Small Business Administration Loans

All You Need to Know About Small Business Administration Loans

Small Business Administration Loans

SBA loan programs provide small business owners with long-term and affordable financing options. The funds are partially guaranteed by the Small Business Administration, encouraging lenders to provide the loans to small businesses. In case the borrower defaults, the government steps in and pays a percentage of the loan.

SBA loans can be used for different purposes which include purchase of equipment or real estate, refinancing existing debts, working capital among other businesses uses.

There are different types of small business administration loans available for business owners. You can apply for any of the programs depending on your needs, business history, and the amount of funding you want and what you intend to use the funds for. Compared to other lending options, SBA loans come with affordable interest rates.

They also have flexible repayment terms, which makes them a good option for small business owners who want manageable monthly payments.

Types of SBA loans

As much as SBA loans can be good option for small business owners, there are also some drawbacks involved. First, qualifying for an SBA loan is tough. The loans are also advanced to borrowers with good credit history.

Lastly, it can take several weeks for the funds to be approved, and this can be inconveniencing to business owners who need immediate cash to fill a cash flow gap. Here are different types of SBA loans available to small business owners;

  • SBA 7A loans
    This is a common type of Small Business Administration loans. Business owners can access amounts up to $5M. The two types of SBA 7A loans are SBA Express and SBA Advantage loans. SBA 7A loans are especially useful for businesses that need cash for working capital. When business owners refer to SBA loans, these are the type of loans that they, in most cases, refer to. Besides providing working capital, the loans can also be used for different other purposes.

What makes SBA 7A loans popular is their flexible repayment terms and relatively lower rates of interest compared to other small business loan options. The loans have an interest rate of 7.25-9.75%. For working capital loans, the repayment term goes up to 10 years. Commercial real estate loans have a term of up to 25 years. They also have an origination fee ranging from 0.5% to 3.5% and SBA guarantee fee of up to 3.5%. Some of the factors that determine the interest rates include individual credit scores and the repayment term. Funding time is between 30 and 90 days and repayments are made on a monthly basis. SBA 7A does not have a minimum loan amount, but most lenders will need you to borrow at least $30,000.

SBA 7A loan requirements
Lenders provide SBA 7A loans for both startup and established businesses. You need to meet the following requirements to qualify for an SBA loan;

  • Credit score of at least 680
  • No recent bankruptcies, tax liens or foreclosures
  • Some lenders may require collateral for loans above $25.000

If you want to use the loan for commercial real estate, to purchase an existing business or business equipment, a down payment of at least 10% may be required. For startup businesses, such small business loans requirements may not be needed, but you should have a strong business plan and prove to the lender that you have management experience. You also have to provide financial projection for the business in the next 3 years.

How to apply for an SBA 7A loan
Just like bank loan applications, it also takes a lot of time and extensive documentation to apply for an SBA loan. It generally takes 45-120 or more days to receive the funds, that is, if you are lucky enough to be approved. During your SBA loan application, it is recommended that you work with a lender who has experience in providing the loan. This will help save on time and it will also increase your chances of getting approved.

  • SBA express loan program
    One disadvantage of SBA 7A loans is the long period of waiting. To ease this problem, SBA offers a service that helps speed up the application process, referred to as SBA express loan. With this option, you can receive a response within 36 hours once your loan application is approved. But it can still take a long time for the loan to be funded.

The SBA Express loan has the same guidelines as SBA 7A loans. However, you can only borrow a maximum amount of $350,000. Only a few lenders are selected to participate. SBA guarantees less than 50% of the loans, making them an expensive option compared to SBA 7A.

  • SBA Advantage loans
    This SBA loan option provides business financing in under-serviced markets. The loans are provided to small business owners who meet all the requirements but do not qualify for SBA 7A loans due to lack of collateral, low revenue among other reasons. The loan has the same requirements as the SBA Express option, loans up to $250,000 are 85% guaranteed. Since this reduces the risk of the lender, it is easier to qualify for the loan.
  • CDC/SBA 504 loans
    This type of SBA loan option is provided to commercial real estate investors. With this program, two lenders are paired together to provide the loan

      • Traditional lender or bank that lends up to 50%
      • Community Development Corporation, CDC that lends up to 40%
      • The remaining 10% comes from the investor in form of down payment.

    It is a requirement for the business to occupy 51%+ of the commercial space. This means that you have the option of renting the remaining 49% to interested tenants. The loan amount is up to $14M with interest rates between 4.85%-5.08%. The repayment term is between 10 to 20 years.

