SBA loans may help you start or grow your business with loans that carry lower interest rates, low down payments and favorable terms. Except for Disaster Loans, the SBA doesn’t make small business loans. Individual lenders make SBA loans, which are typically guaranteed in part by the U.S. Small Business Administration (SBA), a federal government agency.
The SBA was created in 1953 and is a U.S. federal government agency tasked with providing access to capital, along with counseling, exporting and contracting expertise for entrepreneurs. SBA loans are just a part of what it offers. Small business owners can also get free counseling through resource partners such as Small Business Development Centers, SCORE, Veteran’s Business Outreach Centers and Women’s Business Centers. It also provides assistance and expertise for businesses that want to qualify for government contracts or export to other countries. It is funded by taxpayers through Congressional appropriations. That means your tax dollars help it help small business owners, so be sure you take advantage of what it has to offer.
Why consider an SBA loan? In short, because it’s probably going to be one of the best business loans for small businesses you can get. SBA loans are considered good business loans, with small business-friendly terms. Here, you’ll learn about the types of SBA loans and why you should consider this popular type of funding for your small business.
The SBA helps small businesses get loans, either directly through the Disaster Loan program or indirectly by guaranteeing a significant portion of an SBA loan made by a participating lender. The guaranty helps reduce the risk to the lender. The SBA sets detailed standards that these loans must meet. If the lender has followed SBA guidelines and the borrower defaults, the SBA will pay the guaranty amount to the lender. (The SBA then may try to collect from the borrower, and being a federal agency it has some significant collection powers.)
The biggest draw: SBA loans offer low interest rates. “The rates are amazing,” says Bob Coleman, publisher of The Coleman Report, the leading SBA intelligence report for lenders. “For a patient entrepreneur who has her ducks in a row and is willing to go through the process, it’s a lot cheaper capital,” he explains. Interest rates may be fixed or variable, and are pegged to the prime rate, the LIBOR rate, or an optional peg rate. The SBA sets a maximum interest rate that may be charged, but beyond that, interest rates on SBA loans can often be negotiated between the borrower and the lender. SBA loan interest rates vary by program.
The most popular type of SBA guaranteed loan. These loans may be used for a variety of purposes including new construction, expansion or renovation, or to purchase land or buildings; to purchase equipment, fixtures, leasehold improvements; working capital; to refinance debt for compelling reasons; for a seasonal line of credit, inventory or starting a business.
Terms
The maximum loan amount is $5 million. Most 7(a) loans offer maximum 10-year repayment periods, however, loans for equipment may extend to 25 years (or useful life) and real estate loans may also have repayment periods of up to 25 years.The Paycheck Protection Program (PPP) falls under the 7(a) program and was created by The CARES Act to help businesses impacted by the coronavirus crisis. Congress allocated funds for this program that lends small business owners up to $10 million based on payroll costs. Loans are made by participating lenders, not the SBA. If funds are spent properly, the PPP borrower can apply for loan forgiveness through its PPP lender, and may qualify to have the entire loan forgiven. The PPP loan program is now closed to new applications.
These are smaller loans (up to $500,000) with a faster turnaround for approval. They are currently the most popular SBA loan program in terms of total amounts funded. Both term loans and lines of credit are available under this program. These loans may be used for the same purposes as 7(a) loans.
Terms
For term loans, the repayment period is the same as 7(a); lines of credit (LOCs) may go up to 10 years including a term out period where no additional funds can be drawn.This program provides small businesses with long-term, fixed-rate financing used to acquire fixed assets for expansion or modernization. Loans are made through partnership with a non-profit Certified Development Company (CDC) and a private lender. They are typically structured where CDC provides 40% of total project costs (and the SBA guarantees that portion of the loan), the lender covers up to 50% and the borrower contributes 10-20%. These loans can be great for acquiring owner-occupied real estate. (The owner must occupy 51% or more of the property depending on the type of loan.)
Terms
There is no total maximum project loan amount, but the maximum SBA loan amount (debenture) is $5 million. (Certain energy projects or small manufacturers may qualify for up to $5.5 million.) Loan repayment periods are 10-25 years.These smaller loans are made by non-profit community-based organizations. Loan proceeds may be used for working capital, supplies, machinery and equipment, fixtures, etc. They may even be used to refinance debt to improve cash flow. (And some lenders make SBA microloans to startups.)
Terms
The maximum loan amount for the SBA Microloan Program is $50,000 and the average is about $13,000. They will be made for the shortest term possible, up to 6 years.The SBA Disaster Assistance program offers loans to qualified businesses to help them recover from a federally declared disaster. Business Physical Disaster Loans can be used to repair or replace disaster-damaged property owned by the business, including real estate, inventories, supplies, machinery and equipment. Note businesses of any size may be eligible. Economic Injury Disaster Loans (EIDL) are working capital loans to help small businesses and non-profits meet financial obligations that can’t be met as a direct result of the disaster.
