SBA Loan Repayment

Updated October 5, 2020

Whether you’re an established small business or a new startup, the SBA offers several loan options that you can benefit from, and with flexible repayment options. The aim of the SBA is to facilitate the lending process between established lenders and businesses of all sizes. The SBA acts as both a “middle-man” (facilitating the loan process and connecting lenders/borrows) and a guarantor for the portion of the loan. This is a government-backed program.

SBA loans can be borrowed up to five million dollars, and usually, come with more flexible repayment plans. Today, we’ll take a closer look at some of those repayment options and learn about the process, terms, and more.

If you’ve taken out SBA loans and you’re not sure how the repayment process works or you need more detailed information, you’ve come to the right place.

Advantages of SBA Loans Over Traditional Bank Loans

Why do businesses choose to seek funding via SBA loans instead of simply applying with a bank or credit union? SBA loans are often far more flexible and offer better rates, but let’s take a more focused look at some of the advantages of SBA loans.

1. Lower Interest Rates

The interest rate you pay on your loan will determine just how much that financing is going to cost you. That being said, you want as low an interest rate as possible, so you’re not paying a significant portion in interest on the loan. Of course, the rate that you’re offered will depend on your creditworthiness and qualifications.

Often, you can get access to rates as low as 6.75%! This makes borrowing money very affordable, even for small startups or established small businesses. If you’re looking to fund a new business, upgrade your current business, or acquire more working capital, an SBA loan might be the right path for you.

2. More Capital Available

Any lender is going to be worried about risk, especially with the way our economy has ups and downs every few years it seems. With the SBA lending programs, you’ll have access to as much as $5 million, which is a huge amount of capital for small businesses to start with. Instead of going through endless red tape just to acquire a few thousand dollars, you can utilize the SBA’s lending programs to acquire as much as you need as quickly as possible.

3. Streamlined Lending

Lending is a process that no one wants to go through. Endless paperwork, questions, and correspondence between the lender and borrow can seem to take ages to complete. Then, once it’s complete, it feels like another eternity until your funds become available. The SBA has a more streamlined process set up, so you can get your funds as soon as possible. They’ll still look at the same factors any other bank would, but the idea is to fund your business quickly and efficiently.

4. Repayment Terms Are More Flexible

Flexible repayment terms can mean you’ll get the maximum amount of time possible to repay your loans. This can give your business the time it needs to turn a profit so you can pay off your loan amount.

5. Lower Down Payments

Often, the down payment is a hindrance to borrowing. If you borrow a large sum, many lenders can require as much as a 20-30% down payment. With SBA loans, down payments are generally much less; falling in at around 10-20%, depending on the type of loan, the repayment terms, and your creditworthiness.

6. Flexibility

Some business loans come with strict requirements for use. With certain SBA loans, you can use the money for just about any expense that arises. That being said, you’ll still want to have a detailed plan laid out for what you’ll be using your loan funds for. You likely won’t get approved for funding if you don’t show some plan for the money.

Traditional bank loans only work for certain businesses in certain situations. Often, new businesses can’t afford the high-interest rates you’ll often find with private banks. The SBA is something of a buffer between you and the lender, providing protection to both parties and protecting the integrity of businesses.

Of course, you should always be certain of how much you can afford to borrow. This means taking a much closer look at your business’s finances and making sure you can cover the cost of the interest and principal. If you’re among many stakeholders in the business, it’s always a good idea to have everyone share the responsibility for the loan. This can also help you get approved, if you have more people to sign the loan and offer collateral.

The SBA Is Your Ally

The SBA was specifically set up to help small businesses thrive. Not only can they get you the funding you need,  but you’ll also get access to the many resources that are available. These include training and mentorship programs, information on running a business, and so much more.

Types of SBA Loans

The SBA’s primary lending program is called the “7(a)” loan program, of which there are nine options. Each option has its own set of terms, limitations, etc. You’ll find that certain loans are more favorable than others, but all of the SBA’s loans are designed to help businesses grow and thrive.

Standard 7(a) Loan

A standard 7(a) loan is the most common loan option for businesses. The maximum amount you may borrow with this type of loan is five million dollars, and the SBA guarantees up to 85% of loans under $150,000 and up to 75% of loans over $150,000.

The SBA also sets a maximum interest rate for all of its loans, and while the rate of the loan may be negotiated between the lender and borrower, it cannot exceed the maximum amount. With larger loans (over $25,000), the SBA will usually require the borrower to collateralize the loan, and in the case of loans over $350,000, the borrower is required to collateralize the loan as much as possible, up to the full amount of the loan.

Small 7(a) Loan

The SBA also offers a slightly different version of the standard 7(a) loan in the form of a 7(a) small loan. The maximum loan amount is only $350,000, significantly less than the $5 million limit on standard loans. The guaranteed amount is up to 85% for amounts less than $150,00 and up to 75% for amounts over $150,000.