    CDC/SBA 504 loan requirements

      • Credit score of 680+
      • A down payment of 10%
      • The business should occupy at least 51% of the real estate
      • The loan are strictly used for purchase, construction or renovation of commercial real estate. It can also be used to purchase fixed assets
      • You also should have a tangible net worth of below $15M
  • SBA CAPLines program
    This SBA programs offers 5 products inform of lines of credit. These include;

    • Seasonal line of credit
    • Contract line of credit
    • Builders line of credit
    • Standard asset-based line of credit
    • Small asset-based line of credit

    The loans, which is provide for amounts up to $5M are specifically designed to help small business owners meet their short-term financial needs. They attract interest rates between 7.25% and 9.75% with a repayment term of up to 5 years.
    Requirements

    • Credit score of 660+
    • Inventory, purchase orders, accounts receivables act as collateral for the loan
    • No recent bankruptcies, tax liens or foreclosures
    • 10% down payment
  • SBA export loans
    This SBA product helps small businesses to engage in international transactions, expand their export activities and venture into new markets. They are mainly useful for businesses that want to expand their business by venturing into new markets. There are no limitations on the maximum amount to borrow. The loan has an interest rate of 6% to 11.5%. With repayment terms of 7, 3 and 25 years for export working capital, export express loan and international trade loan respectively.Requirements

    • Credit score of 660+
    • Be involved in the business or exporting goods and services to foreign states
    • You should be in business for at least a year to qualify for express export loan.
    • Short term collateral like project contracts or invoices
    • No recent bankruptcies, tax liens or foreclosures
  • SBA microloan program
    Microloans can be described as small loan amounts provided to businesses, not for profit small businesses and childcare centers. SBA offers microloans for amounts up to $50,000. Microloans can be used as working capital, for the purchase of furniture or fixtures, equipment among others. The loans are however not used for purchase of real estate or finance an existing debt. The loan term depends on several factors including the loan amount, your business needs, and how you intend to use the funds. These rates are generally between 8% and 13% with a repayment term of up to 6 years. Microloan lenders also offer training to achieve long-term business success. Funding time is between 30 and 90 days.Requirements

    • Credit score of 640+
    • Collateral required
    • Personal guarantee required
  • Disaster loan
    Disaster loans are offered to help businesses recover from losses due to physical or economic disaster. There are different types of disaster loans and each of them is used to service a specific purpose. The loans can especially be useful for businesses that have been affected by any kind of the above-mentioned disasters, provided you can show proof of the impact. SBA disaster loans have an interest rate of 4-8%. The loan amount is up to $2M with a repayment term of 30 years.Requirements

    • Credit score of at least 640
    • Collateral required
    • You must show your ability to repay the loan

    There are 3 types of disaster loan you can apply for based on the situation. These include:

    • SBA economic injury disaster loans
    • SBA business physical disaster loan
    • SBA military reservists economic injury loans

Advantages of SBA-guaranteed loan

  • They offer competitive terms
    Generally, SBA-guaranteed loans offer fees and rates that are more affordable compared to other lending options.
  • Knowledge support
    Some SBA loan products provide education on how to use the funds wisely to achieve business success.
  • Special benefits
    SBA loans offer low down payments, its overhead requirements are also flexible and some of them do not require collateral.

Finding the best SBA loan lender

SBA-guaranteed loans vary from small to large amounts that can be used for different purposes which includes providing working capital, business expansion or even repairing equipment. In some cases the loans may entail some restrictions on how the funds can be used, therefore you need to look into SBA-approved lender before requesting for the loan.

Assessing eligibility of your business for a loan

As much as each SBA loan may have to meet different requirements, talking to your lender concerning your business needs together with the business profile is advisable. Another source of information would be an SBA District Officer.

The bottom line

As seen above, there are many types of SBA loans available depending on the business needs. Some of the things that make the loans attractive is their flexible repayment terms and affordable rates of interest.

Small businesses can easily qualify for the loan provided they meet all the requirements. But with all the benefits that come with applying for an SBA loan, there are also some drawbacks involved. Besides being difficult to qualify for, they also have lengthy paperwork processes.

This can be a hindrance to businesses that need funding to meet their immediate needs. The loans are however beneficial to small businesses that require funding. You only need to ensure that you meet all the requirements and work with an experienced SBA lender to increase your chances of having the loan approved.

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