What is an SBA Loan? Key Factors You Should Know
Last Updated on October 28, 2021
What Is An SBA Loan?
In this article, we will provide detailed information about the types of SBA Loans, eligibility requirements, usage, and how to get your loan approved smoothly.
What are SBA loans? Small business financing refers to the way in which an aspiring or existing business owner receives money from a lender to begin a new business, buy an existing business or add money to an already existing business to finance future or past business activity. It differs from conventional bank financing because it does not require a personal guarantee or a second mortgage to secure the loan. Because there is no collateral needed, you don´t risk losing the money you loan to the lender in the event of default on your payments.
There are many different types of financing available to businesses. These include general-purpose loans, such as commercial real estate financing, also known as seller-financed loans, and capital advances, which are available for almost any business use. You may even find private funding through various SBA lenders. However, these are only three of the different types of loans available.
The SBA is a government agency created by Congress. It exists to help ensure that the loans given to small businesses help with the success of these small businesses. To qualify for these loans, you must meet specific criteria established by the agency, so you should understand what these requirements are before applying for business financing. For some loans, you will have to submit personal and business financial statements, along with the appropriate documentation proving your income and your business’s status. Other criteria may also apply to SBA loans, and you should research these thoroughly to ensure you fully understand the requirements for each loan program offered.
How do you qualify for an SBA loan?
To be accepted for an SBA loan, you must meet several criteria. Typically, an individual business needs to demonstrate an acceptable credit rating and a significant amount of capital assets. If a company has a substantial amount of collateral, it will be easier to qualify for funding. In addition, prospective borrowers will typically need to submit documentation that demonstrates they plan to repay the loan. This documentation may include the same financial documents that are required of a traditional loan. See more below.
|Be a for-profit business|
The business is officially registered and operates legally
|Do business in the U.S.|
The business is physically located and operates in the U.S. or its territories.
|Have Invested Equity|
The business owner has invested their own time or money into the business.
|Exhaust Financing Options|
The business cannot get funds from any other financial lender.
What are the types of SBA loan?
There are many different types of SBA loans, and it can be confusing to choose the right one for your business. One of the things to consider when comparing loans is the repayment terms. The SBA has made it their priority to be as transparent as possible, which is why you can easily get their Annual Percentage Rates (APRs), loan term information, and other helpful information. Here are the most common options for SBA loans:
- 7(a) loans; A group of SBA loans which guarantee portions of the total amount, cap interest rates, and limit fees.
- 504 loans; Long-term, fixed-rate financing to purchase or repair real estate, equipment, machinery or other assets.
- Microloans; Our smallest loan program, providing $50,000 or less to help businesses start up and expand.
7(a) SBA Loan – What is it?
7(a) SBA Loan is a loan offered by the Small Business Administration that can be used for various needs, such as expanding a business or buying new equipment. They offer low-interest loans and other financial assistance to entrepreneurs in need of funding for their businesses.
The 7(a) loan is also one of the most competitive loans on the market. The success rate for these loans was over 92% in 2016, and it has been increasing year-over-year since its inception in 1958.
Some of the benefits of this program are:
1) You can borrow up to $5 million
2) The long-term repayment period spreads out your payments over time
3) Interest rates range from 1% to 3%
4) You can use these loans as collateral for additional loans, such as home or vehicle loans
Businesses must meet several requirements to qualify for these loans. The most important one is that they have been in business for at least two years and have a tangible net worth of at least $150,000.
- Maximum Allowable Spread: Maturity < 7 years = 2.25% Maturity > 7 years = 2.75%
- SBA can guarantee up to: 85% of a loan up to $150,000 ; 75% of a loan greater than $150,000
7(a) SBA Loan – Eligibility
The 7( a) loan is a small business loan that is offered by the SBA which can be used for both starting and expanding businesses. The loan is made available to companies with less than 500 employees and not more than $7 million in revenues. It can be used as both a start-up and an expansion loan, although it cannot exceed $750,000 per business.
The loan is meant to provide the business with “a reasonable return on its investment,” and it can be used for anything from working capital loans, expansion loans, and even real estate purchases.
Business owners are eligible for the 7(a) SBA Loan if they have been in business for at least two years and have $35,000 or less in personal assets. They can borrow up to $750,000.