Terms
The maximum loan amount is generally $2 million. The maximum term is 30 years (7 years if credit is available elsewhere.)The Economic Injury Disaster Loan program was extended nationwide in March 2020 to help businesses impacted by coronavirus pandemic. These loans are available to qualified small businesses including certain nonprofits and agricultural businesses. The CARES Act added the EIDL grant or advance of up to $10,000 (implemented as $1000 per employee) and later legislation added a Targeted EIDL grant of up to $15,000. EIDL advances (grants) do not have to be repaid, but EIDL loans are currently not eligible for forgiveness. Businesses (and eligible nonprofit organizations) may apply for these loans at SBA.gov. Read FAQs about EIDL due to COVID-19 here.
These loans are designed for U.S. small businesses engaged in or preparing to engage in international trade, as well as those hurt by competition from imports. The borrower must demonstrate they will use this financing to significantly expand an existing export market or develop new export markets, or that the business has been hurt by import competition and proceeds will be used to improve its competitive position.
Terms
The maximum loan amount is $5 million. Repayment terms are the same as 7(a) loans: borrowers have up to 10 years to repay the loan, but up to 25 years of useful life for equipment or real estate.These are short-term, working-capital loans for exporters, typically in the form of a revolving line of credit. Proceeds from export loans may be used for a variety of purposes, including to purchase inventory for export or to manufacture items for export, working capital directly related to export activities, and even refinancing.
Terms
This program allows loans of up to $5 million with maximum terms of 1, 2 or 3 years.These loans, which come in the form of term loans or revolving lines of credit, can be used for “any export development activity” including fixed assets, refinancing and working capital. Designed to be more streamlined with reduced documentation requirements, the SBA provides an answer in 36 hours or less. (Funding will take longer.)
Terms
The maximum loan amount is $500,000 with terms of up to 7 years for lines of credit or up to 25 years for term loans.This pilot loan program offers loans through mission-oriented lenders, which are usually nonprofit financial intermediaries focused on economic development. There is a focus on business owners in underserved markets.
To qualify for an SBA loan, there are basic requirements you generally must meet:
There are other requirements that a business must meet. You don’t have to be a citizen, for example, but undocumented business owners aren’t eligible. And if you’ve ever defaulted on a federal loan (including a federal student loan) it’s going to be much harder to qualify. Those with criminal records aren’t automatically disqualified, but you will have to provide additional information.
First, don’t let the requirements of SBA loans scare you off from considering one. Think of SBA financing as you would any other conventional loan.
“It’s a regular loan and the entrepreneur never deals with the government,” explains Coleman. “The bank lends out its own money and the loan is serviced by the bank.”
Second, understand that while each lender must meet SBA minimum requirements in order to collect the SBA guarantee if needed, lenders may also have their own requirements. One lender may require two years in business for some loans, while another may not.
Tip:
Just because you can’t get approved for an SBA loan through one lender, that does not necessarily mean you can’t get approved through another.“It’s very competitive,” says Coleman. “There are a lot of lenders out there willing to make these loans. The entrepreneur has a lot of choices of which lender to work with.”
You don’t need to know all the ins and outs of the SBA loan program to apply for an SBA loan. All you need to do is to focus on finding an SBA lender to work with. While the SBA sets minimum standards, individual lenders may impose additional eligibility requirements, as long as they don’t discriminate on a prohibited basis. That means you may find one lender requires higher personal credit scores than another. Or a lender may not work with businesses in certain industries, while another lender will. In other words, you’ll shop for an SBA lender just as you would shop for other types of loans.
Business owners often wonder if there are SBA programs for their individual situations. Here are some common inquiries from entrepreneurs looking for this type of financing.
While there are no SBA loan programs specifically for women, the U.S. Small Business Administration does have a number of programs to support women-owned businesses. Female entrepreneurs can certainly apply for SBA loans and they may also want to explore the 8(a) Business Development Program for disadvantaged businesses. In addition, free resources and help for growing your business is available through Women’s Business Centers.
The Patriot Express program and 7(a) Veteran’s Advantage, loan programs specifically for veterans and other members of the military have expired, but the SBA continues to support veteran-owned businesses. Veterans can apply for SBA loans, of course, and receive free support and training through Veteran Business Outreach Centers. If an SBA loan isn’t the right fit, it is worth exploring other loan programs for veterans.
As part of the CARES Act, Congress permanently waived guaranty fees for certain SBA loans. For all SBA Express loans to veteran-owned small businesses approved on or after March 27, 2020, the upfront guaranty fee will permanently be zero.
While there are no specific SBA loan programs for minorities, those business owners can take advantage of free mentoring and educational programs through Small Business Development Centers (SBDCs) and SCORE. Consider the SBA loan programs detailed here and explore the 8(a) Business Development Program for disadvantaged businesses.
And of course, start building business credit as soon as possible so you’ll have more financing options available as your business grows!
At EcoCredit, our specialists will negotiate on your behalf, calling upon consumer protection laws and our long-standing industry experience, to help rebuild your financial standing and liberate you from the restraints of poor credit.