What Is an SBA Loan?

The U.S. Small Business Administration’s mission is to help Americans who have the desire and passion to be entrepreneurs start, build, and grow their businesses successfully. The Small Business Administration (SBA) is not the lender, but a government agency that provides business loan program guarantees of up to 85% of the amount provided through an SBA-approved lender.

SBA loans provide low-rate and long-term funding solutions with some of the lowest interest rates that a business owner like yourself can take advantage of. Why? Well, SBA loans offer far less risk to lenders, which is part of the reason small business owners seek this option.

The three main SBA programs provide financing that can be used for many purposes, such as working capital, equipment, and inventory refinancing debt. These three SBA loans include the 7(a) Loan Program, the Small Business Microloan Program, and the CDC/504 Loan Program.
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Who Can Qualify for an SBA Loan?

While the application and approval process may be complicated and lengthy for an SBA loan, many businesses, including small and new ones, have a good chance of approval because of the nature of the program: to support the American entrepreneur.

So what is involved in getting an SBA loan? Your qualification often primarily hinges on your, as the business owner, personal credit score. It is not the final decision maker, but it is a very important factor. This product is only for business owners with the strongest of credit and credit histories who do not need immediate financing.

You must be prepared and be able to put together a quality, thorough application that will require time, energy, attention, and documentation. This will ensure a speedy decision and approval, but you should still expect it to take weeks, not days. SBA loans aren’t a quick cash flow solution — so it’s important to know this going in. There’s a wide range of alternative lending solutions for a business loan

How to Choose the Right SBA Loan Program

There are many different options out there. However, these three programs are considered to be the most popular:

  • The 7(a) Loan Program – The choice for businesses looking to access working capital or startup their business.
  • The Small Business Microloan Program – Through this program, the SBA works as a third party to loan money to an intermediary nonprofit lender. From those lenders, startups and small businesses receive small loans of up to $50,000 to run their company.
  • The CDC/504 Loan Program– This program provides long-term, fixed-interest rate financing to small businesses that are trying to expand or modernize.

7(a) Loan Program

When small business owners are looking for their first SBA loan, they often end up with a 7(a) loan program. This type of loan is considered general purpose small business loans, which gives them a lot of flexibility with how they can be used by a small business. A 7(a) loan program is ideal for a wide variety of businesses and purposes, which is why it’s often the first type of SBA loan that a business owner may seek. However, there are some candidates that may not be a fit.  Business owners can’t use this type of SBA loan to pay delinquent taxes, buy out a business owner, or reimburse a business owner for arrears or expenses.

There are also several sub-programs within the 7(a) loan program that gives borrowers more to work with. Here are some of the sub-programs that fall under the 7(a) category.

  • SBA Express
  • 7(a) Small loan
  • Veterans Advantage
  • Export Working Capital
  • Export Express
  • CAPLines

The interest rate for a 7(a) loan is some of the most affordable you can find. The maximum interest rates that a lender can offer are guaranteed by the SBA. Individual lenders offer rates that are based upon a borrower’s qualifications — while still being subject to the maximums provided by the SBA. Typical repayment periods are anywhere between 7-25 years, with real estate being on the longer end. Working capital tends to be what encompasses the shorter end of the repayment spectrum.

SBA Microloan Program

This type of SBA loan program works best with small businesses with extremely high startup costs or overhead. The SBA Microloan Program can help businesses that may be looking to borrow smaller amounts of money for working capital rather than hundreds of thousands to millions of dollars.

Traditional bank loans from banks are very difficult for small business owners to obtain, especially if the amount is less than $50,000. Those looking for various types of working capital don’t typically need to borrow massive amounts of money. That’s where microloans come into play.

While we did state that the SBA is not a lender, the SBA Microloan program is an exception. Funds for this type of SBA loan do indeed come from the SBA. These loans can be used for a wide variety of purposes as well, including advertising, marketing, purchase materials, payroll. Although the SBA Microloan Program offers a lot of diversity in regards to how it can be spent, it can’t be used to purchase real estate or refinance debt.

This SBA loan option is perfect for business owners that could see a significant impact from lending less than $50,000. Most of the time, the SBA Microloan Program requires some sort of collateral on the loan along with a personal guarantee. However, the personal credit score requirements are fairly lenient at around 600.

The SBA Microloan program has much shorter terms than other types of SBA loans and can have terms of up to six years with a fairly average interest rate.

SBA CDC/504 Loan Program

If you’re looking for significant funds to expand or need a more long-term funding solution, a CDC/504 loan may be the right choice. As you may imagine, the process and qualifications for SBA loans of this nature are far more involved and complicated, requiring multiple parties for a much longer and tedious undertaking.

Note: 504/CDC SBA Loans have no set maximums.

Breaking down the 504/CDC foundations can be a bit complex due to the big-budget nature of the financing. A bank typically funds up to around half of the project’s costs, while a nonprofit associated with the SBA finance around 40%. The remaining capital for the SBA loan comes from you, usually as a cash down payment. If you take a step back and look at the borrowing structure, it becomes clear that you’re taking out two separate loans. The CDC portion which is affiliated with the SBA is subject to the SBA loan risk guidelines, however, the chunk of capital that comes from the bank is not.  Banks may charge their own interest rates for their piece of the SBA loan — while the CDC is restricted to fixed interest rates.

