What Types of Loan Programs Are Supported By The SBA?
There are a few major types of SBA loans, each with different purposes and dollar limits.
SBA 7(a) Loans
SBA 7(a) are the most common type of loan covered under the SBA program. These loans can be used to refinance debt, buy a business, purchase real estate, or provide working capital, and are issued for up to $5,000,000. Terms vary depending on the purpose of the loan, and there are down payment requirements if the loan is used for a purchase.
The 7(a) program is regarded as more flexible than traditional loans because the terms are generally longer, down payments are lower, and rates can be lower as well. The SBA has created special sub-programs within 7(a) that include specialized funding for businesses that focus on:
- Exporting goods
- Underserved communities
- Active military- and veteran-owners
The SBA does want to see that the business owners have some degree of dedication to being successful and have invested some degree of their personal equity in the company.
Though the loans can be issued for up to $5MM, the 7(a) program will not guarantee 100% of the loan amount. When issuing loans up to $150,000, lenders can expect the SBA to guarantee 85%. Beyond that amount, the program covers 75%, not to exceed a total guarantee of $3,750,000. This means that lenders may additionally scrutinize applications for larger sums, as their risk increases.
Under the 7(a) program, the SBA charges lenders a participation fee, which may be passed on to the borrower, ranging from 3%-3.75%, depending on the dollar amount of the loan.
A CDC is a Community Development Corporation, which is a nonprofit designed to help bring investment to underserved, low income, or otherwise investment-starved areas. The 504 loan is designed to originate in partnership with CDCs, meaning part of the loan is funded by the nonprofit and the remainder is funded by a bank, and the SBA still guarantees a portion of the loan.
The 504 program has more specific purpose requirements than the 7(a) program does. Loan funds can only be used to:
- Purchase land
- Purchase existing buildings
- Purchase long-term machinery and equipment
- Build new facilities or renovate existing space
Under this program, businesses cannot have a net worth over $15MM and are required to have less than $5MM in revenues. Businesses also have to prove that they have the ability to pay back the money by projecting their revenues over the term of the loan.
SBA MicroLoans are issued for up to $50,000 and are designed to help women, low-income, veteran, and minority business owners. The SBA's MicroLoan program provides funding to nonprofit organizations that in turn lend those dollars back into the community. Loan terms max out at six years and rates vary. An important factor to note is that MicroLoans, while available to many underserved business sectors, generally carry higher interest rates than traditional loans - somewhere in the range of 7.5% on average.
The Small Business Administration offers disaster relief loans to individuals and businesses as well. When applying for a loan, a business must pledge assets to be at least partial collateral for a loan under this program, though the approval process may not depend completely on how much is pledged. This program also involves an assessment to determine the extent of damage and costs of repairs. Unlike some disaster relief programs, these SBA programs are issuing actual loans that must be paid back. There should be no fees associated with an SBA disaster loan and the application is filed directly through the agency.
During the application process, business owners will be required to disclose any past bankruptcy, legal or financial issues, personal criminal convictions, personal financial issues, and others. If any past issues exist, additional detail is required, and does not necessarily disqualify the applicant.