The Small Business Administration (SBA) is a government agency in the United States created to support small businesses in various capacities, one of which is giving out loans.
It’s an easy process where the SBA acts as a guarantor for these small businesses and ensures they get the funding they require from lenders. Their role as a guarantor means that they will pay back some of the money in case the business fails to pay back after a certain period.
How Do SBA Loans Work
An SBA loan gives you access to money that can be used for different expenses at a fixed interest rate over an agreed period. This means you do not have to worry about interest rates changing or increasing before you complete payment, it is fixed.
There are different types of loans available for various purposes. Understanding the different loans and identifying which fits your business needs helps you quickly access the money you require and achieve your financial goals.
Types of SBA Loans
There are six different types of SBA Loans;
- 7(a) Loans: The 7(a) loan is the most popular type of SBA loan due to its low-interest rate, which usually spans between 7.5% to 10% and more extended repayment periods that can last between 10 years to 25 years, especially for commercial real estate loans.
The 7(a) loan requires applicants to have a credit score starting from 680 without recent bankruptcy. The amount that can be borrowed in the 7(a) loan type starts from $30,000.
- CDC/504 Loans: This is another common loan type among business owners. However, it is specially created for businesses looking to design their offices or want to rent a new one.
This loan is offered with the Certified Development Companies (CDC). It is only businesses that have made $5 million or less in profit for at least two years before applying for this loan.
- Microloans: As the name suggests, microloans are the smallest of all SBA loans because businesses can get as little as $13,000 on average, and the highest amount any business can get through microloans is $50,000.
Microloans usually come with an average interest rate of 8% - 13% and a maximum repayment period of 6 years. Applicants must have a minimum credit score of 640 and cannot use the loans to repay existing loans or purchase real estate.
- Disaster Loans: Disaster loans are specially reserved for businesses that have been affected by natural disasters like floods, earthquakes, hurricanes, etc. This only applies to situations officially declared natural disasters by the president.
These loans include Military reservists' economic injury loans, Home and personal property loans, Economic injury disaster loans (EIDL), and Business physical disaster loans.
- CapLines: Capline loans are like revolving credit lines. They help small businesses cover short-term expenses like paying for contracts, making payrolls, etc. Capline loans include:
- Builder CapLines: They cover expenses related to the construction or renovations of commercial properties.
- Contract CapLines: Offered to cover financial, administrative, or operational contracts.
- Seasonal CapLines: For covering seasonal increases or invoice financing.
- Working Capital CapLine: Provided to cover short-term operational costs and inventory purchases for small businesses.
Pros of SBA Loans
- Competitive Interest Rates: SBA loans typically have lower interest rates than traditional loans because the SBA stands as a guarantor.
- Low Fees: SBA loan fees are charged based on the loan amount and government guarantee percentage.
- Longer Payment Periods: SBA loans usually have a more extended payment period than traditional loans. 7(a) loans have a ten year payment period and up to 25 years for real estate loans.
Cons of SBA Loans
- Strict Qualifications: The qualification processes for SBA loans are much stricter than traditional loans.
- Slow Funding: Due to the review and approval processes, SBA loans can take a while to be accessed.
- Personal Guarantee: The SBA loan process requires borrowers to come with a personal guarantee that will be held responsible if payment falters.
How to Qualify for SBA Loans:
- You are a for-profit business, no NGOs are allowed.
- You operate in the United States.
- You have shares in the company.
- You meet the required size for your industry.
- You have a good credit score and a strong financial structure.
The application process for an SBA loan can be time-consuming and requires a lot of documentation, including financial statements, tax returns, business plans, and loan applications. However, SBA loans offer several benefits, including longer repayment terms, lower interest rates, and access to financing that might not otherwise be available.
In addition to partnering with lenders to guarantee loans, the SBA provides resources and support for small businesses, including counseling, training, and technical assistance. This support can benefit small businesses starting or looking to grow and expand.
Overall, SBA loans can be a valuable financing option for small businesses, providing access to affordable financing and additional resources and support. However, it's vital for small business owners to carefully consider the eligibility requirements and be sure that they check all required boxes before sending in an application.