What Is An SBA Business Loan?

An Introduction To the Topic

An SBA business loan is a loan that comes from the Small Business Administration, a government agency that supports entrepreneurs and small businesses. The SBA will partially guarantee your small business loan, meaning you’ll have an easier time qualifying for a loan from a traditional bank.

SBA loans are critical for small businesses because they do more than provide the business with the funds it needs to start its operations. The loan also has broader eligibility requirements, plus you can find these loans in varying values. The overall terms for your loan will often be more favorable than what you would get elsewhere.

A Closer Look at the Small Business Administration

The Small Business Administration is an organization devoted to supporting small businesses. This United States government agency offers help for small businesses by providing government-backed guarantees on various business loans from banks and credit unions. The work is about giving these s access to capital.

The objectives of the SBA have been consistent since its formation in 1953. The SBA is about protecting small businesses and supporting free enterprise. By providing guarantees on business loans, it becomes easier for small businesses to remain competitive and capable of starting up right.

The Purpose of SBA Loan Programs

SBA loans for small business use are necessary for allowing businesses to thrive. The SBA does not directly provide money to a business. Rather, the SBA provides a guarantee on most of the funds, meaning the SBA will cover much of the debt if you default on the loan, and the lender will not have to lose as much money. Because of this measure, the lender will not take as much risk, thus improving your chances of receiving the loan your business requires.

SBA loan programs will help businesses receive the assets necessary for many operations, including for working capital and acquiring critical equipment and inventory. Businesses can also use their funds to buy real estate or land for work activities.

Types of SBA Business Loans

7(a) Loan Program

The first of the SBA business loans is the 7(a) loan. This loan includes a few terms:

• Up to $5 million in funds
• A guarantee from the SBA of up to 90% of the loan’s value
• A term of up to seven years for working capital, ten years for business acquisition, fifteen for equipment, and 25 for year estate
• Fixed interest rate, with the maximum being the prime rate plus 8%

CDC/504 Loan Program

The SBA works with certified development companies or CDCs to provide CDC/504 program loans. This loan program works mainly for commercial real estate and construction projects.

A CDC/504 loan comes from two separate sources. A private lender will cover up to 50% of the funds in a trust deed, while a CDC will provide up to 40% in the second trust deed. The applicant provides the remaining 10% as a down payment. The SBA also has a guarantee on the CDC’s contribution.

Other terms in the loan include these points:

• Up to $5.5 million in value
• Minimums for some loans, including minimums of $500,000 through some lenders
• Repayment terms of up to 25 years
• Interest rate capped at the prime rate plus 6%; borrowers can negotiate rates with lenders

Microloan Program

The SBA’s microloan program provides smaller loans of $50,000 or less. These loans have terms of up to seven years, plus interest rates can go from 7 to 9% in most situations. Businesses with lower incomes or businesses run by marginalized communities are often more likely to qualify for microloans.

Advantages of SBA Business Loans

1. You can utilize a lower down payment.

While a typical business loan requires a down payment of about 10 to 30% of its value, you can find a small business SBA loan with a down payment of around 5 to 10%. The total reduces your burden when entering into the agreement.

2. The collateral requirements for SBA business loans are lower.

The amount of collateral necessary for an SBA business loan is less than what a traditional loan requires. Some assets you can use as collateral include real estate, accounts receivable, and stocks or bonds. You may have more success in getting favorable rates when you have more collateral, so check with a lender to see what the terms are.

3. The repayment terms are often longer on these loans.

Small business loans often have repayment terms from six months to five years. SBA loans have repayment terms of five years or longer, so you won’t have to spend as much each month when paying off your loan.

4. You’ll also receive access to counseling and educational resources.

The SBA provides borrowers access to various resource centers, including Small Business Development Centers and the SCORE program.

5. The SBA provides support for minority-owned and disadvantaged businesses.

Many businesses run by those with lower incomes often need help to get their businesses afloat. The same is also true for many minority-owned businesses, as the survival rate for many minority-run businesses isn’t as strong as it is for non-minority s. The SBA provides help for minority-run s through special funding programs, counseling services, and development setups.

What Are the Limits of SBA Loans For Small Business Use?

1. The documentation and application process is more extensive.

After figuring out which SMA business loan you’ll require, you’ll need to apply for that loan through your nearest lender. You’ll have to collect such documents as a financial statement, a certificate for work, income tax returns, resumes, your current business lease, and an overview of your business. Entities aiming to purchase an existing business will require other items like a balance sheet and any franchise or licensing agreements one holds.

2. Approval times are longer.

It can take from 30 to 90 days for you to receive approval for a small business SBA loan. The review takes longer than it would for a traditional non-SBA loan.

3. The eligibility requirements are strict.

You will likely require a decent credit history of at least two years and a FICO score of 690 or greater before you can apply for SBA loans for small business use. You must also have evidence that your SBA loan is one that you cannot find from non-government sources without finding unreasonable terms. Your business must also physically operate in the United States.

4. Funding for certain industries may be limited.

Not all industries are eligible for SBA loans. You won’t be able to get a loan if you run a business in an industry that is highly speculative or unstable. Lending firms, nonprofits, multi-level marketing programs, real estate investment firms, and consumer cooperatives are ineligible for SBA loans.

How to Apply For SBA Loans For Small Business

1. Start by looking for an SBA-approved lender.

Be sure you look for different SBA-approved lenders when searching for an SBA loan. Most major lenders and banks support 7(a) loans, while other smaller s can help you with a 504 loan or microloan. Check the terms of what each lender supports, and see if you meet their eligibility requirements.

2. Collect the necessary documentation for your loan.

You will need to provide the proper documentation for a loan, including:

• The general SBA application form
• A personal history statement
• A personal financial statement
• Business financial statements
• Any prior loan applications
• Business tax returns, preferably from the last three years
• Business license
• Resumes of all business leaders
• A listing of your business history

3. Establish a comprehensive business plan.

Your application should include a listing of how much you need from a loan and its term. You should provide details on what you will do with your loan and how you plan on repaying it in full.

4. Submit the loan application when you are ready.

Your lender will review your application first. The lender will pass your info on to the SBA if they want the SBA to guarantee that loan.

5. Follow up with the lender after a few days or weeks.

Be sure to consult your lender of interest for updates on your loan progress. There’s often a chance the lender has sent your info to the SBA to receive a guarantee on the loan.

A Final Note About Getting a Small Business SBA Loan

An SBA business loan can ensure you receive the support you need when getting your business off the ground. Your SBA loan will help you receive financial support with favorable terms that are easier to manage. You’ll also have an easier time finding financial help through the SBA if you’ve tried other loan measures before, as the SBA will guarantee much of your loan.Be sure to look at the SBA loan options available for your small business financing needs. It is easier to cover the cost of an SBA loan, and the terms are often more favorable. You can contact us at the CapCompass if you have further questions on what can work for you.