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Small Business Administration (SBA) loans can be beneficial for small businesses, offering favorable terms and flexibility. There are a number of SBA loan programs that may be suitable for your business, each with its own specific requirements. If your company qualifies, an SBA loan could be a helpful way to grow your business.
What is an SBA loan?
An SBA loan is a small business loan that is partially guaranteed by the U.S. Small Business Administration and provided by a variety of commercial lenders.
Up to 85 percent of the loan is guaranteed by the SBA and would be repaid by the agency if the borrower defaults on the loan. This limits the risk to the lender if the business fails to repay the loan.
SBA loans are designed to help small companies stay in business and grow by making loans more easily available to business owners who might otherwise have difficulty sourcing financing. SBA loans typically offer longer repayment periods and lower fees than standard commercial loans.
|Consider this SBA loan...||If you need to...|
|7(a) Loan||Expand your business, secure working capital, renovate your building, purchase equipment, or refinance debt.|
|Express Loan||Get funds quickly to secure working capital, renovate your building, or purchase equipment.|
|Export Working Capital Loan||Secure working capital for your export business.|
|Export Express Loan||Get funds quickly to secure working capital for your export business.|
|International Trade Loan||Expand because of growing export sales or to respond to foreign competition.|
|CAPLine Loan||Address short-term and cyclical working capital needs.|
|CDC/504 Loan||Purchase or improve major fixed assets, such as equipment, machinery, buildings, or land.|
|Microloan||Secure startup capital or fund smaller purchases of inventory, equipment, supplies, or machinery.|
|Disaster Loan||Repair or replace machinery, equipment, inventory, or buildings damaged in a declared disaster.|
How do SBA loans work?
Businesses can apply for an SBA loan through lenders—typically banks or credit unions, but some loan programs are through community organizations. The requirements are similar to other business loans. Businesses must pay fees for application and any necessary appraisals. There may also be a guarantee fee for the part of the loan that the SBA will guarantee.
Interest rates for SBA loans depend on the type of the loan, with some loans offering fixed interest rates and others offering variable interest rates. Interest rates are likely to be higher if the interest rate is fixed.
The SBA caps interest rates as a percentage above the current prime lending rate. The cap varies depending on the specific loan program. Other than determining the maximum amount of interest that can be charged, the SBA does not choose interest rates—your lender will choose what interest rate to offer.
SBA loan amounts can be as little as $5,000 or as much as $5 million. It typically takes between 60 and 90 days for applicants to be approved. Once approved, loan repayment terms can range from six to 25 years.
What can you use an SBA loan for?
SBA loans can be used for many business needs, including inventory, real estate purchases, renovations to existing buildings, equipment, payroll, and more. However, they cannot be used for investment properties, real estate development, or lending money to others.
What types of loans does the SBA offer?
The SBA offers a number of loan programs, including:
The SBA’s most common loan program is the 7(a) loan program. These loans can be used for a number of purposes, including:
- Construction or renovation of buildings
- Real estate purchases
- Purchasing equipment, machinery, supplies, furniture, and fixtures
- Working capital
- Starting a new business, expanding, or acquiring another business
- In some cases, 7(a) loans can be used to refinance business debt
The maximum loan amount for a 7(a) loan is $5 million. SBA will guarantee up to 85 percent of loans up to $150,000 and up to 75 percent of loans over $150,000. Lenders do not have to require collateral for loans up to $25,000.
7(a) loans are typically repaid on a monthly basis. Loans can have fixed or variable interest rates. Variable interest rates are capped as a percentage above the prime rate. Those with a term of more than seven years have a maximum of 2.25 percent above the prime rate, while those with a term of less than seven years have a maximum of 2.75 percent above the current prime rate.
There are a number of types of 7(a) loans, such as:
Standard 7(a). Standard loans have a maximum amount of $5 million.
7(a) Small Loan. Small loans have a maximum amount of $350,000.
SBA Express. Express loans are similar to standard loans, but with a lower guarantee percentage. The maximum loan amount is $350,000, and the SBA will guarantee up to 50 percent. The SBA will respond to requests for these loans within 36 hours.
Export Working Capital. Exporters that need working capital to generate additional export sales may be eligible for loans of up to $5 million, with up to 90 percent guaranteed by the SBA. The SBA does not cap interest rates for these loans.
Export Express. This program can provide up to $500,000 of funds to exporters. The SBA will respond to requests within 24 hours. The maximum loan amount is $500,000. The SBA will guarantee up to 90 percent for loans of $350,000 or less and up to 75 percent for loans over $350,000.
International Trade. International trade loans are designed for businesses that need to expand because of growing export sales or need to modernize their business to respond to foreign competition.
