What Are SBA Loans?
If you’ve started searching for business funding, you’ve likely come across a mess of jargon unfamiliar to you and find it difficult to keep up with. SBA loans is among the lingo thrown around in business funding.
An SBA loan is used to assist small businesses, partially guaranteed by the government - they’re also referred to as a Small Business Administration 7(a) loan. It also has a few other types of loans alongside the 7(a) loan, like the 504 loan program, microloans for amounts up to $50,000 and SBA disaster loans for up to $2 million.
However, this shouldn’t be confused with the idea that it’s the SBA doing the lending - they’re not. The SBA simply works alongside networks of preapproved financial institutions like small banks, which typically lend money to these small businesses because of this partial loan guarantee from the SBA.
Essentially, these small banks will lend part of a loan because if the small business does fault on it, at least the SBA will guarantee coverage the portion that the bank backed up. For a small business just starting out, these loans allow the company to grow due to flexible terms and low interest rates without being slammed with crippling debt.
Obtaining SBA Loans
It might sound too good to be true, but SBA loans can cover up to 85% of a loan’s amount of $150,000 or less and 75% of loans totaling more than $150,000. Also it can be received in as quickly as two weeks. That being said, there’s a bit of a catch - SBA loans are difficult to obtain.
The bottom line is that many businesses, whether they’re small or just opened their doors, can qualify for an SBA loan. However, the most critical factor as to whether or not they’ll receive the loan is their credit score. As with any other loan, the lenders want to see strong borrowing histories when considering these small businesses for the loan. The participating bank will be in search for SBA applicants not only with excellent credit, but ones with an impressive business plan, and a proven ability to repay the loan.
Aside from having a good credit score and a well accumulated borrowing history, you’ll need a driver’s license, voided business check, bank statements, balance sheet, profit statements, tax returns, your business plan and your business debt schedule in order to apply for an SBA loan. Experienced lenders can walk you through the process in greater detail, but don’t expect to receive the loan overnight by any means. The SBA process, while sometimes taking into effect in as little as two weeks, is usually at least a few weeks for some businesses depending on the situation.
For some, the downside of an SBA loan is the considerable amount of paperwork that goes into the application process. Obtaining an SBA loan is rigorous, but as a reward, you’ll get fair interest rates and a good-sized loan to fund your business even if others deem it “risky”. To find lenders, you can visit your local SBA district office for a list of names of approved lenders.
There are other avenues for SBA loans that the Association offers like SBA Express, which responds to loan applications within 36 hours. Of course, this will be reliant on outstandingly good credit, so if you have a stellar credit score and your small business finances are in top shape, you could qualify for this type of super-quick loan. The maximum loan through this SBA Express channel is $350,000 and the maximum amount the SBA could guarantee is 50%.
The Details on SBA Loans
Breaking down SBA loans, there are different levels of interest rates based on the amount of your loan and the amount of time you pay it back. You can receive a better interest rate if you’re able to pay off the loan in less than 7 years, but if not, you’ll have a slightly higher interest rate if paying off the loan takes longer than 7 years.
Here’s an idea of the interest rates for the SBA’s flagship 7(a) loan:
In 2019, the current SBA interest rates of a standard 7(a) loan paid off in completion under 7 years for the amount of $25,000 or less is 9.75%, and for the same amount paid over 7 years it is 10.25%. For a SBA 7(a) loan in the amount of $25,001 to $50,000 paid in less than 7 years, the interest rate is 8.75%, and paid in over 7 years, it jumps to 9.25%. For a SBA 7(a) loan in the amount of more than $50,000 paid in less than 7 years, the interest rate is 7.75%, and paid in over 7 years, the interest rate increases to 8.25%.
The loan term depends on how the money will be applied for your small business needs. For example, working capital and loans for daily operations have the repayment terms of 7 years, new equipment loans are 10 years and real estate purchases have term repayments of up to 25 years.
Requirements also entail 2 years or business history, a 640 or preferably higher credit score for you as the business owner, and a profitable businesses will help. However, it’s not a must-have, but you should have $100,000 or more in annual revenue for your business. If these requirements don’t sound like your business will fit the bill for an SBA loan, don’t worry, just because you don’t qualify for one right now, doesn’t mean that you’ll never be able to obtain one.
Choosing the Right Bank for Your SBA Loan
Most small businesses end up applying for their SBA loan through a traditional bank, but if the process feels overwhelming to you, try to follow these guidelines:
Choose a traditional bank that specializes or frequently deals in SBA loans
Select a lender that has a high funding rate fro SBA loans
Consider a bank with an experienced staff who has a history in assisting in SBA loans
Ask your potential lender what the dollar range is of the loans they make
Keep in mind that SBA loans also require a personal guarantee from every small business owner, meaning at least a 20% ownership stake as well as a similar guarantee from others in the company who hold a top management position. This personal guarantee puts you as the business owner as personally responsible for payments if your business cannot make them.
Working Towards an SBA Loan
Graduating your business may also mean working on your personal credit score, too. Remember you can also entertain the various SBA loan programs aside from the popular 7(a) loan like the SBA Microloan for small or newer businesses in need of loans under $50,000.
Maybe your business isn’t quite there for an SBA loan - and that’s okay. You can work with trusted advisers to make your way towards the qualifications that will make your small business most attractive to lenders for an SBA loan.