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The Small Business Administration (SBA) does a lot to facilitate the growth of small businesses in the US. The government agency provides free business counseling, gives disaster relief loans, connects businesses with government contracts, and guarantees business loans. Many businesses count on SBA loans as a source of funding when they’ve been turned down elsewhere.
Because of the nature of SBA loans, there is less risk for lenders. Small businesses can find loans through the SBA that have better interest rates and repayment terms than they otherwise would through banks. However, not everyone is able to get SBA loans. The application process is thorough and requires that businesses meet certain criteria. In this article, we’ll talk about what SBA loans are, take a look at the different types of loans, and go over the qualification requirements.
What are SBA loans?
SBA loans are loans for small businesses that are guaranteed by the Small Business Administration. The SBA doesn’t lend money directly. Instead, it works with local lenders to guarantee that a portion of SBA loans will be repaid in the case of default.
SBA loans come in six varieties: SBA 7(a) loans, CDC/504 SBA loans, CAPLines, export loans, microloans, and disaster loans. Out of these, SBA 7(a) loans, 504 SBA loans, and microloans are the most popular. We’ll spend more time talking about the three popular types below, so we’ll briefly mention the other three right now.
CAPLines can be fixed or revolving lines of credit that are best for covering seasonal costs. Borrowers can have up to 10 years to pay off CAPLines, and they need to provide short-term collateral like assignable contracts or invoices. These SBA loans are available up to $5 million.
Export loans are SBA loans that are specifically designed for businesses seeking to fund new export activity. These SBA loans are also available in amounts up to $5 million and are usually paid off within 12 to 36 months.
Disaster loans are SBA loans available for businesses located in designated disaster areas. Physical or economic damage from a hurricane, tornado, drought, flood, and more can qualify a business to receive disaster SBA loans. These SBA loans are given in amounts up to $2 million and allow borrowers up to 30 years for repayment.
Are SBA loans funded by the Small Business Administration?
Of all the types of SBA loans, only disaster loans are funded by the SBA. All other SBA loans are funded by banks, non-profits, or other local institutions (depending on the type of loan). The SBA connects local lenders with small businesses and guarantees that a portion of the loan will be repaid even if the business defaults. This portion is usually between 50% and 85% of the loan amount. If a business defaults on a loan, the SBA would pay the lender that amount.
Since SBA loans are guaranteed by the Small Business Administration with government funds, the application process can be lengthy. The SBA wants to make sure the businesses they work with have a high likelihood of success (or at least repayment). The shortest time a business can see funding would be two weeks, but that would only be the case for a small business that is well prepared with all of the necessary documents. In other cases, it can take multiple months to get funding.
General requirements for SBA loans
All SBA loans (except disaster loans and some microloans) are only given to for-profit businesses. Businesses eligible for SBA loans must also have operations in the US. Businesses must be of an adequate size—not too big but not too small. For example, a sole proprietor who just opened two months ago probably wouldn’t be qualified for SBA loans. However, if they’ve been open for two years and have some cash flow, they might.
The SBA also requires that businesses exhaust other financial sources before turning to SBA loans. SBA loans aren’t designed to be the first-choice option for small businesses. SBA loans also require that the business owner is investing their own time or money in the business to be eligible. A business owner that used only outside funding and has a hands-off role in operations wouldn’t be qualified.
One of the most important factors in obtaining SBA loans is your credit score (business and personal). SBA loans are given to business owners that have solid track records of borrowing and repayment. It could be hard to qualify for SBA loans if you have bad credit, or if your business has no borrowing history.
Application guidelines for SBA loans
If you’re thinking of applying for one of the SBA loans, get ready for some paperwork. The application process is long and requires a lot of attention.
The first thing to remember is that SBA loans are given out through local (or online) lenders, not the SBA itself. These guidelines are a form of general advice, but each lender can have a unique process. Step one is to visit the SBA’s Lender Match website and create a profile.
Once you match with a lender, you’ll complete the loan application. Potential lenders of SBA loans will look closely at your business and decide if you’re a safe bet. You’ll have to provide many types of documents including your business description, business plan, financial statements, information on your collateral, and more.
What the lender looks for is good credit, a thorough business plan, and the ability to repay. To increase your chances of qualifying for SBA loans, it also helps if your business is profitable.
Here are some other documents you may need:
- Bank Statements
- Loan application history
- Balance Sheet
- Business Lease
- Profit & Loss Statements
- Business certificate or license
- Business Tax Returns
- Business certificate or license
- Personal Tax Returns
- Business Debt Schedule
- Business Plan
Instead of going online to apply, you can also visit a local SBA office to connect with lenders. There are a number of office for SBA loans in Texas. Most are around large metro areas like Houston, San Antonio, and Dallas. A local SBA office will give you a list of approved lenders to start you on the process.
