What are SBA loans? Everything You Need to Know and How To Apply

As a new small business owner, you will need complete knowledge of all the funding opportunities available to you. Many small business owners seek initial loans from friends, family, banks, and other outside investors, but if you’ve tired of all these options, it may be time for you to consider SBA loans. There are many different loan programs that SBA offers, including options for businesses that have been affected by a global event like COVID-19 or a natural disaster.

In this article, you will learn what SBA loans are, how they work, the different types of loan programs offered by the SBA with all their details, the benefits and drawbacks of applying for one, and how to apply if you wish to do so.

Short Summary

• SBA loans are small business financing ranging from $500 to $5.5 million, backed by the Small Business Administration.

• Several types of SBA loans include 7(a) loans, 504 loans, microloans, weather disaster loans, and exporter loans.

• SBA loans’ terms and conditions are friendly to small businesses, with competitive interest rates, long repayment terms, and flexible collateral requirements.

What are SBA loans?

Small Business Administration (SBA) loans are term loans or lines of credit for businesses, ranging from $500 to $5.5 million. Third-party lenders backed by the SBA manage them.

They are designed to help small business owners obtain financing for various purposes, such as business asset acquisition, business expansion, inventory or equipment purchase, and working capital financing.

The terms and conditions of these loans are more favorable than other business loans. These loans have competitive interest rates, longer repayment terms, and more flexible collateral requirements.

Types of SBA Loans

The SBA offers various types of loans to meet the financial needs of small businesses. The three most common ones are standard 7(a) loans, development (504) loans, and microloans, although there are also other types.

7(a) loans

SBA 7(a) loans can be obtained for various approved purposes, including new construction, expansion or renovation, working capital, and partner buyouts or business acquisitions.

The maximum amount of loan: $5 million

Eligibility criteria:

• Being a small business operating for profit.

• Not be in arrears or delay the payments of the debts that exist with the government.

• Having or proposing business in the United States.

• Use the funds in a solid business plan.

• Possess the necessary solvency to ensure the repayment of the loan.

• Demonstrate that credit is essential to carry out the business plan.

Repayment term: Variable, depending on the purpose of the loan and the signed agreement:

• Up to 25 years in the case of loans for the acquisition of assets

• Up to 10 years in case of working capital loans

Interest rates: Variable, with maximum limits established by the SBA

• Loans up to $25,000: Prime Rate maximum rate (preferential rate) plus 4.5%

• Loans over $25,000: Prime Rate maximum interest rate plus 2.25% for terms of less than seven years; Prime Rate plus 2.75% for terms greater than seven years

504 loans

These loans are usually obtained for financing commercial real estate, including the buying or refinancing of existing land or buildings and new construction. They can also be used to purchase equipment.

Maximum loan amount: $5.5 million. Certain energy projects may receive the maximum amount per project, provided they do not exceed $16.5 million.

Eligibility criteria:

• Operating in the United States as a for-profit business

• Have an average net income of less than $5 million in the two years before applying.

• Have a tangible net worth under $15 million

Repayment term: Variable, between 10 and 25 years

Interest: Approximately 3% of the debt

NOTE: 504 loans are exclusively available through Certified Development Companies (CDC), specializing in the specialized in the regulations of these loans.

Microcredits

Micro credits are microloans provided by SBA so that small businesses can expand.

Maximum loan amount: $50,000

Eligibility criteria: Each SBA lender sets its requirements, including some form of collateral

Repayment period: Up to 6 years

Interest: Between 8% and 13%

Weather Disaster Loans

The SBA provides financial help to small businesses that have suffered losses due to weather catastrophes. Natural disaster loans help companies to rebuild, repair, or replace damaged property and assets.

It also directs these loans to homeowners and renters affected by severe weather to replace or repair the occupied dwelling and damaged personal items.

Maximum loan amount:

1. For businesses: up to $2 million

2. For homeowners: up to $40,000 for repairs and replacement of personal effects, and up to $200,000 for repairs or replacement of the main residence

Eligibility criteria:

• Being in a declared disaster area

• Having suffered damages or losses in inhabited property or business

• Not having the real financial capacity to finance their recovery

Repayment period: Up to 30 years

Interest: Variable, depending on the borrower’s ability to pay

Loans for exporters

It is a type of 7(a) loan aimed at companies that seek to expand in international markets and need funding to develop, promote and support their export activities.

Maximum loan amount: $500,000

Eligibility criteria:

• Being a small business that operates for profit within the North American territory

• Have the ability to pay

• Being involved in export activities, following a plan with strategies and objectives

Repayment period: Up to 7 years

Interest: Variable, not to exceed the maximums imposed by the SBA

The export working capital program

These 7(a) loans are designed to provide short-term working capital and support businesses in fulfilling international orders, purchasing inventory for export, and other business-related expenses.