The 504/CDC SBA loan option is typically ideal for a minority of business owners who are looking for commercial real estate options (that you plan on occupying over half of), need to purchase equipment, or are looking to complete costly renovations.

It’s not easy to qualify for this type of SBA loan. Excellent personal credit scores and stipulations regarding creating jobs are required, along with public policy goals. It’s important to have the basics down before attempting the time-consuming and strenuous process of attaining this type of SBA loan.

How to Apply for an SBA Loan

Some application processes are simple and fast. That is definitely not the case with an SBA loan. The application is lengthy, the documentation required is thorough, and if you miss anything you have to start over again. To be sure you include all of the pieces that the SBA requires, here is a checklist of the areas that are considered by the SBA when your application is in the process of getting approved:

Business Plan

You must have a plan in writing that describes the intended use of the money you are requesting and the overall plan for the business. The SBA offers a free business plan guide to help you. It is recommended that you use their business plan or at least compare yours to the one that they provide to ensure you cover everything that they require. Even if yours is an incredibly detailed plan, if you are missing a piece that the SBA considers crucial, your loan application will be rejected and you will have to resubmit it.

Are SBA Loans Hard to Get?

It’s important to know that getting an SBA loan is NOT Easy. Make no mistake about it; getting an SBA backed program will require significant time, documentation, energy, and commitment to get funding for your business. The qualifications for SBA loans are not easy to meet and typically go to those with great creditworthiness.

SBA loans can also take longer than alternative lending solutions, ranging anywhere between 4-6 weeks to be processed. There are several other loan options for businesses looking for quick cash flow, but SBA loans are ideal for borrowers that don’t need funds right away.

How to Apply for an SBA Loan

Some application processes are simple and fast. That is definitely not the case with an SBA loan. The application is lengthy, the documentation required is thorough, and if you miss anything you have to start over again. To be sure you include all of the pieces that the SBA requires, here is a checklist of the areas that are considered by the SBA when your application is in the process of getting approved:

  • Your business must be physically located in the U.S.
  • Your business needs to operate legally and be officially registered as a for-profit business
  • As the business owner, you must have invested your own equity (time or money) into the business
  • You must have exhausted all other financing options and are unable to receive capital from other financial lenders
  • Small businesses are the only size that qualifies, and that size is dependent on the industry

How Much Down Payment Do I Need for an SBA Loan?

Two SBA loan types require a downpayment. Both the SBA 7(a) and CDC/504 loan programs require a down payment equal to 10% of the total borrowed amount. Other types of SBA loans don’t require a down payment but are more difficult to obtain.

Relative to other loan options,  SBA loans have some of the lowest costs on the market. This is especially true for those looking to purchase real estate, buy another business, or make necessary renovations for your business. If you’re looking to obtain a business loan and you decide than an SBA loan is right for you, be prepared to provide a down payment.

Business Plan

You must have a plan in writing that describes the intended use of the money you are requesting and the overall plan for the business. The SBA offers a free business plan guide to help you. It is recommended that you use their business plan or at least compare yours to the one that they provide to ensure you cover everything that they require. Even if yours is an incredibly detailed plan, if you are missing a piece that the SBA considers crucial, your loan application will be rejected and you will have to resubmit it.

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Amount and Use of Funds

You must determine how much you are looking for, how you came up with that exact amount, and describe the use of the money needed for the business. Remember, it must be for a business purpose. Spreadsheets are a great way to show each section of your funding needs and, using the formulas provided, ensure that your numbers are accurate.

Credit History

To put it simply, you MUST have a strong personal credit history for the SBA to consider you for approval. SBA loans are not for those struggling with poor credit score, so before you go through the arduous approval process — make sure that your personal credit history is sound.

Financial Statements and/or Projections

Depending on the type of SBA loans or program you are applying for, you will either have to provide financial projections for a start-up business or financial statements like tax returns, Profit and Loss, or balance sheets for established businesses.

Collateral

Most lenders offering SBA loans require other assets that you must put up as collateral such as a home, financial accounts, inventory, or other property you own. This is not required for every loan, but it may come up in the application process and you should be prepared for it.
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Industry Experience

It is not required that you have industry experience, but it is helpful if you and/or your management have experience in the field. The SBA wants to know that their money is going toward someone who knows what they are doing and has a good chance of success.

Whether you’re looking to buy real estate, pay staff, or even purchase another business — SBA loans have some great option to consider. The Small Business Administration helps open up loans for businesses that need it most with some of the most affordable interest rates on the market. Lenders and borrowers can both rest easy with the guarantees associated with an SBA loan.

The fast, convenient and straightforward way to get the money you need for your business – now! Get your Quote Today by filling out our simple form.

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* All loans made by either WebBank, an FDIC-insured Utah industrial bank, or Bank of the Internet Federal Bank, an FDIC-insured federally chartered thrift located in California. In connection with the loans, the Banks' underwriting conditions and terms apply.