepared.
At your initial meeting with a loan officer, be clear about exactly what you are seeking in a loan. Then save yourself time and money by getting organized.
Are you ready to embark on the SBA loan program? There’s no time like the present, and you’ll never know until you try.