To be eligible for 7(a) loan assistance, businesses must:
Operate for profit
Be considered a small business, as defined by the SBA
Be engaged in, or propose to do business in, the United States or its possessions
Have reasonable invested equity
Use alternative financial resources, including personal assets, before seeking financial assistance
Be able to demonstrate a need for a loan
Use the funds for a sound business purpose
Not be delinquent on any existing debt obligations to the U.S. government
Some businesses may not qualify for a 7(a) loan. Read more about what the SBA considers an ineligible business.
7(a) SBA Loan – Usage
The 7(a) loan has been in existence since 1958, with its main goal being to provide funding for small businesses that are unable to acquire capital from other sources. It can be used as both a start-up and an expansion loan, although it cannot exceed $750,000 per business.
Basic uses for the 7(a) loan include:
Long- and short-term working capital
Revolving funds based on the value of existing inventory and receivables
The purchase of equipment, machinery, furniture, fixtures, supplies, or materials
The purchase of real estate, including land and buildings
The construction a new building or renovation an existing building
Establishing a new business or assisting in the acquisition, operation or expansion of an existing business
Refinancing existing business debt, under certain conditions
7(a) SBA Loan – How to Apply?
You’ll require to gather the suitable files when you’re prepared to start the procedure by dealing with your local lender within SBA standards.
When you’re ready to apply, you’ll need to gather the appropriate documents. Start the process by working with your local lender within SBA guidelines.
Use the following checklist to ensure you have everything the lender will ask for. Once your loan package is complete, your lender will submit it to SBA:
Borrower information form: Complete SBA Form 1919 and submit it to an SBA-participating lender.
Background and financial statements: Complete both SBA Form 912 (statement of personal history) and SBA Form 413 (personal financial statement). These help SBA and other stakeholders assess your eligibility.
Business financial statements: Submit the following to help show your ability to repay a loan:
Ownership and affiliations: Provide a list of names and addresses of any subsidiaries and affiliates, including concerns, in which you hold a controlling interest or that are otherwise connected to you.
Business license or certificate: Provide a copy of the original business license or certificate of doing business. If your small business is a corporation, stamp your corporate seal on the SBA loan application form.
Loan application history: Include records of any loans you may have applied for in the past.
Income tax returns: Include signed personal and business federal income tax returns of your business’ principals for the previous three years.
Resumes: Include personal resumes for each principal.
Business overview and history: Provide a history of the business and its challenges. Include an explanation of why you need the SBA loan and how it will help your business.
Business lease: Include a copy of your business lease, or a note from your landlord, with the terms of the proposed lease.
504 SBA Loan – What is it?
The CDC/504 Loan Program provides long-lasting, fixed-rate funding of as much as $5 million for significant fixed properties that promote business development and task development.
504 loans are offered through Certified Development Companies (CDCs), SBA’s community-based partners who control nonprofits and promote economic advancement within their communities. CDCs are accredited and controlled by the SBA.
Repayment terms; Maturity terms available: 10-year 20-year 25-year504 Loans
Interest rates Pegged to an increment above the current market rate for 5-year and 10-year . U.S. Treasury issues Totals approximately 3 % of the debt, rate may be financed with the loan
504 SBA Loan – Eligibility
Basic eligibility requirements consist of falling within SBA size guidelines, having actually certified management proficiency, a feasible business plan, good character, and the ability to pay back the loan.
Loans can not be made to businesses engaged in non-profit, passive, or speculative activities. For additional information on eligibility requirements and loan application requirements, small companies and lending institutions are encouraged to get in touch with a Certified Development Company in their location.
To be eligible for a 504 Loan, your business must:
Operate as a for-profit company in the United States or its possessions
Have a tangible net worth of less than $15 million
Have an average net income of less than $5 million after federal income taxes for the two years preceding your applicationSource
504 SBA Loan – Usage
A 504 loan can be used for a variety of assets that promote business development and job creation. These include the purchase or construction of:Source
Existing buildings or land
Long-term machinery and equipment
Or the improvement or modernization of:
Land, streets, utilities, parking lots and landscaping
A 504 loan cannot be used for:
Working capital or inventory
Consolidating, repaying or refinancing debt
Speculation or investment in rental real estate
504 SBA Loan – How to apply?
504 loans are available exclusively through Certified Development Companies (CDCs). First, find a CDC in your area to ensure you are dealing with a qualified lender.Source
Then begin to prepare and assemble your 504 loan authorization package, using our 504 Authorization File Library to identify the documentation you will need to apply for your 504 CDC loan.
