SBA Loans: All Program Types Explained
The SBA (Small Business Administration) is the federal government’s primary source for small-business financing. The SBA has facilitated over $1 trillion worth of financing to businesses. Learn how the SBA can help your business.
Are you in search of funding for your small business? If so, SBA loan programs could be what you need to get the ball rolling. With SBA loans from the Small Business Administration, you can start or expand your company and take advantage of the many benefits that come with being an entrepreneur. There are various small business loans available depending on your needs.
Read on to learn more about these program options, what they are, who can apply, and how these loans may help your small business. In addition to this comprehensive resource, we’ve also included a few FAQs to answer any further questions you may have.
What are SBA Loans?
The SBA (Small Business Administration) is the federal government’s primary source for small-business financing. Congress created the agency in 1953 as part of President Eisenhower’s New Look program. Since then, it has facilitated over $1 trillion worth of financing to businesses throughout the country.
Essentially, these loan programs are small business financing solutions partially guaranteed by the government. The goal is to bear some of the financial institution’s risks, hence reducing the burden on the small business.
However, it isn’t the SBA that does the lending. Instead, the government body works with a network of select financiers (traditional banks), ensuring better terms and partially guaranteeing the loans extended to small business owners. That means that if you default on your credit, the SBA will pay back the lender up to 85 percent of the total amount owed.
Who Can Apply for SBA Loans?
As we hinted above, small business loans come in multiple types, and each option has its specific terms and conditions that you must fulfill to qualify. However, there are some general requirements that your small business must meet regardless of the SBA credit funding type.
Note: Small Business Administration PPP loans are no longer available. Financing alternatives to PPP loans are available from a commercial funders.
Business Operations and Intent
- You must be operating in a legal or ethical industry.
- You must be a for-profit business.
Location
- You must be physically located or proposing to operate in the U.S. or within its territories.
Need for Financing
- You must demonstrate a valid need for funding.
- You must have tried other financing options before turning to SBA.
- You must demonstrate a “sound business purpose” for which you intend to use the funding.
Personal Credit Score
- You’ll need to have a healthy personal credit score of generally 640 or higher. SBA doesn’t have a designated minimum credit score requirement, though. So the flexibility varies depending on specific lenders. However, having a bad credit score, say below 500, will likely make it challenging to qualify or lower your SBA financing limits.
Time in Business
- Some banks have no issue working with newer businesses. But generally, you’ll need to have been operating for at least two years to qualify.
Investment
- You must have invested some equity into the business, i.e., time and money.
Business Size
- You must be a small business, as stipulated by the SBA. You can check out this interactive tool to determine if your business satisfies this requirement.
Collateral
- Most SBA financing options also require personal guarantees such as inventory, equipment, or real estate. However, SBA-preferred banks can’t deny you because you lack adequate collateral.
Business Character
- You can’t be delinquent on any existing credit obligation.
- If you have a business partner or employee with more than 20% stake in the business, they can’t be currently incarcerated, on parole, on probation, or defending a criminal charge.
Business Finances
- Your small business must have sufficient finance or cash flow to cover its monthly expenses.
- You must not have too much existing debt that you can’t afford to seek additional funding. At best, you should have a debt service coverage ratio (DSCR) of 1.15 or higher.
What are the Types of SBA Loans?
There are several types of small business loans that can generally be categorized into:
- General small business loans 7(a)
- Microloans
- Real estate & equipment loans: 504 loans
- Disaster loans
We’ll discuss the maximum amount you can borrow for each type, what the cash can be used for, the interest rates, the reimbursement terms, and any other special requirements.
General Small Business Loans 7(a)
The 7(a) program is SBA’s mere, and it’s tailored to help entrepreneurs who want to start up new ventures, expand their current ones, or buy new equipment. The 7(a) loan is also known as a Section 7 loan, and it was created to make sure that minority-owned companies could access capital. The program is available in several sub-categories.
Standard 7(a)
Standard 7(a) is the most common credit type in this category. Here’s what you need to know:
- It offers a maximum loan amount of $5 million.
- The maximum SBA guarantee is 85% for up to $150,000 and 75% for loans above $150,000.
- You may use the funding for operating capital, equipment, or even refinancing other debts.