SBA loans personal guarantee requirement
Before we jump into each type of loan, you should know that all SBA loans require personal guarantees. A personal guarantee ties your own assets to the loan should you go into default. It’s not ideal, but it is a requirement of SBA loans. Since you’ll be giving a personal guarantee, lenders also look at your personal credit score. SBA loans require anyone who owns more than 20% equity in the business to submit a personal guarantee, and that includes your in-laws.
SBA loans: The SBA 7a
The SBA 7(a) is the most common type of all SBA loans. In 2018, the SBA funded over $25 billion in SBA 7(a) loans alone.
SBA 7(a) loans are so common that these loans are what most people are talking about when they use the term “SBA loans.” These SBA loans offer good interest rates and can be used for almost anything applicable to business. For example, a business can use an SBA 7(a) loan to buy another business, purchase real estate, buy equipment, refinance debt, and more.
These SBA loans are offered in amounts up to $5 million and have long repayment terms: 10 years for working capital loans, and 25 years for commercial real estate. To get a 7(a) loan, you need to have a credit score of 680 or better. You’ll also have to put between 10% and 20% down on the loan, and you’ll be asked to provide collateral for a portion of the loan.
SBA 7(a) interest and fees
Since SBA loans are a joint service between the government and lenders, there are some extra costs. The SBA charges a guaranty fee of 1.7% for loans under $150k and 2.25% for loans above $150k. This fee is usually paid by the lender, but it could be added to your total loan amount. Certain lenders can also charge their own origination fees for SBA loans.
The SBA limits how much interest banks can charge you for SBA loans. You’ll be charged the prime rate (set by the market) plus a spread rate—an additional percentage. This additional percentage is capped at 2.25% for loans under 7 years long and 2.75% for loans over 7 years. Some lenders charge a smaller spread rate, so it’s a good idea to shop around and compare SBA loans.
SBA 7(a) excluded businesses
SBA loans are available to thousands of businesses, but there are a few areas of business that are excluded from receiving SBA 7(a) loans. These areas include:
- Pawn or private clubs
- Life insurance
- Bail bond
- Religious teaching
- Real estate development
- Political and lobbying activities
- Mortgage servicing
- Oil wildcatting
CDC/504 SBA loans
The second popular type of SBA loans is the CDC/504 loan. These SBA loans are funded 50% by a lender, 40% by a Certified Development Company (CDC), and 10% by the borrower in the form of a down payment. CDCs work with SBA lenders to provide financing to specific business operations.
These SBA loans are meant for commercial real estate—with some restrictions. The business is required to occupy at least 51% of the space, so the loan can’t be used to just purchase a facility and rent the whole thing out. The business is also required to have less than $15 million in tangible net worth, and it might be required to meet public policy or job creation goals.
CDC/504 SBA loans are given with a maximum amount of $14 million, or $20 million in total if more than one is taken out.
CDC/504 SBA loans interest
These SBA loans carry a fee of about 3% of the loan amount. This fee can be financed into the total loan, as well. As far as interest rates go, it gets a little complex. With this type of loan, there are two sources of funding: the CDC and a bank or non-bank lender. The SBA sets limits on the amount of interest that a CDC can charge, and the current rate is about 3.87% for 10-year loans and 4.21% for 20-year loans. Remember, the CDC covers up to 40% of these SBA loans.
The SBA does not limit what banks can charge for their portion, which is usually 50% of the loan. A standard interest rate can be anywhere between 5% and 9.75% for that portion. When blended together, borrowers can expect to pay an interest rate between 5% and 6% for CDC/504 SBA loans.
These SBA loans require the borrower to have a credit score of 680 or better, just like SBA 7(a) loans.
Microloans are another popular type of SBA loans. The SBA started their microloan program in 1992 and by 2017 the SBA had given over $900 million in microloans. When you consider that the maximum loan amount is $50,000, you can see that many businesses have benefited from this program.
Microloans can be used to start a business or for working capital, furniture, supplies, inventory, equipment, and more. However, you can’t use these SBA loans to purchase real estate or refinance debt.
These SBA loans are managed by specific community-based non-profits called intermediaries. Each one may have a slightly different application process, but many require business owners to provide collateral and personal guarantees. The minimum amount given for these SBA loans is $500, and the program is available to small businesses even in the startup phase—as long as you have a good business plan.
Microloans interest and fees
Micro SBA loans can have interest rates between 8% and 13%. There are also no fees with this loan program. Lenders will want to see that you have a credit score above 640, 40 points less than what is required for a 7(a) or CDC/504 loan. These SBA loans are also expected to be paid off quickly: 6 years is the maximum time allowed for repayment.
Business Credit As An Alternative
If you would like to get approved for business lines of credit without a personal guarantee then business credit may be an option for you. The process for business credit can feel daunting, but it is possible. If you’d like to hire professionals to handle the process for you then we recommend contacting us for a free business credit overview.
The Credit Agents