Small businesses looking for funding may be eligible to receive loans guaranteed by the Small Business Administration (SBA). These loans have lower interest rates and help thousands of businesses grow. SBA loans come in several forms to suit a variety of businesses and their needs.
An SBA loan is financing guaranteed by the U.S. Small Business Administration. These loans are designed to help small businesses get the funding to start, grow, or expand their business.
The SBA reports that half of small businesses fail by their fifth year, so many conventional lenders are cautious about new businesses. By backing loans, the SBA encourages small business growth. However, the government backing means that they involve more work to be qualified and apply for an SBA loan.
While SBA loans can be ideal for many small business owners, not all will find a loan that meets their needs or meet qualifications. When you are looking for funding for your small business,
|Loan amounts||$10,000 to $5,000,000||The Federal Reserve reports that the average loan is $633,000|
The smallest and largest loan amounts are hard to find
|Interest rates||SBA caps rates||Up to the discretion of the lender|
|Qualifications||Varies by type of SBA loan but broad requirements overall||Varies by lender but often higher to account for additional risk|
|Time to funding||A few weeks to three months||Within days|
|Usage restrictions||Sound business purposes|
Some types have specific purposes
|Varies by lender. Many require detailed information about spending plans|
|Collateral||Personal guarantee is usually required|
Collateral or down payments may be required
|Options for no personal guarantees or collateral|
|Flexibility||Government sets options||May be able to negotiate repayment schedules and other details|
SBA loans are generally seen as better than loans from traditional lenders. SBA loan interest rates are almost always lower because the government guarantees some of the loan, which means less risk for lenders. Certain SBA loans are also open to younger businesses than traditional lenders are usually willing to serve.
However, if you need fast funding, a traditional loan may be better.
The Small Business Administration offers several types of loans, and these categories often have sub-categories. Below are the most common types and sub-types that business owners should know.
Most of the loans highlighted below are specific categories of SBA 7(a) loans.
|Primary purpose||SBA loan interest rates|
|Standard SBA 7(a)||General business purposes||Below $50,000: Prime + 6.5%|
Over $50,000: Prime + 4.5%
|Express loan||Fast funding||Prime plus 4.5% to 8%|
|CDC/SBA 504 loan||Long-term assets like equipment and real estate||Typically around 3% of the loan amount.|
|SBA microloan||Small amounts for startups and underserved communities||Typically 6% to 9%|
|SBA CAPLines||Businesses needing funds on a rotating basis for certain needs||Comparable to SBA 7(a) loans|
|SBA export loan||Businesses offering goods and services abroad||Can be negotiated|
|SBA disaster loan||Support for businesses affected by natural and economic disasters||Varies|
|SBA community advantage loan||Community-based loans for underserved markets||$50,000 or less: Prime + 6.5%|
$50,000 to $250,000: Prime + 6%
$250,000 and above: Prime + 4.5%
When people refer to an SBA loan, they usually mean the most common type: the standard SBA 7(a) loan. Unless the loan is for a specific purpose or meets certain qualifications, a business will usually apply for a standard SBA 7(a) loan.
These loans do not have many restrictions on how the funds can be used. Many business owners use them for working capital, refinancing other debts, purchasing equipment and real estate or acquiring inventory.
The SBA guarantees a certain amount based on the total loan amount. It backs 85% of loans under $150,000 and 75% of higher-cost loans. Like most loans, they are repaid with monthly payments that include principal and interest. Rates are either fixed (they do not change during the loan term) or variable.
SBA 7(a) loans come in a few formats, including the small loan and the large loan option. The requirements and details differ by type.
Standard SBA 7(a) requirements and details
Business owners should check for specific loans within this category they may be eligible for. For example, if at least 51% of the business is a veteran or in the military, they can apply for this loan. The business owner must be an honorably discharged veteran, active-duty military, active reservist or National Guard member. Widowed spouses of service members who died in service can also apply.
Business owners needing money quickly may also apply for the SBA 7(a) express loan up to $500,000. The turnaround time to approval is less than 36 hours, but the SBA only guarantees 50% as there is less time to evaluate qualifications. Funds don’t come right away, however. The business owner will still have to wait a while for funds to be distributed.
SBA express loan requirements and details
These loans are similar to SBA 7(a) loans, but they have more requirements and some restrictions. SBA 504 loans are generally used for long-lasting machinery and equipment, purchasing real estate or constructing buildings.
The first half of the loan is backed by the SBA. It has similar requirements and terms as the SBA 7(a), but the government will only fund up to 50% of the total loan value (TLV). The other half of the loan comes from a Certified Developing Company (CDC) that usually puts up 40% of the loan value. The remaining 10% is the down payment from the borrower. Banks that offer this loan will have a CDC they work with.