CAPLines. CAPLine loans are designed to help small businesses with short-term and cyclical working capital needs. Loans up to $5 million are available. Borrowers must meet standard 7(a) loan requirements. There are four types of CAPLine loan:
- Contract loans can be used to finance administrative costs and overhead for one or more specific contracts or purchase orders. These loans have a term of up to 10 years.
- Builders Line loans are designed for construction contractors and must be used to pay for construction or substantial renovation of commercial or residential buildings for resale. These loans have a term of up to five years.
- Seasonal Line of Credit loans provide funds to cover seasonal increases of inventory and accounts receivable. These loans have a term of up to 10 years.
- Working Capital Line of Credit loans can be used for short-term working capital and operational needs. These loans have a term of up to 10 years.
CDC/504 loans are intended to finance major assets that can promote business growth and job creation. These loans are offered through Certified Development Companies (CDCs). CDCs are community-based organizations that are certified by the SBA.
To be eligible for a 504 loan, you must operate a for-profit business based in the U.S. Your net worth must be less than $15 million and your average net income must be less than $5 million for the two years previous to your application.
Eligible projects that 504 loans can be used for include:
- Purchasing buildings or land
- Constructing new buildings or facilities
- Purchasing machinery and equipment
- Improving or modernizing facilities, land, landscaping, streets, parking lots, or utilities
504 loans cannot be used for working capital, debt consolidation or refinancing, or rental real estate investment.
Repayment terms can be 10, 20, or 25 years, depending on the project. Interest rates are fixed for 504 loans. Like 7(a) loans, the SBA caps interest rates, which are based on market rates; 504 loans typically have lower interest rates than 7(a) loans. A 10 percent down payment is required from the borrower, with the CDC providing 40 percent of the funding and a bank or credit union providing the remaining 50 percent.
SBA’s microloan program offers loans of less than $50,000. For-profit businesses are eligible and new businesses are included, which means that this type of loan may be suitable for new startups. The SBA works with Community Development Financial Institutions or other nonprofit lenders to provide microloans. Microloan programs may require you to participate in business development programs and other advisory services to help your company.
Microloan terms are typically up to six years. The loan can be used for inventory, equipment, supplies, and other needs, but cannot be used for real estate purchases or debt repayment.
The SBA offers loans to businesses affected by declared disasters. These loans are available to businesses of any size and to both for-profit and nonprofit companies. Loans are available for up to $2 million. Funds must be used to repair or replace damaged machinery, equipment, inventory, or buildings.
Repayment terms for disaster loans can be up to 30 years. The SBA caps interest rates at four percent for companies that are unable to get credit elsewhere, and eight percent for companies that are able to get credit elsewhere.
SBA Loan Changes Due to COVID-19
The SBA has made several temporary changes to SBA loans due to COVID-19.
- New loans. SBA offers several loans and funds specifically designed for businesses affected by COVID-19, including the Paycheck Protection Program, COVID-19 Economic Injury Disaster Loan, Shuttered Venue Operators Grant, and Restaurant Revitalization Fund.
- Increased loan limits. SBA Express Loans will have a maximum loan amount of $1 million through September 30, 2021. On October 1, 2021, the maximum loan amount will permanently change to $500,000.
- Increased guarantee percentages. The SBA will guarantee 90 percent of most 7(a) loans through September 30, 2021. The SBA will guarantee 75 percent of SBA Express Loans of $350,000 or less through September 30, 2021. For SBA Express Loans greater than $350,000, the guarantee percentage will remain at 50 percent. All guarantees will revert to the previous percentages on October 1, 2021.
- Fee reductions. From December 27, 2020, to September 30, 2021, 7(a) loans will not charge upfront or ongoing fees.
- Debt relief. The SBA will pay six months of principal, interest, and fees for all 7(a), 504, and microloans, with a maximum monthly payment of $9,000. If monthly payments are greater than $9,000 per month, borrowers must pay the excess amount. Paycheck Protection Program loans are not eligible for debt relief.
What are the benefits of an SBA loan?
There are a number of major benefits that make SBA loans attractive to businesses:
- They are open to businesses that may not be able to receive a loan elsewhere. Because the SBA guarantees a portion of the loan amount, businesses that would not otherwise be able to qualify for a loan may be able to secure funding through an SBA program.
- They offer lower interest rates. SBA loan rates are typically lower than conventional loans because the SBA provides a cap on interest rates.
- They offer longer terms. SBA loans can offer terms as long as 25 years for loans used for real estate purchases, and 10 years for other loans. This can be helpful for businesses making major purchases. Longer repayment periods can make payments more manageable.
