For many years, the SBA (Small Business Administration) has provided support for small businesses in America by offering improved access to affordable financing.
If you’re a small business owner, then you’ve probably heard about the SBA loans somewhere in your journey.
The SBA has offered reduced government-backed loans to small business since 1953.
SBA loans are useful for most business operations, such as working capital, equipment, inventory, real estate, and refinancing.
Although the SBA does not provide direct loans to entrepreneurs, they offer support to financial establishments by guaranteeing a share of the loans — thereby removing a lot of the investor’s risk.
The SBA provides backing for established lenders like credit unions and banks so they can give out loans with favorable interest rates and repayment conditions through a variety of lending plans available to entrepreneurs.
Put simply, the SBA offers incentives to lenders for providing abundant, affordable loans to small businesses by reducing their risk.
Your business receives financing, and the lenders get interest payments; so if you can’t repay, they lose very little.
There are several SBA lending programs accessible to owners of small businesses that are meant to encourage Americans from all industrial backgrounds as they pursue their objectives.
The key to applying for obtaining an SBA loan is recognizing the most suitable program for your business and how you can qualify to be an applicant.
The requirements of SBA loans are not easily met, and the process of application can be time-consuming. Yet, for the majority of borrowers, the access to reduced loans from SBA lenders that they can’t obtain elsewhere is worth the effort.
Are you eligible for an SBA guaranteed loan? And what type of SBA loan is best suited to your business? Continue reading this article to find out more SBA loan information!
What Exactly Is The SBA?
The SBA is a government-owned agency that supports entrepreneurs and small businesses across America.
The mission of the SBA is to maintain the overall US economy by encouraging, providing counsel, protecting, and assisting the welfare of small businesses. SBA loans are meant to support commercial ventures.
The agency assists small businesses in many ways. Besides its SBA loan fee programs, the SBA also distributes government contracts and offers educational services.
Furthermore, the SBA lends its support to diversity initiatives, and it will provide loans to businesses that meet its specified requirements. SBA programs can thus be especially helpful resources for women, minorities, startups and veteran-owned companies.
How Do SBA Loans Work?
The SBA loan facility is conventional debt-based financing which has benefits for entrepreneurs and owners of small businesses.
Are you looking to buy real estate, purchase an existing business, obtain working capital, or cover construction costs? An SBA guaranteed loan can supply the required funding for your business.
The loans are financed by individual banks. The SBA incentivizes banks to loan to owners of small businesses at reduced rates by guaranteeing these banks 50 to 90 percent of any loan that goes into default.
Due to this association between lenders and the SBA, entrepreneurs have access to funding to purchase or develop their small business interests with affordable repayment options and reduced interest rates.
Why Does SBA Operate This Way?
The SBA has sound reasons for not lending money directly to small businesses.
If the SBA offered loans directly instead of guaranteeing them, the SBA would grow to be much bigger and more costly, requiring more funds to provide the loans and to recruit a bigger staff. Still, extending financing to businesses would take a long time.
In a nutshell, the SBA guarantees loans from banks to solve the problem of credit availability.
Lending funds directly would not make the SBA financing feasible.
Related: Apply for Small Business Funding Now
SBA Loans Today
Luckily, there are various SBA loan types — which provide opportunities for small business owners operating in unique situations, specific markets, or who require smaller loan amounts.
Below is an overview of the different types of SBA loans offered via its lending program:
SBA 7(A) LOANS
This is the flagship SBA loan program that provides loans for nearly all general business purposes.
The 7(A) loan program is an accessible and affordable small business loan which has reduced interest rates of between 7 to 9.75 percent as well as long repayment conditions of a maximum of ten years (twenty-five years for commercialized real estate).
However, interest rates are likely to change as prime increases.
SBA EXPRESS LOANS
Since the approval process for SBA 7(A) loans can extend for months, the SBA Express Loan program is available for those who require quicker funding.
SBA Express Loans are the fastest SBA loan with a maximum of $350,000, stringent eligibility requirements, and slightly increased interest rates. The SBA will only guarantee fifty percent of Express loans, but the first approval of the SBA loan application usually happens after a few days. Complete funding often requires only a few weeks.
Getting this SBA loan is trickier, but definitely faster. The approval speed for the SBA Express loan is best suited for existing small businesses or service-oriented businesses without a standard location.
SBA 504 LOANS
While seeking to support and encourage economic growth, the SBA aligned with the CDC (Certified Development Companies) to grant access to 504 Loans.
504 loans are used for funding fixed assets like the construction of new facilities or purchasing existing buildings, which are no less than fifty-one percent owner-occupied and also offer repayment conditions of up to ten and twenty years.
SBA EXPORT LOAN
Small business owners who engage in international transactions could be eligible for SBA export loans.
The SBA finance terms and interest rates for export loans can vary greatly and are only accessible by companies that have been operating for more than one year and export their products overseas.
SBA CAPLINES PROGRAM
SBA’s CAPLines program could be best suited to small businesses in need of short-term operating capital.
A credit line obtained through SBA CAPLines consists of four different loan programs that are all accessible in conjunction with either the 504 or 7(A) loan.
