SBA Loans: How to Apply, Pros & Cons and Everything You Need to Know
For a variety of reasons, business owners may seek out financing. Some common ones include increasing salary and benefits, improving health care options, investing in new machinery, or expanding current activities. Whatever the reason you need more capital, one good option for financing your firm is to apply for a loan from the Small Business Administration. What is it, and how can you use it in your favor are questions that you will find answers to in this guide on how to apply for one!
What is an SBA Loan?
The SBA is a federal organization whose mission is to promote the expansion of small businesses. While the SBA does cooperate with banks, community development organizations, and micro-lending institutions and establishes standards for how such lenders might structure loans, the SBA itself does not lend money.
Different types of SBA loan programs have different eligibility requirements and other specifics. The terms of repayment typically include restrictions on the money's intended usage. If your banker has experience with SBA loans, the process may be easier for you as the program's specifics are subject to change.
How do SBA Loans Work?
For an SBA loan, you must first approach a financial institution such as a bank or credit union. If you default on an SBA loan, the government will reimburse the lender for the full amount of the guarantee.
When applying for an SBA loan, every shareholder with a 20% stake or more must sign an individual guarantee. If the business fails to make payments when due, the responsibility for such payments will fall on you and your personal assets, thanks to this guarantee.
Lenders are more open to working with small firms since both the government guarantee and the personal guarantee minimize their risk. Once your SBA loan has been granted, your lender is responsible for finalizing the loan and disbursing the cash. Your repayments will be made directly to the lender on a regular schedule, most often monthly.
Types of SBA Loans
Numerous SBA loan programs exist, each with its own set of requirements and restrictions. The purpose of the loan is a major factor in determining which Small Business Administration loan is ideal for you. In this article, we will discuss the most frequent categories of SBA loans.
SBA 7(a) Loans
For established small firms, the Small Business Administration offers the 7(a) loan, a type of "general purpose" credit. In many circumstances, it can increase cash flow and provide access to more money on more favorable terms. Use the funds for anything from buying or renovating a commercial property to expanding your business through acquisition or buying out a business partner.
SBA Express Loans
The majority of the time, an SBA Express loan is used for operating capital. Perfect for purchasing or developing a business, obtaining equipment (including machines and cars), as well as furniture and other office basics like printers, fixtures, and more, and for refinancing existing debt.
SBA 504 Loans
Long-term, fixed-rate financing is provided for big assets like land and buildings through an SBA 504 Loan, which is usually utilized for real estate and equipment. Excellent for debt consolidation, facility construction, renovation, land acquisition, and long-term equipment financing.
SBA Microloans
Small Business Administration microloans are lower-dollar-amount loans. An intermediary lender, often a nonprofit community development company, does the heavy labor in the microlending process while the SBA provides the financing. The lending institution handles all aspects of the loan application, funding, and management process. This loan is perfect for cash flow, stocks, supplies, machinery, and equipment.
SBA Disaster Loans
For damages that exceed insurance coverage, small businesses that have been hit by disasters like the COVID-19 epidemic may be eligible for SBA disaster loan assistance. To be eligible, your company must be located in a FEMA-declared disaster area, have fewer than 500 employees, and meet other SBA-established criteria for small business size. The funds will be put to good use in repairing infrastructure and meeting other necessary operating costs when a disaster has been declared.
SBA Community Advantage Loans
The SBA’s 7(a) loan program includes a subset of SBA loans known as Community Advantage Loans. When the Small Business Administration recognized a need to "address the credit, management, and technical assistance needs of small businesses in underserved regions," they developed the SBA Community Advantage loan program in 2011. Good for regular company needs; not a source of revolving credit.
SBA Export Working Capital Loans
Small business owners can apply for export working capital loans before an export sale or contract is finalized, allowing them more time to negotiate favorable payment terms. With these loans, the maximum amount you may borrow is $5 million, and the processing period ranges from 5-10 business days.
SBA Export Express Loans
With the help of an SBA loan guarantee and a streamlined program called Export Express, small businesses can borrow up to $500,000 from a local partner bank. Most significantly, the money you receive from Export Express can be put toward anything that would assist your small business in expanding into international trade.
SBA International Trade Loans
Small businesses can get financing to expand into foreign markets and invest in competing with larger imports with the support of international trade loans. A maximum of 90% of the loan amount is guaranteed by the SBA in an international trade loan, making them ideal for financing fixed assets, operating capital, or debt consolidation.