- Fees are low. SBA loan program fees include a guarantee fee when you secure the loan and a yearly fee, but these costs are typically low. Loans for lower amounts may not have guarantee fees.
- They are flexible. SBA loans can be used for a wide variety of different business purposes.
What are the drawbacks of an SBA loan?
There are some disadvantages to the SBA loan programs. These include:
- The loan approval process is longer. SBA loans usually take 60 to 90 days to be approved. This may not be fast enough for businesses that need funds quickly.
- There are personal guarantee requirements. Any owner with a 20 percent or greater stake in the business must personally guarantee the loan. This means that you would be held personally liable if you are unable to repay the loan.
- There are collateral requirements. In most cases, SBA loans will require business or personal assets as collateral. These assets could be seized if you default on the loan.
- Businesses must be established. In most cases, businesses must have been operating for at least two years to qualify. However, some loan programs may be able to offer loans to newer businesses or startups. Generally, a strong business plan and revenue are also required.
How do you qualify for an SBA loan?
According to the SBA’s requirements, eligible companies:
- Must be for-profit businesses.
- Must be based in the U.S.
- Must have owners with equity invested in the company. People who own 20 percent or more of the company must have invested their own time or money in the business.
- Must be a small business. The SBA’s standards for the size of small businesses depend on the industry. You can see the SBA’s size standards here.
- Cannot be able to obtain financing from commercial lenders. Businesses must be able to show that they cannot obtain funds from other sources in order to be eligible for an SBA loan.
In addition to the SBA’s requirements, individual lenders may have their own requirements. Generally, lenders will expect businesses to have been operating for at least two years, have strong revenue, and have a good credit score.
What types of businesses are not eligible for SBA loans?
Some types of companies are not eligible for SBA loans. These include:
- Gambling companies
- Life insurance companies
- Political lobbies
- Pyramid sales schemes
- Real estate investment firms
- Religious organizations
How can you apply for an SBA loan?
Since SBA loans are offered through lenders, you’ll need to apply through a bank or credit union. The SBA offers a lender match service that can help you find a lender. Local advisors from Small Business Development Centers may also be able to assist you. If you are seeking a 504 loan, you will need to find your local CDC to apply.
Businesses should have a goal of how much money they are seeking and a clear idea of how it will be used before applying for a loan. You will need to have financial documents, business and revenue forecasts, and other documentation that indicates that you have budgeted for the loan and are capable of paying it back. Once you apply through a lender, the lender will apply for the loan guarantee from the SBA.
AdvisorSmith spoke with the following experts to provide critical insight on SBA loans for business owners.
Dr. Jeff Cornwall
- Jack C. Massey Chair of Entrepreneurship
- Belmont University
Robert J. Blaney
- District Director
- U.S. Small Business Administration, Arizona District
- Professorial Lecturer
- Department of Accounting and Taxation
- American University
Q. What are the benefits of SBA loans as opposed to other types of loans?
Robert: SBA-guaranteed loans are better for a lender because if the borrower defaults, the lender will receive up to 85% of the loan repaid through the guarantee. Some SBA loans can have lower interest rates and a longer repayment period than a commercial loan, meaning a smaller monthly payment.
For example, a conventional loan may have a 10-year term with a balloon payment in four or five years, while an SBA loan can have a term of up to 25 years, never have a balloon payment, and maintain the same interest rate for the life of the loan. Further, SBA loans never have loan covenants such as maintaining a certain debt to equity ratio or maintaining a minimum level of earnings before interest and tax (EBIT).
Q. Are SBA loans hard to get?
Robert: No. The SBA sets guidelines for loans made by its partnering lenders, community development organizations, and micro-lending institutions. The SBA reduces risk for lenders and makes it easier for them to access capital. That makes it easier for small businesses to get loans.
In general, eligibility is based on what a business does to receive its income, the character of its ownership, and where the business operates. Normally, businesses must be for-profit, meet size standards, be able to repay, and have a sound business purpose.
Even those with bad credit may qualify for startup funding. The lender will provide you with a full list of eligibility requirements for your loan. A low credit score is a common reason why it is difficult to get an SBA loan. Banks are risk-averse and may consider both your personal and your business credit score.
Q. How can businesses increase their likelihood of receiving an SBA loan?
Robert: A small business owner can increase their chances to qualify for a loan by building their credit, which happens when you pay your bills on time and pay your taxes. It’s important to know your lender and what the lender’s loan requirements are. Not all lenders will lend for all business purposes.
Lenders are risk-averse, and most maintain a very balanced loan portfolio for their own business purposes. If you do not know what a lender’s requirements are, seek advice from a Small Business Development Center, a Women’s Business Center, or the SCORE Association near you.