- The rate is negotiable between lenders and borrowers but may not exceed the SBA maximum.
- The credit repayment period is 10-25 years.
7(a) Small Loan
Here’s what you should know about 7(a) small loans:
- The maximum loan amount is $350,000.
- The maximum SBA guarantee is 85% for up to $150,000 and 75% for loans above $150,000.
- The rate is negotiable between SBA lenders and borrowers but may not exceed the SBA maximum
- The maximum repayment period is 25 years.
- You may use the funds for operating capital and refinancing smaller credit amounts.
SBA Express
- The maximum loans amount is $500,000.
- The maximum SBA guarantee is 50%.
- The rate is negotiable between the lender and the borrower but may not exceed the SBA maximum.
- You may use the funds for time-sensitive financing needs.
- The maximum reimbursement period is seven years but can be extended when you initially get the credit.
Export Express
- The maximum loan amount is $500,000.
- The maximum SBA guarantee is 90% for loans of $350,000 or less and 75% for loans more than $350,000.
- The rate is negotiable between lenders and borrowers but may not exceed the SBA maximum.
- You may use the funds to finance your small export business.
- The maximum payback period ranges between seven and 25 years.
Export Working Capital
- The maximum loan amount is $5 million.
- The maximum SBA guarantee is 90%.
- The rate is negotiable between the lender and the borrower but may not exceed the SBA maximum.
- You may apply for this loan if you need extra operating capital to enhance your export sales.
- The credit repayment period must not exceed ten years.
International Trade
- The maximum loan amount is $5 million.
- The maximum SBA guarantee is 90%.
- The rate is negotiable between the lender and the borrower but may not exceed the SBA maximum.
- You may use these funds for long-term financing if your small business needs to level the playing field with foreign entities.
- The loan maturity is ten years for permanent working capital, up to 10 years for machinery and equipment or the useful life of the equipment (not to exceed 15 years), and up to 25 years for real estate.
MicroLoans
The second loan type is a MicroLoan. As the name suggests, these are business loans available at a low-interest rate for start-up, newly established, and growing businesses. It was authorized in 1991 and became operational the following year. MicroLoan’s primary purpose is to provide credit to entrepreneurs who have been denied access to conventional bank financing due to a lack of personal guarantee or poor credit history.
Here are other crucial details you should know about the program:
- The maximum loan amount is $50,000.
- You can use the amount to enhance, re-open, repair, rebuild, or improve your small business. In other words, you can use the loan for operating capital, furniture, inventory, supplies, equipment, fixtures, or machinery.
- The maximum payback term for an SBA microloan is six years.
- The rates vary depending on the lender but range between 8 and 13%.
- You can’t use a MicroLoan to refinance existing debt or purchase real estate.
Real Estate & Equipment Loans: 504 Loans
Are you looking for a long-term, fixed-rate financing solution to enhance your small business growth and lead job creation? If so, a 504 loan is a perfect fit for you. Also known as a Section 504 loan, this small business loan program has the sole purpose of helping small businesses obtain financing for commercial property.
Here’s what you need to keep in mind when applying for a 504 loan:
- The maximum loan amount is $5 million.
- To qualify, you must be a for-profit small business, have a tangible net worth of less than $15 million, and have a net income after tax of less than $5 million for the two years preceding your application.
- You may use your 504 financing to purchase or construct an existing building/land, new facilities, and long-term machinery and equipment. You can also use it to modernize or improve land, streets, parking lots, existing facilities, or utilities.
- The interest rates for 504 loans are pegged to an increment above the present market rate for 5-year and 10-year U.S. Treasury issues. The rate stands at approximately 3% of the total debt and may be financed with the SBA credit.
- There are three maturity terms: 10-year, 20-year, and 25-year.
Disaster Loans
Disaster loans are low-interest SBA credit funding options issuable to small enterprises and non-profit organizations that have suffered substantial damage from declared disasters. They’re available in four distinct types: physical damage loans, mitigation assistance, economic injury, and military reservists.
Physical Damage Loans
Physical damage assistance is available to enterprises of all sizes, homeowners, renters, and non-profit organizations located or living in declared disaster areas. However, you must have experienced damage to your home or property to qualify for this SBA assistance. Here are a few more details you should know about this type of financing:
- The maximum loan amount is $200,000.