Again, the interest rate can be negotiated, but must not exceed the SBA’s maximum. The turnaround time is about the same as a standard loan (5-10 business days), and collateral will be required, in most cases, for amounts over $25,000.

SBA Express

This loan option offers a 36-hour turnaround time for an expedited lending process. Borrowers can obtain up to $350,000 in funding, and can expect similar terms and conditions as SBA standard and small loans. However, the SBA only guarantees 50% of the loan. You may be required to collateralize the loan depending on your lender and the loan amount.

Export Express

Export express is a more streamlined option for borrowing, and the SBA guarantees up to 90% of the loan if it’s under $350,000, and up to 75% of the loan for amounts exceeding $350,000. The SBA response time for this option is 24 hours, and turnaround times will vary. You can get up to $500,000 in funds with this option.

Export Working Capital

This type of lending program is for businesses that can generate export sales and need extra working capital. You can get up to $5 million in funding, the SBA guarantees 90% of the loan, and the turnaround time is about 5-10 business days.

International Trade

This is a long-term option for businesses that have export sales. It offers similar terms and conditions to the export working capital loan, and turnaround times are the same as EWC loans.

Preferred Lenders

This isn’t exactly a loan option, but rather a program designed to give “preferred” lenders more power to process, accept, and distribute SBA-guaranteed business loans.

Veterans Advantage

These loans are available to veterans of the U.S. Military. To qualify, you must be:

  • Honorably discharged 
  • Active duty
  • Service-disabled veteran
  • National Guard member
  • Current spouse of an active-duty service member

For more information and detailed terms of each SBA loan, please visit SBA.gov.

The Repayment Process

Now that we better understand what SBA loans are and what benefits they have to offer, let’s talk about the repayment process. Many business owners are wary of repayment terms on loans (as they should be), but the SBA can offer some of the best repayment terms out there. In most cases, you can repay SBA loans in 25-30 years, with rates from 6.75% interest and up.

Interest is the cost associated with borrowing your money. The lender still has to make money on the principal amount, but with many lenders, the interest rates climb as your credit score decreases. While you still need to have a decent credit score for SBA loans, you’ll get greater flexibility and lower interest rates when you borrow through the SBA.

Fixed Repayments

This is the more “traditional” repayment method, where you pay a fixed amount every month on your loans. This is the best option for businesses that have a reliable and stable source of income. If your business doesn’t consistently gain revenue, this might become difficult to maintain.

Variable Repayments

Repayments can change with variable repayment options. Some repayment options require a percentage of each sale to go towards your loan, so you won’t have a fixed amount every month. If you only bring in a few hundred sales, you might have to pay 10-15% of every sale toward the loan.

If your business is tied to the prime rate, your payments could increase as the prime rate increases. On the flip side of the coin, if the interest rate were to drop, so too would your payment amounts. This is a good example of why it’s so important to have good business and/or personal credit. The prime rate is reserved for those with the best credit, or, in lending terms, the least risky borrowers.

How Often Should I Make Payments?

Depending on the terms of your loan, you’ll either be paying on a daily, weekly, or monthly basis. The frequency of payments essentially comes down to the amount you’ve borrowed and the interest rate. The best route to take here is to put money toward your loan as often as possible. As long as you’re still bound to the loan, your business will be in debt, and you can never turn a true profit while you still owe.

As technology has changed, so too have the payment methods. Where checks used to be the business standard, electronic payments are now the standard method. SBA loans can be repaid via the automatic bank system. This is even more of an incentive to be certain you have the funds available for your payments, as an overdraft could result in disaster for your business.

How Should I Go About Repaying My Loan?

You’d be surprised how many businesses don’t utilize some kind of budget for their finances. This is a critical mistake, as every business should have some way to track income and expenses. How else will you know if you’re able to meet all of your financial obligations?

If you’re not currently utilizing a budget, it’s a good idea to create one to better plan out your repayment process. First, figure out all of your expenses. Yes, that means the small ones, too! Be honest with yourself when you’re making a budget. Sugar-coating or downplaying expenses doesn’t do anything for your wallet.

Once you’ve identified all of your expenses (including your loan costs), it’s time to take an in-depth look at how much money your business is making. Do you have just one location? One income source? Be sure to document anything that counts as income.

Once you have both sets of information, you can get a true picture of what your financial situation looks like. Are you bringing in enough money to cover expenses? What about the cost of your loan? A good rule for budgeting is to always prepare for the worst. While this can seem pessimistic, it’s important to be ready for times of scarcity, emergencies, or other complications that may arise. After all, you don’t want to default on any loans, and missing payments is a good way to put your business behind schedule.

Be Aware Of Penalties

Penalties can be the financial ruin of any borrower. Late fees especially cause turmoil, so be aware of your loan’s penalties. Some lenders offer a grace period for businesses that are unable to meet their financial obligations, while others are more strict about late fees and other penalties. If you’re going to be late on a payment, always let your lender know. It’s better to speak with the lender and let them know what’s going on than to simply miss a payment or pay it late without saying anything.

