SBA Loans
What precisely is an SBA loan?
SBA Loans are financial products offered by banks and commercial lenders to both new and existing small businesses, with backing from the United States Small Business Administration (SBA). These loans aim to provide funding for small companies that may have difficulty securing traditional bank financing. Under this arrangement, the bank or SBA lender extends financing to the small business, while the government assumes the majority of the lender’s potential losses in the event of default. By mitigating risk for the lending institutions through the SBA guarantee, it incentivizes banks and lenders to approve loans they might otherwise decline. However, to qualify for SBA backing, both the small business and the commercial lender must meet specific guidelines set forth by the SBA prior to funding.
SBA 7(a) Financing
- Interest rates: 7-25%
- Terms: 6 months – 5 years
- Funding time: 3-10 days
- Repayments: weekly – monthly
- Industries funded: most
The SBA 7(a) program stands as the Small Business Administration’s largest lending initiative, encompassing various other SBA financing options. While SBA 7(a) loans can extend up to $5 million, the government guarantees only up to $3.75 million for any single small business. Among the debt finance programs falling under the 7(a) program are SBA Express Lender Structured Loans, Export Express lender structured loans and lines of credit, International Trade Loan, Export Working Capital Loan, and CAPLines (Seasonal, Contract, Builders, Working Capital).
The utilization of SBA 7(a) loan proceeds is diverse and includes purposes such as starting a business, acquiring an existing business, purchasing or constructing buildings, securing working capital, procuring inventory, fixed assets, and raw materials, funding leasehold improvements, and in certain qualifying scenarios, refinancing and consolidating business debt. SBA 7(a) financing is available in both term loan and line of credit formats.
SBA 504 Financing
- Loan Amounts: Up to $10,000,000
- Rates: 5-7%
- Terms: 10-20 years
- Funding time: 30-60 days
The SBA 504 program was established to aid small business owners in financing long-term fixed assets, such as commercial buildings and business equipment, and in certain instances, refinancing long-term equipment loan terms at market or below-market rates. Although there is no set limit on the size of the SBA 504 commercial loan, the SBA guarantees only up to $5 million of the facility.
The SBA 504 loan operates through three key parties: the small business owner, a conventional bank lender, and a non-profit Community Development Corporation (CDC) lender. Under this program, the borrower commits to providing 10% of the loan facility, while the bank agrees to contribute 50%, and the CDC pledges to cover the remaining 40% of the loan.
SBA Microloan Program
- Loan Amounts: Up to $50,000
- Rates: 6-13%
- Terms: Up to 6 years
The SBA Microloan program extends loans of up to $50,000 to small business owners and non-profit childcare centers. Qualification criteria and permitted use of funds for the SBA microloan program closely resemble those of the 7(a) program, allowing for a wide range of uses. However, a notable distinction lies in the administration of the microloan program: the SBA allocates funding to non-profit micro-lenders, who subsequently distribute the funds to eligible companies.
Eligible Businesses
- Must be for-profit
- Meet SBA’s definition of small business
- Must have reasonable amount of equity
- Exhausted all other finance options
- Can not be delinquent on government debt
- Have a valid need for the SBA loan
- Purpose for the SBA loan must be for a valid business purpose
Ineligible Businesses
- Financial businesses
- Developers and Rentals
- Life insurance companies
- Foreign Businesses
- Businesses that are engaged in any illegal activity
- Businesses principally engaged in religion or religious belief
- Speculative companies
