Guide to SBA Loans – Everything you need to know
To help you understand the entire concept of SBA loans, this article will serve as a guide.
SBA or Small Business Administration loan is a government initiative introduced for the purpose of aiding small business owners with easy access to funds. In this dynamic business environment, these loans provide a means of boosting the capital to meet, help, and assist small businesses to grow and expand. Working on the basis of connecting the borrower with lenders, the program is secured and guaranteed by the U.S. government. You might be wondering what the types of SBA loans are, how to qualify for a loan, how to apply for a small business loan and so on. To help you understand the entire concept of SBA loans, this article will serve as a guide.
SBA loans for small businesses or startups
During the initial stages of business, you are bound to realize how crucial a capital injection can be to your business. The introduction of SBA loans offers the benefit of providing small business owners with easy access to capital and financial help. This small business loan program was introduced in 1953 and was signed after the Small Business Act by the Republican President Eisenhower, the 34th President of the United States. As a matter of fact, it provided more than 61,000 loans totalling over $44.8 billion to small firms in 2021. Thus, SBA loans ensure small business owners with the capital they need to start, build, manage and run their early-stage businesses.
What are SBA loans?
The Small Business Administration (SBA) Loan is a program that is designed to meet the capital needs of small businesses. Easy and quick access to capital is crucial in this competitive marketplace, and thus SBA loans help by providing small business owners with access to capital in a timely manner. The loan program was launched with the aim of providing a reasonable, economical and flexible way of helping small business owners in finding loans. As a result, this small business loan program bridges the gap between the small business owner and lenders of funds.
How do SBA loans work?
There are certain SBA loan requirements that must be met in order for a small business to be eligible for an SBA loan. Prepare all necessary documents to demonstrate your eligibility for an SBA loan. To start with the process, you must fill out the SBA loan application and wait for loan approval. Once the loan is approved, you will be assigned an SBA-registered lender who will provide you with the necessary funds. In this regard, the borrower will repay the loan in a fixed period along with interest. While the loan amount will vary depending on the requirement, purpose, valuation of the business, and other related factors. It is essential to note that the maximum loan amount is $5 million.
Types of SBA loans
Now that you have a basic idea of what SBA loans are and how they work, let’s look at the various types of SBA loans that are available:
- 7(a) loans – This is the standard SBA loan program for small businesses. The loan amount is capped at a maximum of $5 million; thus, this is the most preferred SBA loan. With a maturity period ranging from 15 to 25 years, the interest rates for this loan are based on the amount and the loan term. 7(a) loans are available for businesses that require expansion capital, fixed assets, working capital, and more. The SBA guarantees 85% for loans less than $150,000 and 75% for loans more than $150,000
- 7(a) small loans – This is another type of SBA loan program that is available for small business owners who require a lower amount of funding (up to $350,000). It is similar to the standard 7(a) loans. However, the maximum loan amount is lower. Although the interest rate can be negotiated with the lender, and hence 7(a) small loans can be used for a variety of purposes. Therefore, this SBA loan is useful for short-term cash flow to meet working capital needs, training programs, special projects, etc.
- Non-7(a) microloans – This SBA loan program provides funding for business owners who require small loans which are typically in their early stages. Specially authorized intermediary lenders, which are nonprofit businesses with expertise in lending and technical assistance, can access money from the SBA. These middlemen then provide loans, the average of which is roughly $13,000 and can reach a maximum of $50,000. While the range of interest rates is 7.75% to 8.5%, and thus this SBA loan program can be used to purchase supplies, furnishings, equipment, or machinery.
- SBA Express loans – As the name suggests, the turnaround time of SBA Express loans is faster than other types, within 36 hours of application submission. The maximum amount of funding available is $350,000 with an interest rate ranging from 4.5% to 6.5%. SBA guarantees 50% of the loan amount, making it a viable option for small business owners who need quick access to capital. The structure of the SBA Express loans is similar to the standard 7(a) loans. This loan program is mainly helpful for businesses that require working capital, machinery, and equipment.
- International trade loans – This program helps small business owners who want to expand their businesses internationally by expanding their customer base, entering into new markets and international trades. With maximum loan amounts of $5 million and SBA guarantees up to 90% of the loan amount, this program is the perfect choice for businesses that want to promote their products and services internationally. The interest rates are flexible and can be negotiated with the lender.
