SBA Loans

 There are many reasons why business owners may need to borrow capital. Examples include investing in new equipment or expanding operations; providing better training and development for employees; enhancing health benefits and improving salaries, among others. A loan from the Small Business Administration might be right for you and your business.

What is a Small Business Administration (SBA) loan? 

The SBA is a government agency dedicated to small business growth. The organization offers several loan programs for a wide variety of needs and company types, but the SBA does not directly lend money; they partner with banks, community development organizations, and micro-lending institutions and set guidelines for how those lenders can structure loans. 

Each type of SBA program is unique and involves parameters and stipulations not necessarily offered in the other SBA loan programs. These conditions often revolve around how the money can be used and the terms under which it should be repaid. The details of the program are constantly changing, so the more familiar your banker is with SBA loans, the simpler the process could be for you. 

Advantages of an SBA loan: Guaranteed by the government: 

If the loan is defaulted or unpaid, the lender can ask the government to honor the loan. This reduces the risk to the lender, allowing it to extend credit to borrowers it might otherwise decline. 

Favorable terms: Because of the government guarantee, lenders may be able to provide loans with more favorable terms than a conventional loan.

More time to pay: Repayment terms are longer than traditional loans, extended to up to 10 and even up to 25 years in some cases. Plus, on loan terms of less than 15 years, there is no prepayment penalty. 

Affordability: SBA loans often require lower down payments, which allows the borrower to preserve the cash they need to operate the business. 

Types of lenders that handle SBA loans: 

• SBA standard lender – This qualified lender must submit transactions for review and receive a guarantee upon approval for every loan. 
• SBA preferred lender – This lender is the more qualified of the two types. Loan approval times can be reduced because the SBA checks only the lender’s justification of eligibility for the borrower, not their underwriting. 

How to apply for a Small Business Administration Loan: 

Each type of SBA program is unique and often revolves around how the money can be used and the terms under which it should be repaid. 

Ready to apply? Now it’s time to get ready to complete and present all the necessary paperwork. Follow the five steps to a successful SBA loan application: 

Step 1: Know exactly what your business needs are: 

Know the answers to these questions: 

• Why do you need the money? 
• How much do you need? 
• How long will it take you to pay it back? 
• What is the current financial health of your business? 
• Do you have collateral to put up? How much do you need? 
• How fast do you need the money?” 

The answers you give may help determine your best course of action. Once you know how much you need and how it will be used, the better equipped you’ll be to determine the best loan option for your business needs. 

Purpose of the borrowed funds: Back up your request with facts that support how much you are asking to borrow. Lenders appreciate the effort, and it will give them the confidence they need to trust in your ability to pay them back. 

Step 2: Know what lenders are looking for: 

The 5 C’s of Credit 

1. Capacity – Can your business absorb unexpected expenses or a downturn in the economy? 

2. Capital – Do your assets outweigh your liabilities? How much capital have you and others invested? 

3. Collateral – This includes accounts receivable, inventory, cash, equipment, and commercial real estate. 

4. Conditions – Certain factors may affect your ability to make payments, such as the economy, industry trends, and pending legislation. 

5. Character-- Personal integrity, industry experience, credit history, and good standing are critically important. 

Step 3: Provide an overall financial snapshot of your small business: 

Be ready to share details about the financial side of your business. Provide the lender with a comprehensive background on your company, future growth plans, and your own personal information. 

• Maintain a good credit score 
• Borrow only what you know you can pay back 
• Present a repayment plan, complete with projections and a safety net 
• Show a history of paying bills on time 
• Provide collateral 

Step 4: Choose the right SBA loan for your business 

The 5 types of SBA Loans* 

1. SBA 7(a) Loan 

2. SBA Express Loan 

3. SBA Microloan 

4. SBA 504 Loan 

5. SBA Disaster Loan 

*SBA loans and terms vary by lender. 

SBA 7(a) loan: The 7(a) loan is the basic SBA loan; designed to finance established small businesses. It can offer access to more capital with longer terms and, in many cases, improved cash flow. 

Ideal for: 

• Purchasing or expanding a business 
• Working capital, improvements, or refinancing 
• Equipment, including machinery and vehicles 
• Furniture and other office essentials such as printers, fixtures, and more 
• Purchase, refinance, build, or renovate commercial property 

Advantages: 

• Longer maturity and easier qualification than conventional loans 
• Lower down payments 

Loan maturity: Up to seven years for working capital 

• Up to 10 years for equipment and business acquisition 
• Up to 25 years for real estate 

Maximum loan amount: 

• $5 million 

SBA Express loan: This loan is generally used for equipment and working capital. Ideal for: 

• Working capital 
• Purchasing equipment 
• Financing vehicles or inventory 

Advantages: 

• Longer maturity than some conventional loans 
• Easier qualifications than a conventional loan 

Loan maturity: 

• Up to seven year-term with first-year revolving option and balance amortized across the remainder of the term for working capital 
• Up to 10-year term for equipment 

Maximum loan amount: 

Up to $350,000 

SBA Microloan: This is a very small, short-term loan, typically offered to new and growing small businesses and to certain types of not-for-profit child-care centers. For microloans, you may need to fulfill training or planning requirements designed to help you launch or expand your business in order to be considered eligible. 

Ideal for: 

• Working capital 
• Supply and inventory purchases 
• Equipment, including machinery and vehicles 
• Furniture and other office essentials such as printers and fixtures 
• Partner buyouts 

Cannot be used for: 

• Debt repayment 
• Real estate 

Maximum repayment term:

• Six years – varies based on: 
• Amount 
• Plans for the funds 
• Needs of the borrower 
• Specific lender requirements 

Maximum loan amount: 

• $50,000 (average loan: $13,000) 

SBA 504 loan: Primarily used for real estate and equipment, this loan offers long-term, fixed-rate financing for major assets, including land and buildings. 

Qualifying criteria: 

• The net worth of your small business should be less than $15 million 
• Net income cannot exceed $5 million after taxes for each of the previous two years. 
• SBA 504 loans are typically financed 50% by the participating commercial lender, up to 40% by the Certified Development Company (CDC) which is what the SBA guaranties, and as little as 10% by the business borrower. 

Ideal for:

• Buying land 
• Financing long-term machinery 
• Purchasing existing buildings 
• Building or renovating facilities 
• Refinance debt 

Cannot be used for:

• Working capital or inventory 

Advantages: 

• Longer maturity and easier qualification than conventional loans 
• Lower down payments or fixed assets 

Loan maturity: 

Up to two years on interim construction period 

• Up to 10 years on equipment 
• Up to 25 years on real estate 

Maximum loan amount: 

• No maximum 

SBA Disaster loan: Designed to help businesses damaged, destroyed or affected in a declared disaster, a disaster loan offers low interest rates. 

Ideal for: 

Repairing or replacing business assets such as: 

• Real estate 
• Machinery 
• Equipment 
• Inventory 

Maximum loan amount: 

• $2 million 

How to apply: Following a presidential disaster declaration, a Disaster Loan Application and IRS Form 4506-T must be submitted directly to the SBA. The following information will be required: 

• Contact information 
• Social Security number 
• Federal Emergency Management Agency (FEMA) registration number 
• Deed or lease information 
• Insurance information 
• Income, account balance, monthly expenses, and other financial information Employer identification number (EIN) for business applicants