Maximum amount: $5 million

Eligibility criteria:

• Being a small business that operates for profit within the North American territory.

• Be involved in export activities.

• Submit an export plan with strategies and objectives to assess the project’s feasibility.

• Demonstrate the need for working capital for export.

Repayment period: Between 1 and 3 years

Interest: SBA Lenders and borrowers negotiate the interest rate, and there is no maximum interest rate limit from the SBA

International Trade Loans

International trade loans help companies that are expanding or affected by imports through long-term financing. They are used in export transactions for fixed assets, construction, real estate equipment, and working capital.

Maximum amount: $5 million

Eligibility criteria:

• Meet the basic criteria for a standard 7(a) loan.

• Participate in international trade.

• Demonstrate the ability of the company to expand in current markets or develop new markets.

• Have a schedule that specifies the fulfillment of specific use of the loan for the activities allowed.

Return period:

• Up to 10 years for permanent working capital and machinery or equipment

• Up to 25 years for real estate

Interest: SBA Lender and borrower negotiate the interest rate, subject to the maximum limits established by the SBA

SBA Express Loans

It’s another type of 7(a) loan. It provides fast (36 hours) and simplified financing to small businesses and focuses on expediting the application and approval process, allowing businesses to obtain capital faster and with fewer requirements.

Maximum amount: $500,000

Eligibility Criteria: Each SBA lender sets its requirements

Repayment period: Up to 10 years

Interest: Variable, not to exceed the maximums imposed by the SBA

Benefits and Drawbacks of SBA Loans

Before applying for any of the SBA loans, you must know the benefits and drawbacks of doing so. Weighing the pros and cons and making informed decisions minimizes the risks of issues and problems in the future.

Benefits of requesting an SBA loan

• Lower interest rates compared to other business loans

• Backed by the SBA, which provides greater security for the lender and facilitates access to financing for small businesses

• Flexible terms regarding repayment

• Financing for a broad range of business needs

• Resources and business advice to help small businesses succeed

Disadvantages of requesting an SBA loan

• Lengthy application process due to exhaustive documentation and review processes

• Request for personal guarantees to back the loan

• Strict requirements and demand for a variety of documents and guarantees

• Restrictions on the use of funds, which must be used for specific business purposes

• Maximum limits on the loan amounts that can be requested. They vary by program and may not be enough

How to get an SBA loan?

If you decide that an SBA loan is the best option for your small business, you can start the credit application process by following these steps:

• Learn about the SBA offer: Access the SBA website and go to the “Loans” section. Read the terms and conditions, the amounts offered, interests, and terms, and compare them.

• Choose the indicated loan: Select the loan that best suits your business needs. Take note of the requirements, necessary documents, and everything you need to gather to fill SBA form and make the application.

• Lender Match: This SBA tool helps you find lenders near your area. Enter your ZIP code in Lender Match for information on the SBA-approved lenders nearest you.

• Apply for the loan: Once you have identified the right lender, apply for the business debt through them. They will be in charge of approving your application and helping you manage the loan.

Conclusion

In conclusion, SBA loans present a versatile and attractive funding option for small business owners seeking financial support. With various loan programs catering to diverse business needs, these loans offer favorable terms, including competitive interest rates, extended repayment periods, and flexible collateral requirements. For those considering SBA loans, a step-by-step approach involves learning about available options, selecting the appropriate loan, using tools like Lender Match, and applying through an approved lender to access the financial assistance necessary for business growth and success.

FAQs

What is the SBA?

The SBA is the Small Business Administration, an agency of the United States government that supports small businesses by offering loans, advice, and resources to promote their growth and success.

How to pay off an SBA loan?

There are several options. You can directly pay the lender, who will indicate the means. Another option is to use the MySBA loan portal, which allows you to pay and check balances and maturities. You can also set up automatic payments deducted from your bank account.

What are the requirements to get qualified for an SBA loan program?

The requirements vary according to the type of loan chosen. Generally, your business must have a stable income demonstrating the ability to pay and a good credit history. Your personal credit history and score should also be good.

Can SBA loans be used for international trade?

Yes, specific SBA loan programs are aimed at helping businesses involved in international trade. These loans can finance various aspects of export activities, including working capital, fixed assets, construction, and more.

What are the alternatives to SBA loans for small businesses?

While SBA loans can be a great funding option for small businesses, there are alternative sources of financing to consider as well. These alternatives include Business Line of Credit offered by Bluevine, Same Day Funding offered by Capital Express, and Millendeal Business Loans.