- Export Working Capital Program – It offers small businesses the ability to obtain financing for exporting goods or services. Identical to the international trade loan program, the SBA guarantees 90% of the loan amount. The maximum loan amount is $5 million and the repayment period depends on the maturity of the export contracts. The interest rates are negotiable, making this SBA loan program a reliable option for small businesses that want to make direct or indirect exports.
- Export Express loans – This is another variation of international trade loans and the export working capital program. However, the sole purpose of this program is to help small businesses that need immediate funding to expand into export markets. While the maximum loan amount of $5 million, the SBA guarantees 90%, and interest rates are negotiable with the lender remain the same as in the previous two programs.
- CapLines – This program is the same as the standard 7(a) loans with the exception that the CapLines program is mainly used for short-term capital needs. The maximum loan amount is $5 million and the interest rate varies depending on the loan amount. It is mainly used by businesses that require quick access to capital for various reasons, such as material costs, payroll costs, and other minor costs. The repayment period also varies depending on the loan amount, with a maximum maturity period of 24 months.
- 504 loans – This SBA loan program helps small businesses that need fixed assets such as real estate, buildings, and equipment which would enable them to grow their businesses. The maximum loan amount is $5 million with usually fixed interest rates. The SBA normally contributes 40% of the overall project expenditures, a partner lender contributes up to 50%, and the borrower contributes the remaining 10% for these loans. For two years prior to the application being submitted, a business must have an average net income of $5 million or less after federal income taxes and a tangible net worth of less than $15 million to be eligible.
- 504 refinancing program – This is a sort of remodeling for existing 504 loans. In a similar fashion to the 504 loan program, this loan can be used to fund fixed assets, real estate, and more. You must have made all of your payments on time for the previous 12 months in order to qualify. The maximum loan amount is $5 million with a fixed interest rate that is the same as the standard 504 loan program.
- Disaster loans – This SBA loan program is intended for small businesses affected by natural disasters or other unforeseen circumstances. You must have suffered a loss of income and physical damage to the property or real estate that negatively impacts your ability to operate your business. The maximum loan amount is $2 million with low-interest rates. As a result, this SBA loan program is perfect for businesses that require short-term cash flow to help get back on their feet.
- SBA 8(a) Business Development Loans – Small business owners with socially and economically disadvantaged backgrounds can access this SBA loan program. With maximum loan amounts of up to $7 million, interest rates vary depending on the loan amount. In addition to this, training, financial management, and technical assistance programs are made available to borrowers.
- SBA Microloans – This SBA loan program is a true boon to micro-entrepreneurs and small business owners who want to start or expand their businesses. With total loan amounts of up to $50,000, this program caters to people with very limited means. This SBA loan program requires that the borrower must be a U.S. citizen, permanent resident, or documented alien to be eligible for the loan funds.
- SBA Community Advantage Loans – Small business owners in underserved markets can receive funding to provide essential products and services. SBA Community Advantage loan program is intended to remove the financial barriers that prevent small business owners from expanding their businesses and offering employment opportunities to people in the areas where they operate. With maximum loan amounts of up to $350,000, the interest rate varies depending on the amount requested.
Benefits of SBA loans for your business
There are several benefits to taking out an SBA loan. Following are some of the importance of SBA loan:
- Government guarantee – Small business owners that need funding, should not hesitate to take SBA loans because they are backed by the authority of the Federal government. This ensures that if the borrower fails to repay his loan, the SBA will claim the defaulted amount depending on the terms and type of loan program.
- Affordable – Even though SBA loans are backed by the authority of the government, their interest rates remain competitive. Small business loan rates are usually lower than the standard lending rates of other institutions. This makes the loans affordable to small business owners.
- Long repayment time – The repayment period of SBA loans is usually longer than other types of loans. While the repayment period varies depending on the loan amount, type of loan, and repayment schedule. However, the repayment period of SBA loans is typically favorable for small business owners.
- Benefits to small businesses – Small business owners with SBA loans are entitled to numerous benefits other than financing. From technical assistance and training to mentorship, funds management, and more, small business owners can learn a great deal from the SBA.
- Variety of uses of funds – SBA loans can be used to fund a variety of business needs, including but not limited to equipment, buildings and real estate, inventory improvements and expansion, development of new lines or changing existing lines to make them more profitable, startup capital for new ventures in new locations or markets.
- Favorable terms – The terms and conditions of SBA loans are more favorable compared to other types of loans and business financing. SBA loans have low-interest rates, longer repayment periods, and higher limits on the loan amount. This means that SBA loans can be considered one of the best business loan options.