These credit programs all have reduced interest rates (5.75 to 8.25 percent); however, they come with short repayment conditions of about five years.
The growing audience of remote, freelance, and online entrepreneurs, who often require reduced funding to open or develop their businesses, can benefit from the SBA Microloan program.
SBA Microloans may be used for the majority of business purposes, except for purchasing real estate and paying existing debts.
SBA Microloans are financed by the SBA – unlike the other SBA programs, which have intermediary SBA loan lenders – but they originate and get approval via non-profit intermediary lenders.
SBA DISASTER LOANS
Nobody expects to be a victim of an economic or natural disaster. Yet, it does happen; the SBA offers assistance by means of disaster loans.
Small business owners who can provide evidence of unfavorable impact from a disaster may be given a maximum SBA loan of $2 million in funds with rates as little as four percent.
Challenges of Acquiring an SBA Loan
At this point, you may be wondering how hard it is to get an SBA loan. Even though SBA loans are intended to encourage small business owners, getting approval for your loan is not always a simple or straightforward process.
Since the SBA guarantees defaulted loans and because banks and other lenders still bear some risk while they offer reduced rates unlike regular loans, borrowers must typically be eligible for loan consideration.
Lenders often consider five factors to confirm eligibility (called the 5 Cs), and they also expect to see a substantial down payment and a brilliant business plan.
Meeting all these qualification requirements, presenting a faultless application package and raising enough capital to be considered eligible for an SBA loan can be a tough task for anyone — especially if you’re a busy, aspiring small business owner.
The SBA terms also require that all small business owners sign their personal guarantee agreement which states that they would be personally liable to repay the loan if the business can no longer do so.
Most lenders will still need as much warranty from your small business as possible. Sometimes, the real estate or equipment you are purchasing may be used as security for your SBA loan. In other cases, small business owners will have to provide assets that they already own.
While you typically still have to provide collateral, you may not have to offer as much; also the lender could be more open about what they are willing to receive as collateral.
Some small business owners might also be required to make a down payment. For instance, 7(a) 504 SBA loans expect recipients to pay a small fee (usually ten percent) of the entire cost of your project.
Who Can Obtain An SBA Loan?
Owners of small businesses must have a strong credit score and borrower profiles to obtain an SBA guaranteed loan.
To get a loan, you will need to meet the SBA requirements as well as those of its partners.
You must be able to provide evidence that your business is financially capable and prepared to meet the repayment terms.
To demonstrate that your business can repay the loan, you will be required to submit financial paperwork from your company, along with detailed information on how you intend to invest the credit.
If your business can’t currently repay, maybe because you’re still a startup, you must prove that it can be done in the stated period by supplying relevant information such as industry experience and business plans.
To demonstrate that you’ve been an accountable borrower previously, both the SBA and the lender will assess your credit score and history.
Unfortunately, small business owners who have bad credit history will have a difficult time qualifying for the SBA loan. The amount of time it takes to get an SBA loan depends on the proven business credibility of an applicant.
Related: Entrepreneur Education
How to Make an SBA Loan Application
To qualify for an SBA guaranteed loan, you will have to demonstrate your willingness and capability to pay back the funds.
To do so, you will be required to fill out lots of paperwork and then wait an extended period to allow the SBA administration and its associates to process your loan application duly.
You can begin by sending your application to the SBA partner lenders directly.
To find out which lender you should apply to, the SBA offers users a Lender-Match platform, which pairs borrowers with the most suitable loan lenders for their business needs.
The required documents are usually determined by the loan you’re applying for and the nature of your business, but most small business owners can expect that they will have to fill out forms and submit documents such as:
- Federal Private Tax Forms
- Federal Business Tax Forms
- Profit And Loss Statements
- Balance Sheets
- Business Debt Schedule
- AP /AR Agings
- Forms About Your Small Business Operations And History
- Statement Of Your Personal History
- Project-Specific Information
- Your CV Or Resume
You may also be required to submit information about the business or real estate you are looking to buy, the debt you seek to refinance, a projected income statement, business plan, as well as other relevant documents.
Both the SBA and the partner bank (or lender) will then process the information you have provided and decide if you qualify for the loan.
When your SBA loan status is up in the air, they may request for more paperwork while they evaluate your creditworthiness and assess your credit history.
If you receive approval from all parties involved, the funder will disburse your loan, and you can start investing your new SBA funds.
How Long Will It Take To Obtain An SBA Loan?
Getting your SBA loan usually requires a few months.
Besides needing lots of documentation and paperwork, your SBA loan application must undergo processing by both the SBA officials and the lending partner before the loan application is either approved or denied.
Both of these institutions are likely to take some time processing your loan application and disbursing your approved funds.
Borrowers applying for less than $350,000 have two options to accelerate the process: SmartBiz and SBA Express Loans.
Small business owners who need financing will have a hard time finding better loan options than the government-supported SBA guaranteed loan.
Even though they have a broad process of application, SBA loans carry reduced interest rates and extended repayment conditions.
Related: 3 Ways to Qualify for Funding