All of these SBA-funded resource partners provide business assistance counseling free of charge. They can also advise you of additional financial and legal documents you may need such as profit and loss statements, tax returns, licenses, contracts, leases, or articles of incorporation depending on your business structure, and then assist you in preparing a strong business plan that outlines your business vision.
Q. What are common reasons for SBA loan applications being declined?
Robert: Loans are often declined for lack of foreseeable business revenue, character issues such as a criminal record, unpaid prior federal debt such as college loans or taxes, poor collateral, low credit scores, or the inability to repay the loan.
Q. Can businesses get an SBA loan for a startup?
Robert: Yes. A business startup must have a strong business plan and strong financial projections. Many new business owners or start-ups use SBA’s Microloan program which provides loans up to $50,000 to help small businesses and certain not-for-profit childcare centers start up and expand.
The average microloan is about $13,000, and the SBA provides funds to specially designated intermediary lenders, which are nonprofit community-based organizations with experience in lending as well as management and technical assistance. These intermediaries administer the Microloan program for eligible borrowers. Each intermediary lender has its own lending and credit requirements. Generally, intermediaries require some type of collateral as well as the personal guarantee of the business owner.
Q. What are major trends occurring in the small business lending market?
Jeff: We will continue to see relatively tight credit for small business lending. No matter what programs are in place, banks will always base lending decisions on the financial strength of the business. As many small businesses continue to struggle to recover, many simply do not qualify based on traditional loan criteria. Many businesses will need to find other means of financing.
Caroline: Identifying trends in the small business lending market depends on what industry sectors or types of small businesses you’re looking at. Some small business industries—like restaurants and live entertainment venues—are still struggling. To help these sectors, the SBA has been focused on lending programs like the Restaurant Revitalization Fund, which has received $75 billion in applications during the program’s application window for about $28.6 million in funding from more than 362,000 applications.
Also, the SBA rolled out the Shuttered Venue Operators Grant Program, which includes over $16 billion in grants to shuttered venues, to be administered by SBA’s Office of Disaster Assistance. These industry-specific programs are in addition to the economic injury disaster loan programs that the SBA already administers.
However, even with the billions of dollars the SBA and Treasury have been administering in the form of loans and tax credits to small businesses, the numbers are still not great. There will be a need for new lending as time goes on and small businesses will have to look to the private sector and new avenues to meet those needs.
Q. With vaccines becoming more widespread and the economy recovering from the pandemic, what effects do you see on small business lending?
Caroline: The Biden Administration has considered vaccine distribution to be key to economic recovery for small businesses. In fact, the American Rescue Plan included two new tax credits targeted to small businesses to help them provide paid leave for employees to get vaccinated. Overall, however, small businesses are still struggling to recover.
That noted, small businesses are finding new ways to secure funding, and online lending has become normalized.
Jeff: Established businesses that are coming out of the pandemic in a relatively strong financial position will have access to new credit. However, there is a high probability that increasing inflation will begin to push interest rates higher. Since much of small business lending involves variable rates, or rates that adjust frequently, the cost of credit for small businesses will increase. Just like equity funding from angels and VCs, we can expect lending to be concentrated on existing businesses with a relatively strong track record.
Q. How will the depletion of PPP loan funding impact small business recovery?
Jeff: The PPP loan funding was in place to deal with the immediate impact of public policy decisions. There is adequate capital available for businesses that are bankable, so the PPP program is no longer as critical to small businesses as it was a year ago.
Caroline: SBA Administrator Guzman testified before the House Small Business Committee that as of May 23, the SBA had approved more than “6 million loans totaling $273.7 billion in 2021, and that 95% of those loans had gone to Main Street businesses with fewer than 20 employees.”
To push out that many loans, Guzman noted that the SBA had partnered with more than 5,000 lenders that it hopes to continue working with, post-PPP and the pandemic, in order to promote greater avenues for more small businesses to access capital.
Now that the PPP has closed to new loans (as of May 31), the SBA will be focused more than ever on processing PPP loan forgiveness, which is key to small business recovery. The PPP money was a critical cash lifeline during an economic crisis—and now the focus needs to be on loan forgiveness that was promised to qualifying applicants.
Guzman testified that as of the end of May, SBA had process more than 60% of 2020 loans (i.e., 3.3 million lender forgiveness decisions) that totaled more than $279.4 billion.
SBA loans can be an excellent resource for small businesses seeking funding for a variety of projects. Although SBA loans may take a longer period of time to approve, they typically offer favorable interest rates, long repayment terms, and low fees. If your business is eligible, an SBA loan could be a great way to help grow your business.