SBA 504 loan requirements and details
A 504 loan cannot be used to purchase working capital, inventory, current debt or rental real estate.
SBA 504 loans have extra requirements. The borrower can’t have an average net income of over $5 million during the last two years, and its net worth has to be less than $15 million. The loan amount also can’t be more than the business owner’s assets. If the loan is for construction, the business has to use at least 60% of the property and 80% within 10 years. Finally, for every $65,000 of the loan, the business has to create or keep a job.
This loan program is designed for businesses that need small amounts of money, typically up to $50,000. The interest rate is typically higher than a 7(a) loan, but the loan terms are more flexible.
Only certain non-profit lenders can provide these loans. Microloans don’t require a credit history, and income requirements are lower than most loans. Many microloans go to underserved and low-income individuals and communities that often cannot get traditional loans. These loans are also ideal for
Although SBA loans are typically not given to non-profit businesses, some childcare centers may qualify.
SBA microloan requirements and details
Microloans cannot be used to buy real estate or pay other debts.
This program offers lines of credit usually bundled with SBA 7(a) loans, although it is possible to get a CAPLine as a standalone in some cases. Lines of credit typically have interest rates that mirror the standard SBA 7(a) loan.
CAPLines come in a few forms:
Many lenders consider exporting to other countries risky, making it difficult for businesses wanting to offer their products and services abroad.
Export loans are in a specific categorization of SBA 7(a) loans, and it has subcategories for specific uses:
These loans generally require that the business has been successfully operating internationally or that the business owner has previous experience doing business abroad.
SBA export loan requirements and details:
This loan program is designed for businesses affected by a natural disaster and need to repair or replace damaged property. The business has to have evidence it was impacted by a disaster, and there are varieties based on the type of disaster and how it impacted the business. Business owners can apply for more than one at a time if they qualify for more than one type.
This category includes loans created to support businesses through the COVID-19 pandemic. It also includes the Military Reservist Economic Injury Loan, which allows businesses to get up to $2 million for operating expenses if a critical employee is called to active duty.
The interest rates, maximum amount, loan term and other details are determined by what kind of disaster and other factors.
The community advantage loan is a pilot program scheduled to end on September 30, 2024. At that time, the program will stop accepting new applicants unless it is extended or becomes permanent. The program was created in 2011 and was extended past its original expiration date of March 31, 2020.
These loans are for small businesses in underserved areas. Because of the unique audience for this loan, credit score requirements are much lower than those for other loans. Unlike most business loans that require a strong business credit history and personal credit score, a strong business plan is acceptable for new businesses without a credit history, and low personal credit scores are accepted.
Like SBA 7(a) loans, these loans can be used for almost any reasonable business purpose. These loans come from specific lenders.
SBA community advantage loan requirements and details:
Each program has different requirements, so applicants should check with their lender and the SBA website to see specific requirements. Some requirements are standard for all SBA loans.
To qualify for an SBA loan, a business must meet be:
The applicant needs to have invested personal equity into the business and be current on any existing government debt. The owner will need to show a reasonable business need and that they have not been able to secure other financing.
Anyone who owns a percentage of the business should be prepared to give an unlimited personal guarantee. This gives the government to claim the personal assets of the borrowers if the loan is not repaid. Some loans only require owners of 51% or more to have a personal guarantee, but other types will require it even for owners with smaller percentages of ownership.
While some types of SBA loans have more specific steps, the general process of getting an SBA loan will resemble the following:
Most SBA loans take a few months to process. Some types are faster, and some lenders may be able to process your application faster too.
Turnaround for approval of SBA loans can vary depending on the type of loan involved. Express loans are generally reviewed within 36 hours of submission. However, the general rule of thumb is that it can take anywhere from 30-60 days. You can check for updates through the Capital Access Financial System (CAFS) found on the SBA website after you create an account.
If you already have an SBA loan, you can check the status of your balances, payments, and other data through the CAFS. This online data management tool is available for most loan types, including the Paycheck Protection Program (PPP), all SBA disaster loans like COVID-19 EIDL and physical loss loans, 7(a) loans, SBA/CDC 504 loans, and the microloans program.
SBA loans can be an excellent way for small businesses to get low-cost financing, but the variety and requirements can seem overwhelming.
If you plan to apply for an SBA loan, consider using Llama Loan as part of your process. We have tools and resources to help you find lenders that offer SBA loans in your area, collect the information you need and find the right financing for your business.