Disadvantages of SBA loans
Well, there are some disadvantages of SBA loans, some of which are explained as follows:
- You must have a solid business plan with 2 years of existence before acquiring a loan from SBA.
- The approval process might take 60-90 days from the moment you submit your application to the SBA.
- All partners who own 20% or more of the business must provide a personal guarantee along with a guarantee fees
SBA loan requirements to fulfill
Now, once you have decided to apply for an SBA loan, know the various SBA loan requirements that need to be fulfilled in order to qualify for a loan. These requirements are not really complicated and are as follows:
- Eligibility requirements – The business must be in existence for 2 years, and the Principal owners must be U.S. citizens or permanent residents. Additionally, you must state the funds requirement when applying for an SBA loan.
- Required documents for SBA loans – All the required documents for SBA loans must be submitted as part of the SBA loan application. Below mentioned are the documents required for an SBA loan:
- Business financial statements – The business financial statement is a detailed report that includes your company’s income statement, balance sheets, cash flow statements, and other financial statements. The report should be in accordance with the accepted accounting principles (GAAP)
- Personal statements – The personal statement should include information about your personal documents, your net worth and liquid assets, income tax statements, employment history, and other related documents.
- Projected financial statements – The projected financial statement should include information about your company’s sales revenue, expenses, and profits or losses forecasts. It should also include market projections, new product revenues, or other planned growth or development.
- Business valuation to qualify for SBA Loans – The worth of your business needs to be determined before applying for an SBA loan. Business valuation is basically the estimated worth of your business at a particular time. It could be done by valuing your business or by hiring an expert like Eqvista to put your company’s worth in a specific range.
How to apply for SBA loans?
Now that you have decided to apply for an SBA loan and know the requirements and terms of the loan, it is time to move forward with the SBA loan application. Here is how you can apply for an SBA loan:
- Identify business needs – There are many different ways to think about your business’s needs. Some businesses require more funds for current operations, while others may need to expand. Knowing your business’s specific needs will help you determine the most suitable SBA loan for your business.
- Identify lender’s need – SBA-registered lenders will consider your needs or requirements and the SBA maximum loan limit, the type of loan, and repayment terms before deciding whether to issue you a loan. As such, you must first identify the needs of the lenders you are seeking to approach.
- Provide financial details of your business – Your financial information should be detailed enough to provide lenders with the necessary information. The financial information may include your latest financial statements, cash flow forecast, or other supporting financial documents.
- Choose the right SBA loan – A variety of SBA loan programs are available to help you achieve your business goals. You must evaluate your financial needs, the loan repayment terms, interest rates and factors before choosing an SBA loan that best meets your business needs.
- Apply through local banks – When applying for SBA loans, you should seek out local banks in your area that are eligible to provide SBA loans. Since these banks were pre-approved for SBA loans, you will be able to apply for and receive the loan faster.
- Consider visiting the small business development center – Consider visiting the Small Business Development Center (SBDC) in your area, where you can learn more about SBA loans, receive expert guidance on issues related to loans and loan proposals, and apply for an SBA loan.
To better understand SBA loans, we answer some frequently asked questions:
How much down payment is required for an SBA loan?
When you apply for an SBA loan, you will have to provide a down payment of 10%. It is typically lower than other types of loans due to the fact that the government backs SBA loans.
Who can get SBA loans?
SBA loans are designed for small business owners who wish to start or grow their business in the United States only. The business must be for-profit, owners must have some personal savings, and the business must have reasonable equity for the owner.
How long does it take to approve an SBA loan?
It takes about 60 to 90 days from when you submit your application for an SBA loan or in some cases, up to 120 days. However, it varies depending on the type of loan that you want to apply for and the lender you choose.
What is the cost of SBA loans?
Well, there might be some fees that you need to pay when you apply for an SBA loan. However, it totally depends on the financial situation of the business. The fees will be based on the external factors of the business.
Get a business valuation to qualify for SBA loans!
SBA loans are easy to obtain; however, in order to qualify for SBA loans, a business valuation report is required. You might be confused about how to get a valuation for your business. Well, Eqvista is here to help you with your business valuation report. The team of experts at Eqvista are well versed with the latest valuation methodologies and can provide an accurate business valuation report to help you qualify for SBA loans. Get in touch with Eqvista today, and let us help you qualify for SBA loans.