Remember that good communication can also save you credit troubles in the future. If you’re not making payments or making late payments because of a sudden cease of income or other complications, your lender might assume you’ve defaulted on the loan. This will affect your credit score and your ability to acquire funding later on.

Lenders may actually be more forgiving than you think. There’s a common misconception that lenders aren’t flexible or don’t care, but the fact is, the lender is looking to recover their loan amount. They’ll likely work with you to get your repayments back on track, because a repaid loan is always better than a defaulted one.

If I Pay Back My Loans, What Do I Do Next?

Hopefully, you’ll be able to pay back your loans without any problems. If that’s the case, you’ll feel a weight lift off of your shoulders when you make your last payment. When you’re done paying on the loan, it’s a good idea to make sure you’re completely finished paying. You don’t want any late fees, outstanding fees or penalties, or other amounts to be left behind. Make sure our balance is $0.00. You can call your lender, or, in some cases, check your online portal to make sure you’re all done paying.

After that, you’ll want to make sure your automatic bank payments are canceled. Sometimes, banks will continue to make payments until you cancel them, and you don’t want to keep paying on something that’s already been paid off.

How To Know When Loans Are The Best Option

The decision to take out a loan for your business should not be made lightly. It’s important to consider all factors before you decide to borrow money. Can you afford to repay the money? Are you able to get good loan terms? Can you get exactly what you’re looking for? Does the business truly need loan funds to upgrade, expand, or get off the ground?

The SBA exists to assist new businesses and established ones alike. It’s understandable that not every potential entrepreneur has thousands of dollars in working capital lying around to launch their business. Sometimes, borrowing money is the only way to secure the right amount of funding to launch your ideas. Investors can be fickle, and while crowdfunding is a popular option, there’s no guarantee you can get donations.

Business Expansion

If you’re looking to upgrade or expand your business, a loan is usually a good option. Since you’re already able to establish that you’re creating revenue, it will be much easier to convince a bank that it’s a worthy investment. Even so, you’ll want to look into future projections and have a detailed plan on what you intend to do with your loans.

Some loans will cover certain things, so be certain that your SBA loan doesn’t have any specific terms. For example, a disaster relief loan from the SBA is not able to be used to expand a business, but rather to recover the costs associated with a natural disaster.

Starting A Business

One of the most popular reasons for borrowing money from the SBA is to start a brand new business. This may be the most popular of options, but that doesn’t mean it’s easy. You’ll need to have a good business plan in place, research on how your business and/or products and services should perform in the market, and so on. The more detailed you are, the better.

Covering Capital Losses

Sometimes, a business loses money because of slow seasons or things like the COVID-19 crisis. In such times, a business loan may mean the difference between your business sinking beneath the waves and staying afloat until the hard times are over. You still need to pay your employees, utilities, and other bills, after all; even when there’s a pandemic raging around you.

When to Not Borrow Money

Of course, there are also times when borrowing money isn’t a good idea, and could land you in hot water.

A Failing Business

Some business owners will try to take out loans to revive a failing business. If you’re too far in debt or just a step away from closing your doors, it’s unlikely that lenders will even approve you for a loan. On the off chance they do, you could be putting your personal assets at risk by borrowing money for a failed business.

It’s a better idea to close down the business and perhaps start over when you’ve financially recovered. Then, you can start with a fresh slate and make it more likely that lenders will provide you with funds.

Extravagance

Borrowing money for the sake of purchasing expensive decorative items or other luxuries for your business is simply bad decision-making. The business is ultimately responsible for the costs associated with any loans you take out, and if you’re using those funds to furnish the lobby with expensive artwork and furniture, you’re essentially throwing money down the drain.

That doesn’t mean you can’t splurge a bit on your business’s aesthetics, but don’t borrow money to do so.

Before You Have A Plan

Borrowing money without a well-researched and thought-out business plan can result in disaster. It’s unlikely you’ll be approved, but if you are, you could wind up spending the money incorrectly or being irresponsible with it. It’s a lot of responsibility to have thousands or even millions of dollars at your disposal. Have a plan before you borrow.

Final Thoughts

Borrowing money via SBA loans can be a quick and flexible way to launch, expand, or improve your business. However, as with any loans, you must be careful and think about what you’re asking for. Don’t ask for more than you need, as this can be a problem when you go to pay back the loan.

If you’re approved for more than you need, it can be incredibly tempting to take the money, but remember that you’re paying all of it back with interest. Most people put the cost of the loan in the back of their head, but it should be a critical part of your decision-making process.

Be certain you need funding before you consider borrowing. Refer to our sections on when to borrow and when not to borrow if you need further clarification. The bottom line is that borrowing money isn’t for every business or situation, and that’s ok. Sometimes, you just have to stick with what you have or find funding elsewhere.

The SBA is dedicated to helping small businesses grow and thrive. They are your ally. Even so, you’ll be subject to the terms and conditions of the loan. Keep that in mind as you’re applying to borrow money, and don’t make hasty decisions without researching all of your options first.

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