- You may use the proceeds to repair your home or commercial property and refinance part or all your previous mortgages.
- The maximum rate is 4%.
- The maximum repayment period is 30 years, with zero pre-payment penalties or fees.
- You’ll need to provide a personal guarantee for small business loans over $25,000.
Mitigation Assistance
This SBA program is for those wishing to protect your home or business against future disasters or damages. That is, if you’ve already applied for a disaster loan but need to rebuild a more robust business, you can increase your assistance by up to 20% to accommodate the extra costs. Here are some of the projects for which you may pursue this kind of loan:
- Flood mitigation – In this case, the loan may cover the costs of moving your home or business to a safer location, landscaping the property, sealing the roof deck, elevating structures, adding a sump pump, and converting the lowest flow into a flexible space.
- Wildfire mitigation – The assistance may come in handy in installing a fire-rated roof, non-combustible gutters, fences, gates, and mesh screening. You may also need the cash to remove roof and gutter debris that might cause combustion and replace your single-pane windows with dual or multi-pane alternatives.
- Earthquake mitigation – The disaster assistance credit may help strengthen your building, install window films to prevent shattered glass injuries, and anchor rooftop equipment.
- Wind mitigation – You may need the disaster mitigation credit to upgrade to pressure-rated windows, install hurricane roof straps, strengthen structures, etc.
Economic Injury
Economic injury disaster loans are available to small businesses, small agricultural cooperatives, and most private non-profit organizations. If you’ve suffered a substantial economic injury and your business is located in a declared disaster area, you may qualify to apply for this SBA assistance. Substantial economic injury means your small business can’t meet its obligations or pay its ordinary and necessary operating expenses.
Some other things you should know before applying include:
- The maximum loan amount is $2 million.
- You may use the proceeds for operating capital and everyday expenses.
- The maximum rate is 4%.
- The payback term depends on the borrower’s ability to repay the loan, but it can’t exceed 30 years.
- You’ll need to provide a personal guarantee for small business loans exceeding $25,000.
Military Reservist
A military reservist loan is financial assistance extended to a small business with an essential employee has been called up to active duty as a military reservist. Its primary purpose is to provide the cash that your business may need to cover the operating expenses resulting from the departure of the essential employee.
Here’s what else you should know:
- The maximum loan amount is $2 million.
- You can use the proceeds to cover the ordinary and necessary expenses.
- The maximum rate is 4%.
- The repayment term depends on the borrower’s ability to service the loan, but it can’t exceed 30 years.
- You need collateral if you’re seeking a loan exceeding $50,000.
The Benefits of an SBA Loan
This program has its fair share of perks and drawbacks. Let us look at the pros and cons in the section below.
Pros
- Lower down payment requirements – One of the best things about SBA financing is that it allows small business owners to make smaller down payments than they would otherwise have to. With an equity contribution as low as 10%, you can qualify for popular financing options like the SBA 7(a) loan.
- Longer repayment terms – Unlike traditional banks, which often require borrowers to pay back their loans within five years, SBA-preferred banks offer extended repayment periods. For example, the SBA provides a 15-year fixed-rate loan instead of the standard five-year option. That could mean more money for you over time.
- More flexible funding sources – Another great thing about SBA financing is that it gives small business owners access to other types of funding besides just bank loans. For example, the agency provides low-interest financing for disaster mitigation, emergency response, export business enhancement, etc.
- More affordable rates – These business loan interest rates are way lower than traditional banks. For example, the average rate on an SBA loan is only 2.5% compared to 6.9% on a conventional loan.
- No pre-payment penalties – Borrowers don’t have to worry about paying pre-payment penalties or fees when repaying their business loans.
- Both new and established businesses can apply – SBA banks have no bias against either new or existing companies. As long as you meet their specific requirements, it doesn’t matter how long you’ve been in business.
- Flexible lending programs – The SBA also offers various funding programs such as the 504 loans, 7(a) loans, Microloans, etc. These programs allow small business owners to get the financing they need without going through the lengthy application process for a regular loan.
- Fast approval time – Most SBA funding programs have a quick turnaround time of 5-10 business days or less. Borrowers can rest easy knowing that their application will go through and get processed almost instantaneously, paving the way for a quicker disbursement of funding.
