SBA Loans Explained: Everything You Need To Know

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The Small Business Administration (SBA) is an excellent resource if you need a business loan. Loans offered in partnership with the SBA tend to have better rates and fees than other types of loans, typically boasting longer term lengths and lower interest rates. And, because the SBA guarantees a portion of these loans, they are often easier to obtain than bank loans.

Does the SBA offer the type of loan you’re looking for? Read on to find out!

Table of Contents

What Is The SBA?

The Small Business Administration (SBA) is a government institution that was founded in 1953. Its mission is to “aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation.”

The SBA assists small businesses in a number of ways, but arguably, its most important contribution to the American business landscape is its loans program.

There are a number of SBA loan programs; these vary according to business need. The most popular are the 7(a) Loans, but the SBA also offers a Microloan program, CDC/504 Loans, and Disaster Loans. These programs are typically offered in partnership with banks, credit unions, nonprofits, and other organizations.

SBA Loan Programs At A Glance

Below is a short summary of each loan. In the following sections, we’ll go over individual loans in more detail.

7(a) Loans General-use small business loans for many business purposes.
Microloans Small (max $50,000) loans for working capital, equipment, inventory, or other business projects.
504 Loans Large loans used to acquire fixed assets such as real estate and equipment.
Disaster Loans Loans used to rebuild and maintain businesses following a disaster.

7(a) Small Business Loans

The 7(a) Loan Program is the SBA’s primary program, and it’s by far the most popular. Many loans fall under the umbrella of the 7(a) program. These include:

  • Standard 7(a) Loans
  • 7(a) Small Loans
  • SBA Express Loans
  • Export Express Loans
  • Export Working Capital Loans
  • Veteran’s Advantage
  • CAPLines

Loan Uses

This is the SBA’s most popular loan program, in part because it’s so versatile and widely applicable to most business needs, though some loans are for specific businesses or specific uses. Of particular note is the SBA Express program. While SBA loans can still have time-consuming applications, the SBA Express program is designed to make the process a little faster.

7(a) loans can be used for many business purposes:

  • Working capital
  • Expansion or renovation
  • Construction
  • Land and real estate purchasing
  • Equipment purchasing
  • Inventory purchasing
  • Starting a business
  • Debt refinancing
  • And other reasons

Eligibility

Eligibility is dependent on the SBA’s standards as well as the standards of the partner lender.

The SBA’s standards are fairly straightforward:

  • Your business must be for-profit
  • You must do business in the United States or its territories
  • You must have reasonable owner equity
  • You must have used personal savings and other alternative financial assets before seeking an SBA loan

If you meet those requirements, you have a good chance of qualifying for an SBA loan, at least in the eyes of the SBA (partner lenders have more standards). That said, the SBA will not fund certain industries, including gambling businesses, pyramid sales plans, and lenders. Other business types, such as farms, recreational facilities, and fishing vessels, might have to meet certain requirements or submit extra documentation to be approved.

Partner lenders might also have additional requirements. Most will require you to have been in business a certain amount of time, have a certain credit score, and maintain a debt-to-income ratio that will support repayments. Specifics regarding these standards will vary according to partner.

Rates & Fees

The maximum amount you can borrow via most 7(a) programs is $5 million. Some programs, such as the SBA Express and 7(a) Small Loan programs, will allow a maximum of $350,000.

Term lengths vary according to why you are borrowing. For most loan purposes, including working capital and equipment, the maximum term length is 10 years. If you are using the loan to purchase real estate, the term length can go up to 25 years.

Interest rates vary depending on the financial institution you’re working with. That said, the SBA has set maximums regarding how much the lending institution can charge.

Currently, these are the maximums:

Loan Amount Less Than Seven Years More Than Seven Years
Up To $25,000 Base rate + 4.25% Base rate + 4.75%
$25,000 – $50,000 Base rate + 3.25% Base rate + 3.75%
$50,000 Or More Base rate + 2.2% Base rate + 2.75%

The base rate can be determined by one of three sources: the prime rate (such as the one published by the WSJ), the LIBOR, or the SBA Peg Rate. Rates can be fixed ( the rate stays the same over the life of the loan) or variable (the interest rate will change if the base rate changes).

For example, if you are borrowing $100,000 and your term length is 10 years, your maximum interest rate might be 7% (the current WSJ prime rate plus 2.75%). As you can see, SBA loans tend to have more reasonable interest rates than many other business lenders, whose rates generally range from about 5% – 30%, or even higher.

The interest rate isn’t your only fee, though. In addition to the interest, SBA 7(a) loans come with a guarantee fee, which varies based on the size and length of the loan. This fee is initially paid by the partner lender, but they can pass the cost on to you. Partner lenders can also charge other fees in addition to the guarantee fee.

Microloans

Microloans are small loans that are typically granted to businesses in need of an infusion of cash to start or continue business growth. The SBA doesn’t originate microloans itself—it loans money to intermediaries, which are then responsible for passing the money to small businesses.

SBA microloans can be a good resource for startups or small businesses that need a small amount of money. Microloans do not exceed $50,000 and have short term lengths, which make them less risky (and easier to qualify for) than larger-sized business loans.

