SBA Loans: What You Need to Know

Introduction to SBA Loans
An SBA loan is easily the most sought-after business loan on the market today. Other types of business loans cannot offer the same preferable terms, interest rates, and credit limits. However, these advantages also make the SBA loan particularly difficult to be eligible for.

Aside from the challenging requirements, the process of application also catches most business owners off guard because of the different misconceptions about the loan. Before seeking approval, you first need to understand what makes SBA loans similar to, and at the same time different from traditional business term loans.

SBA Loans Explained
SBA is the acronym for Small Business Administration, the government agency that guarantees the loan. It is not the lender. SBA Loan applications are not sent to the SBA directly. Instead, applications are made through 1 of 3 different types of financial institutions. These are credit unions, commercial banks, and alternative financing facilitators for businesses such as the United Capital Source. The loan is intended to help a small business start or grow.

SBA guarantees as much as 85% of loans not exceeding $150,000 and as much as 75% of loans exceeding $150,000 but not over $500,000. This way, even if the borrower defaults on the repayment, the lending institution will still get back 75 or 85% of the principal.

The SBA neither approves nor rejects applications. It depends on the discretion of the financial institution. Each lender has its own approval criteria. Once the lender approves an application, it sends its own application to the SBA for the agency’s guarantee.

How SBA Loans Work
There are different kinds of SBA Loans. These are the following:

The 7(a) Loan
The most popular SBA loan type, you can use the 7(a) loan for a lot of purposes. These include buying new equipment, hiring more workers, ordering bulk inventory, and paying off existing loans, among others.

You can borrow as much as $5M with a long repayment term of as much as 25 years, depending on your loan purpose. Interest ranges between 5 and 10%. Loans up to $150K typically come with a 1.7% fee, and 2.25% for higher loans. The fee is sometimes included in the loan’s total cost. A loan packaging or origination fee may also be charged.

You cannot use a 7(a) loan for some purposes including buying a building intended for lease to another business, repaying debts to the US government, and reimbursement to a business owner for a past investment in the business.

The CDC 504 Loan
You can only use this type of loan to buy a major asset like commercial real estate and heavy-duty machinery. Often, the financed asset is put up as collateral. You can get as much as a $5.5M loan with a term as long as 20 years. Interest is between 5 and 6%, and fees usually comprise 3% of the loan amount. You may need to put up a down payment of around 10%.

The lender, however, will require you to specify the intended use of the funds that will help determine the borrowing limit, and whether the loan will be approved or not.

If you will use the loan, for example, to create jobs, you need to create a job for every $65,000 of the borrowed amount. A manufacturing business creates a job for every $100,000. The borrowing limit is $5M.

If the loan is intended for a public policy-related purpose such as minority business development, business district revitalization, or women-owned business expansion, the loan limit is $5.5M.

Finally, if you are a small manufacturing business owner, you need to retain or create at least 1 job for every SBA-guaranteed $100,000 amount of loan. The loan must also be used for a public policy-related purpose. Meeting these criteria makes you eligible for as much as a $4M loan.

The SBA Microloan
The loan is based on the average SBA Loan size. The maximum loan is $50K. Repayment terms is up to 6 years, and interest is anywhere between 8 and 13%. There are no fees for an SBA Microloan.

Economic Injury & Disaster Loans (EIDL)
An EIDL is offered to businesses that have experienced physical damages brought by natural disasters like tornadoes and floods. The borrowing limit is $2M, with interest pegged at 3.75%. Maximum term is up to 30 years. The initial monthly due is deferred 1 full year from the promissory note date. No fees like prepayment penalties are required. There is also no collateral requirement.

An EIDL, unlike other SBA loans, can’t be drawn from banks and 3rd-party lenders. You need to instead apply through the SBA website directly.

Prior to the CARES Act, an eligible business had to prove failure to obtain credit or loans from other sources, and lack credit or cash on their own for operational expenses. This requirement is no longer applicable. Even if you have an existing credit line, theoretically, you can still get an approval for EIDL.

While an EIDL has traditionally been made available only for registered entities like corporations and LLCS, a sole proprietor, cooperative, tribal business, and even an independent contractor, can now access it.

One requirement that has remained unchanged is that an applicant company must have no more than 500 employees. If you are applying for an EIDL under $200,000, you can get approval even without putting up a personal guarantee.

We specialize in facilitating SBA Loans.

Get in touch with us for a free consultation session on how you can obtain an SBA Loan!