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SBA Investment Programs
The SBA doesn't put money directly into small businesses, but it does give money to SBICs that are qualified and have expertise in certain fields. The SBICs then invest in small businesses with both their own money and money that is guaranteed by the SBA.
The following are the different SBA Investment Programs:
Small Business Investment Company (SBIC)
Small Business Investment Companies (SBICs) are investment firms that are privately owned and operated but are governed by SBA regulations. They make equity and loan investments in SBA-eligible small businesses using their own assets and monies acquired with an SBA guarantee. Research SBICs to check if your company meets the criteria.
Small Business Innovation Research (SBIR) Program
With the help of this initiative, small enterprises are encouraged to participate in federally funded R&D with commercialization potential. Examine the SBIR to see if the awards competition is a good fit for your needs.
Small Business Technology Transfer (STTR) Program
This program provides financing options for federally funded innovative research and development. Small enterprises that are eligible for this program collaborate with nonprofit research organizations during their initial and developmental phases. Determine whether the STTR program is appropriate for your company.
SBA Loan Terms and Conditions
As with many processes, terms and conditions are part of getting the desired results. Keep reading to know more about those for SBA Loans.
Terms of SBA Loans
The borrower and the participating lender negotiate the particular terms of SBA loans within the SBA's guidelines. All SBA 7(a) loans must generally comply with the following rules.
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The necessary paperwork must be gathered before you can submit your application. Work within SBA limits with your local lender to begin the process. Make sure you have everything the lender will require by using the checklist below. Your lender will send your loan package to the SBA once it is complete:
- Form for borrower data (SBA Form 1919).
- Accounting records (SBA Filter 413).
- Affiliations and ownership (a list of names and addresses of any subsidiaries and affiliates).
- Business authorization document (a copy of the original business license or certificate of doing business).
- Application history for loans (records of any loans you may have applied for in the past)
- Tax returns for income.
- Resumes.
- Business history and overview (history of the business and its challenges, along with the explanation of why you need the SBA loan and how it will help your business).
- Enterprise lease (a copy of your business lease, or a note from your landlord, with the terms of the proposed lease).
Conditions of SBA Loans
The conditions for an SBA Loan are:
- You are the owner and operator of a business that generates profits.
- Your company may be legally structured as either a sole proprietorship, corporation, partnership, or limited liability company (LLC).
Eligibility for SBA Loans
Of course, eligibility will play an essential role in the process of getting and applying for an SBA Loan; here are the necessary steps to maintain your eligibility:
Eligibility Requirements
For enterprises to be qualified for 7(a) loan assistance, they must:
- Be a small business as defined by SBA and run for profit.
- Being involved in or attempting to engage in business in the United States or any of its territories.
- Have prudently invested capital.
- Prior to requesting financial aid, explore other financial options, including your own assets.
- Be able to prove that you need a loan.
- Put the money to good use for your business.
- Not have any outstanding debts to the United States government that are past due.
Special Considerations
Some organizations and people require special consideration. Franchises are eligible, with the exception of circumstances in which a franchisor retains enough power over operations to resemble an employment contract. For instance:
- Farms and agricultural enterprises are eligible, but those who apply should first look at Farm Service Agency (FSA) programs, especially if they have a history with FSA.
- Recreational centers and clubs are eligible as long as (a) they are accessible to the general public, or (b) in cases where membership is restricted to a specific group of people, membership is not selectively denied to that group and the total number of memberships is not capped or limited in any way.
- Fishing boats are acceptable. However, those looking for funding must first submit a finance request to the National Marine Fisheries Service for vessels with a cargo capacity of five tons or more (NMFS).
- Legal aliens may apply. However, the type of status held (such as resident, lawful temporary resident, etc.) is taken into account when calculating the level of risk pertaining to the continuation of the applicant's business.
Loan Amounts
The average maximum loan amount for 7(a) loans is $5 million, the maximum loan amount for SBA Express loans is $350,000, and the maximum loan amount for SBA Export Express loans is $500,000.
The SBA will only be responsible for up to $3.75 million ($4.5 million under the loan for international trade). The highest guarantee to the lender for a $5 million SBA-guaranteed loan is $3.75 million, or 75% of the loan amount. Depending on the loan size and program type, a different percentage of the loan is guaranteed.
Interest Rates for SBA Loans
Interest rates are negotiated between the borrower and the lender, but they are subject to SBA maximums, which are pegged to the prime rate, the LIBOR rate, or an optional peg rate. Regardless of which rate is used, the borrower is responsible for paying the SBA maximum. There is also the option of having variable interest rates.
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