Loan Uses

Microloans are not as all-encompassing as 7(a) loans. Still, these loans can be used for many business purposes, including “working capital and acquisition of materials, supplies, furniture, fixtures, and equipment.” You can’t use these loans to purchase real estate.

Eligibility

In the eyes of the SBA, any business eligible for a 7(a) business loan is also eligible for a microloan. Non-profit childcare centers are also eligible for this type of loan.

That said, the SBA does not actually have a hand in evaluating loan applicants or distributing loans. The intermediaries responsible for distributing the loans have separate application processes and their own qualification requirements. It’s important to note that the intermediaries you’re eligible to borrow from will depend on where your business is located.

Rates & Fees

Microloans max out at $50,000. According to the SBA, the average microloan size is $13,000.

The interest rates are set by the intermediary, but the SBA will not allow them to go over a certain amount. Generally, you can expect interest rates between 7% and 10%. Intermediaries are allowed to set term lengths as well, but these cannot go over six years.

CDC/504 Loans

The 504 Loan Program is designed to promote small business growth and job creation by financing the acquisition of fixed assets such as land, real estate, or machinery.

The SBA works with Community Development Companies (CDCs) and partner lenders to offer 504 loans. CDCs are not-for-profit organizations certified by the SBA that are dedicated to, as you might guess, developing communities. Partner lenders are typically banks and other financial institutions.

Loan Uses

504 loans can be used to fund fixed assets, such as land, real estate, long-term equipment, and construction. Loans can also be used to refinance debt, but only if the debt is “in connection with an expansion of the business through new or renovated facilities or equipment.”

SBA 504 loans cannot be used to fund short-term needs or current assets, such as working capital or inventory. They also cannot be used to refinance most debt (unless the debt meets the above standards).

Eligibility

These are the requirements you must meet in order for the SBA to approve a 504 loan:

  • Your business must be for-profit
  • You must have used other resources before seeking a 504 loan
  • Your business must have a tangible net worth below $15 million
  • Your business must have an average net income of $5 million or less after federal taxes for the last two years
  • You must not be engaged in non-profit, passive, or speculative activities

You must also meet other standards set by the SBA, the CDC, and/or the partner lender. For example, the project has to meet certain community development goals by creating or retaining jobs, improving the local economy, increasing competitiveness, etc. Naturally, you must also be able to prove that your business is creditworthy and that you can repay the loan.

Rates & Fees

504 loans do not have a maximum borrowing amount, but the maximum the SBA will contribute in most cases is $5 million. The amount contributed to fund projects is divvied up between three parties: the SBA, a partner lender, and your business. Typically, the SBA puts up 40%, the partner lender puts up 50%, and you contribute 10%. In some cases, you will have to contribute as much as 20%.

Term lengths vary depending on the use of the proceeds. The term length is 10 years for equipment and machinery and 20 years for land and buildings. Interest rates are based on 5- and 10-year US Treasury rates.

Disaster Loans

If your business has incurred physical or economic damage due to a disaster, you may be eligible for a disaster loan from the SBA.

Disaster loans are designed to help small businesses that have been affected by disasters such as floods, hurricanes, or earthquakes. Small businesses in a declared disaster area can apply for a long-term, low-interest loans to rebuild or weather the aftermath of the disaster.

Loan Uses

Disaster loans can be used to cover physical damage and economic injury losses. Physical damage losses include, as you would expect, damage to real estate, equipment, or inventory. Economic injury is a little more complicated — this term applies to businesses that cannot resume normal operations because of the disaster. A portion of the loan can also be used to make improvements that will minimize or prevent damage in the future.

Eligibility

Private property owners are eligible for disaster loan assistance. This includes small for-profit businesses, private non-profit organizations, homeowners, and renters.

To qualify for a disaster loan, you must be in a declared disaster area. You can check whether your area qualifies via the SBA’s Disaster Loan Assistance website.

Rates & Fees

For small businesses, the maximum borrowing amount for a physical damage or economic injury disaster loan is $2 million. Naturally, the maximum amount you can borrow is based on your need and ability to repay the loan, among other factors. According to the SBA, “The amount SBA will lend depends on the cost of repairing or replacing your business and business contents…minus any insurance settlements or grants.”

Your maximum interest rate and term length will depend on whether or not you have credit available elsewhere. If you do, the maximum rate is 8% and the maximum term length is seven years; if you don’t, the maximum rate is 4% and the term length is 30 years. Disaster loan interest rates are fixed, which means your rate will not change over the life of the loan.

How To Find SBA Loans

The easiest place to start your search for an SBA loan is via the organization’s Lender Match service. After answering a few questions about yourself, your business, and the financing you’re looking for, the SBA promises to match you up with eligible partners within two business days.

If you think you might be eligible for a disaster loan, you might want to take a look at the SBA’s Disaster Loan website. And if you’re looking for a microloan, the SBA has a list of lenders available on their list of intermediaries page.

Bianca Crouse

Bianca is a writer from the Pacific Northwest. As a product of the digital age, she likes absorbing large amounts of information and figures she might as well pass it on. When not staring at a screen, she is probably foraging for food outside, playing board games, or harassing somebody with theories about that movie she just watched.

Bianca Crouse

Bianca Crouse

Bianca Crouse

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