SBA Microloans – What is it?
As the name suggests, microloans are very small loans usually given to individuals for start-up businesses or personal needs.
Microloans are small amounts of loans that may range anywhere from $100 to $50,000. These loans can be given for start-up businesses, home repairs, and personal needs. People who receive these loans may be required to pay a higher interest rate and stricter repayment terms than what would be expected for a traditional loan. Microloans are available through certain nonprofit organizations that are experienced in lending and business management.
Microloans are available through certain nonprofit, community-based organizations that are experienced in lending and business. These organizations provide a service that is different from the services offered by traditional lenders. They offer microloans to people who want to start a business or seek other opportunities.
The typical interest rate is around 0.5%. The need for microloans is greater than ever before. With the increased need for small loans, more and more entrepreneurs are being denied loans from traditional lenders because they don’t meet the requirements.
SBA Microloans – Eligibility
Each intermediary lender has its own lending and credit requirements. Generally, intermediaries require some type of collateral as well as the personal guarantee of the business owner.Source
SBA Microloans – Usage
Microloans can be used for a variety of purposes that help small businesses expand. Use them when you need under $50,000 to rebuild, re-open, repair, enhance, or improve your small business.
Proceeds from an SBA microloan cannot be used to pay existing debts or to purchase real estate.Source
SBA Microloans – How to apply?
Microloans are available through certain nonprofit, community-based organizations that are experienced in lending and business management assistance. Individual requirements will vary.
To apply for a Microloan, work with an SBA-approved intermediary in your area. SBA-approved lenders make all credit decisions and set all terms for your microloan. To find an authorized microlender near you, contact your local SBA District Office.Source
What Are The Benefits Of Sba Loan?
The benefits of the SBA loan are that they are very competitive in interest rates and repayment plans. They can use the funds to purchase equipment and use them for working capital.
- An SBA Loan is a form of a loan provided by the Small Business Administration. They are an excellent alternative for what most people call “bank loans.” They are very competitive in interest rates and repayment plans, which helps many small businesses get back on their feet. The funds from the SBA Loan can be used to purchase equipment or for working capital and many other things.
- SBA Loans are one of the best ways to start a business. They are loans backed by the United States government, and they can be worth up to $5 million.
- SBA Loans can be used for many benefits, including buying equipment or starting a business. This type of loan is one of the most popular ways to start a business because it offers many benefits.
- An SBA Loan is a loan backed by the U.S. government, and it can be worth up to $5 million. These loans have some great benefits, such as helping you buy equipment or getting you started with your business idea, making them one of the best ways to create your own company!
- SBA loans are used to finance start-ups or projects of people with good credit ratings.
- One of the great benefits of these loans is that they are long-term and offer low-interest rates. SBA loans also allow for flexible repayment plans, so borrowers can pay off their debt over time or use a combination of methods.
- The main drawback is that you need collateral for these loans, which can be a problem if you don’t have any property to offer up as collateral.
The SBA loan program is an excellent option for entrepreneurs. It is a long-term loan with an easy application process and flexible terms.
The SBA loan program provides a wide variety of financing options, from term loans to lines of credit. And its terms are typically more flexible than those of most other lenders because it was created to support small businesses in America and the people who own and operate them.
The new SBA loan is a viable option for small businesses. However, before applying, you should first consider your needs and whether you can meet all the eligibility requirements.
The SBA loan is excellent for small businesses that want to start or expand their business. It is a viable option, but it is also an attractive choice because it offers competitive rates and flexible repayment terms.
The SBA Loan program is a government-guaranteed loan for small businesses that cannot get funding from other sources. The U.S. Small Business Administration (SBA) provides the guarantee, and the lender provides the funds.
In conclusion, this article has explained the SBA Loan and what it entails. It is excellent for small businesses that want to start or expand their business. It is a viable option, but it is also an attractive choice because it offers competitive rates and flexible repayment terms.