What is an SBA Loan?

SBA loans,loans backed by the Small Business Administration, are easy-to-qualify-for loans that are designed to offer favorable terms to small businesses across the country.. SBA backing acts as a kind of collateral, covering up to 85% of losses if you default on a loan. This backing helps lenders offer rates and terms that would otherwise be impossible for small businesses to acquire. The SBA does offers some loans directly, but most SBA loans are brokered third-party with banks which are in partnership with the SBA. The benefits of getting an SBA loan are numerous however, it is often difficult to get the backing of the SBA, mostly due to the extensive paperwork and time involved in applying.

Types of SBA Loans:

What’s Covered Below:

Rates (%)

SBA rates tend to be lower than those on traditional small business loans, though the rates vary depending on the type, size and term of the loan. For example, if you have a SBA 7(a) loan of under $25,000, with a term of less than seven years, your interest rate will be prime+4.25%. The interest rate is prime+3.25% for seven year loans between $25,001 and $50,000, and prime+2.25% on those worth more than $50,000. If you are paying an SBA loan back over more than seven years, an extra 0.5% is added to the interest rate. The SBA has set a maximum interest rate that lenders can charge to CDC/504 loans, it being between 3.83% and 4.56% depending on the length of the loan.

SBA Loan Requirements

SBA loans require a lot more paperwork than most other small business loans, as with any source of financing tied to the government In addition to your business plan, your credit score and your business credit score lenders may ask for your previous addresses, educational background, criminal records, a resume, your intention on how to spend the loan and some financial statements. While some SBA loans are designed to help startups, most others will ask that your business is at least two years old. The SBA will also ensure that your business meets their definition of a small business. Not all SBA loans ask for collateral, but some will. To avoid abuse, SBA 504 loans are only given to those with a net worth of less than $15 million, and a net income of less the $5 million. Some specialized SBA loans (such as 8(a) loans) exist for the benefit of members of marginalized groups. To qualify for these loans you must prove that you are socially and/or economically disadvantaged in one of the prescribed ways the SBA recognizes, usually based on race or gender.

What if I Have Bad Credit?

Some SBA loans are more generous than others, but it’s rare that an SBA loan is awarded to a business/individual with credit seen as worse than fair. If you’re a member of a marginalized group, the SBA may have small specialized loans for you. If your business is important to your community, a micro-loan may be granted to you even without an extensive credit history. To establish or improve your business credit history, the SBA recommends getting a business credit card and using it moderately, making regular payments along the way. The process can take some time, but with patience, you can develop your credit and get a loan at a good rate.

No Credit Check

Unfortunately, the SBA does not back or provide any loans without a credit check. If you want to avoid a credit check because you have no business credit history, SBA loans are sometimes given on the basis of personal credit. If you do not qualify for those, the SBA recommends that you get a business credit card to improve your business credit history.

SBA 7(a) Loan

The SBA 7(a) Loan is the most common type of SBA-backed small business loan. These loans range in size between $500 and $5 million, depending on the means and needs of your business. SBA 7(a) loans are only granted for those who do business in the United States. You can spend the funds on real estate, repairing equipment, paying off debt, expanding, or purchasing machinery or supplies. SBA 7(a) loans come in the form of both standard lump-sum loans and lines of credit. In contrast with other SBA loans, the interest rate on SBA (7)a loans is negotiated between the lender and the borrower, and cannot. The rates cannot exceed the SBA’s pre-set maximum. There is an express version of this loan, known as the express SBA loan, which is smaller ($350K instead of $5M), but it is much quicker and has a simpler application process; after applying, you can expect to hear back within 36 hours.

SBA 504 Loan

If you are starting or expanding a business which is important for your local community, then you may qualify for an SBA 504 loan. The SBA 504 loan (sometimes referred to as a Certified Development Company (CDC) loan) works like other SBA loan, only with more emphasis on the business’s impact on its local community. The rates for SBA 504 loans are even lower than the rates of SBA 7(a) loans, but they come with stricter application requirements. To get an SBA 504 loan, you need to prove that the loan will help to enrich your community via your business’s continued growth and operation. Community development can come through job creation (at least one new job for every $65K backed by the SBA), public policy (such as developing rural areas), or upgrading facilities to improve health, safety, or environmental impact. An SBA 504 loan cannot be used as working capital, to repay debt, or for a real estate investment.

How to Get an SBA Loan

Before you apply, you should find the SBA loan which suits your needs and then ensure that you meet the minimum requirements for that loan. After you should find a suitable lender, preferably one that you are familiar with and that has experience in dealing with SBA loans. Before you apply, you’ll need to gather the relevant documents. These documents can include (but are not limited to): your business plan, your credit score /your business’s credit score, your educational background, financial statements from your business, and proof of the size of your business. Make sure you have all of the necessary documents beforehand, because applying without having everything ready can delay the acceptance of your application. While they may involve more paperwork, the benefits of SBA loans more than make up for it. If you qualify, take advantage of these loans to grow your business today.

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