The Definitive Guide to SBA Loans
October 8, 2019 | Last Updated on: July 20, 2022
October 8, 2019 | Last Updated on: July 20, 2022
The Small Business Administration (SBA) is a federal agency that works with lending institutions to provide loans to small businesses. The term “SBA Loan” can be a little confusing because the agency itself does not lend money directly to small business owners. Rather, it works with its lending partners – usually banks, community development organizations, and micro-lending institutions – to make it easier for business owners to secure capital. The funding for SBA loans comes from the lenders themselves, while the agency provides government-backed loan guarantees that mitigate lenders’ exposure to risk, thereby making it easier for business owners to get loans.
For instance, when Jeff Meier wanted to take full ownership of his grocery business, he approached six different banks for help with the acquisition. All of them refused.
Meier then decided to take a different route. He contacted Rappahannock Economic Development Corporation (REDCO), a certified nonprofit commercial lender, to obtain an SBA 504 loan that allowed Meier to buy out his former business partner, free up the store’s cash flow, and diversify debt.
Meier’s Battleground Country Store in Fredericksburg, Virginia, opened in 2016 with 18 employees. Today, the store has 29 employees and continues to expand its range of services. While Meier credits his experience in the U.S. Air Force and National Guard for honing his leadership and management skills, he also says that the success of his store wouldn’t have occurred without his SBA loan.
Meier’s case is similar to that of many small business owners who have secured SBA loans to expand their businesses. The loan he qualified for is one of 13 different loan types that the SBA packages in six loan programs. In all, the SBA helped issue more than $5.4 billion in loans in 2018 and, through August, was on pace to top that figure in 2019.
“Helped” is the operative word since the SBA doesn’t lend money directly to small businesses, with the exception of its Disaster Loan program. The SBA guarantees a portion of the loan, which reduces risk for lenders. This lower risk to the lender makes it easier for small businesses to get loans, especially businesses that would normally not qualify for a loan. Examples of this are businesses with insufficient down payments for collateral for traditional bank loans.
The typically lower SBA loan interest rates and term lengths make repayment less complicated. Simply put, borrowers have less money to repay over a longer period of time.
All SBA loans are similar in purpose and share characteristics, but they are each designed for different needs and different borrowers.
The SBA doesn’t have one narrow definition of a small business. Rather, different criteria are set according to industries. There are other factors that separate an SBA loan from a commercial one.
The SBA has six loan programs that offer 13 different loans. These loans are designed to accommodate a variety of needs.
The programs are as follows (All SBA interest rates are current as of August 2019):
SBA Interest rates for 7(a) loans can range from 7.5 to 10 percent. They also come with a number of fees, such as an origination fee of 0.5 to 3.5 percent, an SBA guaranty fee of two to 3.5 percent and a loan packaging fee of $2,000 – $4,000.
How Can I Use Money from an SBA 7(a) Loan?
The SBA has rules on how you can and cannot use proceeds from an SBA-guaranteed 7(a) loan. Typically, the use of loan proceeds is very general. However, there are some limitations and restrictions on the use of funds.
Acceptable uses of SBA 7(a) Loan Proceeds
Financing for long and short term assets used in normal business operations. Acquisitions and refinances are eligible, and may include real estate and business goodwill. Working lines of credit are available:
The SBA interest rates for all of the CAPLines range from 7.5 to 10.0 percent. The SBA loan payment terms are 10 years, except for Builder CAPLines, which is five years. A credit score of at least 680 and short-term collateral, such as invoices or contracts, are required.
A credit score of 680 is required, and the business must already be involved in exporting goods or services to foreign countries. For Export Express, the business must be at least one year old.
SBA interest rates on Disaster loans range from four to eight percent, with SBA payment terms that can stretch up to 30 years. A credit score of 660 and an ability to repay the loan are required.
The Military Reservists Economic Injury SBA Disaster Loan is one of several SBA loans for veterans. According to the SBA, veteran-owned businesses comprise 9.1 percent of the 30 million private sector businesses in the United States that employ nearly 60 million workers.
The SBA report also notes that veteran-owned business employ more than five million workers and contribute $1 trillion to the U.S. economy. As more veterans returned home and discharged, the SBA Veterans Advantage loan has been created to keep fueling this important economic sector.
The SBA Veterans Advantage loan is similar to a standard 7(a) loan. It can provide working capital of up to $5 million to start or grow a small business with no guaranty fees up front for loans of $125,000 or less. For loans of greater than $125,000 veterans can benefit from a 50-percent reduction of guaranty fees up to $5 million.
There are no guaranty fees for all SBA Veterans Advantage Loans under the SBA Express loan program. Under this program, veterans can borrow a maximum of $350,000. This figure was chosen because of all SBA loans that go to veterans, 73 percent are for $350,000 and less.
In addition to loans, the SBA also provides counseling and training to give veterans the support they may need in business.
To qualify for an SBA Veterans Advantage loan, at least 51 percent of the business must be owned and controlled by individuals in at least one of the following groups with the appropriate accompanying documents:
Veterans and their spouses who apply for the SBA Veterans Advantage Loan must meet all the requirements of the SBA 7(a) loans. These include a credit score of at least 680, personal collateral and good credit. Two years of operating as a business is preferred, but startups are eligible should the owners have enough experience in the industry and a good business plan.
The SBA doesn’t have a loan program specifically targeted for women-owned business. The 8(a) Business Development Program is designed to help small businesses compete in the marketplace. The 8(a) program is a key component in the federal government’s plan to award at least five percent of all federal contracting dollars annually to small businesses owned by socially and economically disadvantaged people or entities.
The 8(a) program is also a good option for minority-owned businesses. Business owners can get certified as an 8(a) business through the certify.SBA.gov website. Applicants will also need to have a profile at SAM.gov before they can use the certification website. The Office of Women’s Owned Business Ownership (WBO) is a good resource for women-owned businesses. It helps women business owners through programs coordinated by SBA District offices. These programs include business training, counseling, federal contracts and access to credit and capital.
Most SBA loans for women and SBA loans for minorities are standard SBA 7(a) loans. The terms and requirements for these loans are the same for women-owned businesses and minority-owned businesses.
While the SBA offers a variety of loan options – and is accessible to businesses that may not typically qualify for a loan – an SBA loan application still has strict eligibility requirements. The most general requirements are that all major owners of the business must have good or excellent credit. The owners also must have a reasonable amount of equity in the business, and cannot have delinquencies or defaults on other government loans. This includes student loans.
The business must be at least two years old and meet the SBA’s definition of a small business. It has to prove that it tried and failed to get funding from other lenders. The business must also operate as a for-profit entity based in the United States and in an eligible industry. Loan packaging and vice industries such as gambling are examples of industries that typically don’t qualify.
The lender and the type of SBA loan that is being applied for may have additional requirements. If a business fails to meet the age or credit score requirements, it could qualify for an SBA startup loan through the 7(a) program.
Other reasons why an SBA loan application may be rejected is if any of the business owners has a criminal past, or if the business has too many assets.
Applicants may have to provide documents such as:
Since the SBA guarantees the repayment of the majority of the loan, it’s not uncommon for lenders to ask for collateral to cover the balance. For instance, if the SBA guarantees 80 percent of the loan, the lender may ask for personal collateral to cover the remaining 20 percent.
Businesses that are interested in applying for an SBA loan should find a lender that’s not only knowledgeable about these loans, but also originates many of these loans. Such a lender will save time and increase the chances of getting funded.