Cons
- Applying for the loan requires paperwork – While the application process for most loans isn’t too complicated, there are specific documents that you must submit to be considered. You’ll need to provide proof of eligibility, financial statements, tax returns, and even a copy of your personal credit report.
- A limited number of lenders – Because the program has strict guidelines, there are not many lenders approved for these types of loans.
- Small business loans are tough to qualify for – If you want to take advantage of the SBA’s financing program, you’ll first have to prove yourself worthy by meeting specific criteria. The good news is that once you do, you’ll be eligible for financing at competitive rates. However, it may take a while before you receive the final word on whether or not you qualify.
- The loan approval process can be slow and cumbersome if you use a non-SBA preferred lender – This is because the SBA has granted special authority to specific high-volume lenders/banks to approve the loans internally, bypassing SBA’s review and approval process. These banks are commonly referred to as SBA-preferred lenders. So if you decide to apply for financing via a non-SBA preferred lender, you may experience delays or other complications with your small business loan application.
SBA Loans May Help Your Business
There’s no doubt that a small business loan may be the financial muscle your business needs to move to the next level. So whether you’re looking to expand, rebuild, start up, relocate, or rebrand your business, these loans may be an excellent solution for you.
Here’s a closer look at the top six ways SBA financing may help your small business.
Leveling the Competition
A small business loan ensures that your small business competes favorably with already established ventures by providing the cash to acquire the latest equipment and enhance your market outreach. That means you’ll be able to offer better products and services than your competitors, which increases your chances of winning new clients.
Gaining Access to Capital
A small business loan lets you tap into the resources needed to fuel your small business growth. By leveraging SBA funding, you can increase production capacity, hire more employees, purchase additional inventory, and invest in marketing campaigns. As a result, you’ll likely be able to generate greater profits, which translates to higher revenue and increased profit margins.
Reaching your Goals Faster
A small business loan allows you to achieve your goals sooner than you would otherwise be able to. With the credit you receive, you can pay off debt, renovate your office space, buy new equipment, or make other necessary improvements to your company. In addition, you can also use the cash to fund business expansion plans, such as buying another location or hiring more staff.
Improving Cash Flow
When you’re running a small business, every dollar counts. That’s why a small business loan gives you the flexibility to spend less time worrying about how much cash you have coming in and more time focusing on growing your business. In addition, you won’t have to worry about paying back the loan until after you’ve paid down all outstanding debts and bills.
Flexibility
You don’t have to wait around for months or years to see results when you get a small business loan. Instead, you’ll be allowed to service the loan over a set period. That means you can focus on building your business without worrying about repaying the loan right away.
Expansion of Your Small Export Business
Export express, export working capital, and international trade loans are excellent examples of small business loans that allow you to grow your business internationally. Of course, if you want to reach new markets overseas, you’ll need to establish a presence there. But first, you need adequate operating capital, which these loans can provide. More capital will help you build your brand awareness and gain valuable customer relationships.
Frequently Asked Questions
Yes. If you want to take out an SBA loan, you must agree to pay it back within a specific timeframe, as they’re not government grants. The reimbursement schedule depends on the type of credit you choose. For example, if you go for an export express loan, you’ll have 7-25 years to service the loan, depending on the financier and the amount borrowed.
If you default on your loan payments, the bank may try to recover the total amount from you. If they cannot recover their losses, they may turn to the SBA to invoke the guarantee. Then, the lenders and the SBA may settle on a reduced amount to recover the loan. And when the SBA finally comes knocking, they might not require you to repay the total amount owed.
The loan amount depends on several factors, including your credit history, income, assets, and projected sales. When applying for a loan, lenders will ask you about your current financial situation and what you plan to do with the money. They’ll then consider this information along with your past performance and future projections to determine whether you’re eligible for the loan and the amount you qualify for.
In most cases, it takes no longer than 60 days. However, some lenders may need up to 90 days before they’re willing to approve your application. Thus, the entire loan application process, approval, and funds disbursement take 60-90 days.
The federal government backs each SBA credit, ensuring that all SBA lenders get repaid upon maturity of their loans even if the borrower defaults. As long as the SBA is satisfied with the loan terms, it will cover the payments made by the small business owners. Thus, there are virtually no risks involved from the lenders’ side.
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