SBA loans are business loans partially guaranteed by the U.S. Small Business Administration and provided by participating lenders, typically banks. Although these loans have strict lending criteria, qualifying for an SBA loan offers flexible terms and low-interest rates, making them one of the most attractive small-business loan options available.
Here’s a look at how SBA loans function, the various types of SBA loans available, what each can be used for, and the steps to obtain SBA financing for your small business.
What is an SBA Loan?
An SBA loan is a small-business loan designed to cover startup costs, working capital, expansions, real estate purchases, and more. These loans are issued by private lenders but are backed by the federal government, specifically the Small Business Administration.
How Do SBA Loans Work?
To apply for an SBA loan, you go through a lending institution such as a bank or credit union. The lender then requests a loan guarantee from the SBA, which means if you default, the government reimburses the lender for the guaranteed portion of the loan.
The SBA requires an unconditional personal guarantee from anyone owning at least 20% of the business. This means your personal assets are on the line if the business cannot meet its repayment obligations.
Both the government and personal guarantees reduce the risk for lenders, making them more inclined to work with small businesses. Once approved, your lender handles the closing of the loan and disburses the funds. You then repay the lender directly, typically on a monthly basis.
Types of SBA Loans
Several types of SBA loans exist, each with specific terms and purposes. Here’s a summary of the most common types:
SBA 7(a) Loans: Up to $5 million for working capital, expansion, and equipment purchases.
SBA Express Loans: Up to $500,000 for quick funding of working capital, expansion, real estate, and equipment purchases.
SBA 504 Loans: Up to $5 million (up to $5.5 million for certain projects) for purchasing long-term, fixed assets like land, machinery, and facilities.
SBA Microloans: Up to $50,000 for working capital, inventory, supplies, equipment, and machinery.
SBA Disaster Loans: Up to $2 million to repair physical damage from a declared disaster and cover operating expenses.
SBA Export Working Capital Loans: Up to $5 million to support export sales.
SBA Export Express Loans: Up to $500,000 for expedited funding to enhance export development.
SBA International Trade Loans: Up to $5 million for long-term funding to expand export sales or modernize to compete with foreign competitors.
The SBA also offers lines of credit, real estate loans, and business acquisition loans.
Pros of SBA Loans
Competitive Rates: Interest rates are based on the prime rate plus a markup, known as the spread, resulting in generally favorable rates.
Low Fees: SBA loans typically involve an upfront guarantee fee and an annual service fee, though there are no upfront guarantee fees or annual service fees for SBA 7(a) loans of $1 million or less through September 2024. Additionally, no upfront guarantee fees apply to SBA Express loans for veteran-owned businesses.
Longer Terms: SBA loans offer extended repayment periods, giving you more flexibility with your business finances. Maximum maturities are 10 years for working capital or inventory loans, 10 years for equipment loans, and 25 years for real estate loans.
Large Loan Amounts: SBA loans can provide substantial funding, with 7(a) loans and the 504/CDC program offering up to $5 million (or $5.5 million for certain projects), surpassing typical maximums from other lenders.
Cons of SBA Loans
Difficult to Qualify: Despite the reduced risk for lenders, you need to meet stringent eligibility criteria, including several years in business, strong financials, and a good credit history.
Slow Funding Process: It can take one to three months to receive funds, due to the detailed application process and extensive documentation required.
Collateral Requirements: SBA loans often require an unlimited personal guarantee from major business owners and may also require physical collateral or a down payment, depending on the loan type and business qualifications.
Qualifying for an SBA Loan
To qualify for an SBA loan, your business typically needs several years of operation and a solid credit history. Additionally, the SBA requires:
– The business to be for-profit and operating in the U.S.
– The business owner to have invested their own time and money into the business.
– Demonstration of a need for financing and a business purpose for the funds.
– Proof of creditworthiness, indicating the ability to repay the loan.
– The business to meet the SBA’s definition of a small business.
– Attempts to secure financing from non-government sources before seeking an SBA loan.
If your business is newer or smaller, SBA microloans might be an easier option to qualify for.
Steps to Get an SBA Loan
Ensure Eligibility: Ensure your business meets the eligibility criteria, such as having at least two years in business, strong annual revenue, and a good credit score (typically around 690).
Contact Luminary Financial: Utilize Luminary Financial’s Lender Match tool to connect with potential lenders within two days.
Prepare Your Documents: Gather necessary documents, which may include the SBA’s borrower information form, statement of personal history, personal financial statement, business financial statements, tax returns, business license, loan application history, business owner resumes, lease agreement (if applicable), and a one-year cash flow projection.
Submit Your Application: Submit your application and wait for approval, which can take from 30 days to several months. For quicker funding, consider the SBA Express loan, which offers up to $500,000 with faster processing.
Securing an SBA loan can provide significant benefits for your business, offering substantial funding with favorable terms. Contact Luminary Financial to start your SBA loan application and leverage these advantages for your business growth.