SBA loans are loans issued by private lenders and backed by the U.S Federal Government’s Small Business Administration (SBA). These fixed-rate loans are designed to make it easier for small businesses and entrepreneurs to get financing.
More than 800 lenders, community development organizations, and micro-lending institutions are authorized to issue SBA loans. Under the SBA’s 7(a) loan guaranty program, the lender provides the loan and the SBA promises to pay the lender a portion of the loan if the borrower defaults.
Having government backing allows lenders to take on more risks when it comes to providing loans to small businesses. In the 2018 financial year, lenders issued a combined $25.4 billion in SBA loans.
For many businesses, an SBA loan is a way to get a lower interest rate than a regular business loan.
There are 2 reasons for this:
First, the government caps fixed-rate SBA loans at a certain level.
Second, lenders are willing to take more risks when they know the government is there to bail them out.
Having said that, rates can still vary from lender to lender. Therefore, the first thing to look for when comparing SBA lenders is interest rate. In addition, we recommend comparing lenders by reputation, level of customer support, and ease of application process.
The standard SBA 7(A) is the most common, and most versatile SBA loan. With a loan amount of up to $5 million and the widest range of uses, it can benefit any business that’s eligible. That said, it’s an especially attractive option for startups due to the combination of large capital and flexibility.
If you can pinpoint your needs specifically on new machinery or facilities, however, the SBA 504 loan is your best bet. It’s similar to the standard 7(A), with loans of up to $20 million and extended repayment terms, but it’s designed specifically for large, stationary spending. Look into the 504 if your business is in need of new land, new facilities, or expanded operations.
SBA express loans, meanwhile, get you money quicker, but less of it. The express loan drastically reduces the time it takes to receive financing (approval comes within 36 hours), making it ideal for those looking for quick turnaround. It’s best if you’re an established business with specific, time-sensitive needs, since eligibility is more difficult and new businesses might not be approved. The loan amounts cap out at $350,000, but because of their speed they’re ideal if you’re eligible and require less capital for an urgent or niche need.
SBA fees and interest rates vary by the type and amount of loan you take out, as well as market interest rates that fluctuate. The current maximum interest rates for standard 7(A) loans range from 7.75%-10.25%, the former for loans repaid in less than 7 years and the latter for repayment that takes more than 7 years. Repayment terms expand if you use the capital to purchase new equipment (10 years) or real estate (25 years).
A loan guarantee is the amount the federal government has agreed to pay on the loan. It can be as high as $3.75 million, and it guarantees that in the event of deferral, the lender will still receive that amount from the government. Loan guarantees are what give private lenders the confidence to offer SBAs with lower payments and more flexible terms.
SBA loans typically take 60-90 days from application to receival of funds. Of course this depends on the loan type, the eligibility of the applicant, as well as other factors unique to each business. Those that require quicker access to finances can apply for an express SBA loan, which reduces approval time to 36 hours, and delivers money to the borrower’s bank account in a matter of weeks.
The Small Business Administration sets rules and guidelines that lenders must follow when issuing SBA loans. To qualify for an SBA loan, a business must be a for-profit business located in the United States or its territories. The business owner must have invested their own time and money in the business and must have exhausted all other financing options. In addition to standard 7(a) loans, some lenders offer 2 other types of loans, subject to different requirements. These are 7(a) small loans, up to $350,000; and SBA Express, up to $350,000, with a turnaround time of no more than 36 hours.
The SBA last updated its guidelines for standard 7(a) loans in 2018. Business owners should be aware of these requirements:
Maximum loan amount is $5 million.
Minimum credit score is usually 700, although some lenders have been found to accept credit scores as low as 620.
Collateral generally isn’t a requirement of loans worth $25,000 or less. Loans of $25,000 to $350,000 always involve some collateral. For loans exceeding $350,000 the SBA requires lenders to “collateralize the loan to the maximum extent possible up to the loan amount.”
Businesses involved in certain industries, such as gambling, medical research, and marijuana, are ineligible—even if their activities are legal in the state where they are located.
Applying for an SBA loan typically involves a lengthier application process than for a regular business loan. The following is a list of thing lenders may take into consideration:
Personal background, including criminal record. Anyone owning more than 20% or more of the business must fill out a form with their personal information and sign a personal guarantee.
Business background. Members of the company management team should be prepared to provide a resume outlining their business and work experience.
Business plan. This should include a value proposition, financial statements and projections, details of any existing debts, and a clear outline of how the SBA loan funds will be used.
Personal and business financial statements, tax returns, and bank statements.
Business credit report. As with a personal credit report, the lender will need you to provide details so it can access this report.
|Type of SBA Loan||Loan Amount||Repayment Term||SBA Loan Rate|
|SBA 7(a) Loan||Under $25,000||Over 7 years||Prime rate + 4.75%|
|SBA 7(a) Loan||Between $25,000 and $50,000||Over 7 years||Prime rate + 3.75%|
|SBA 7(a) Loan||Over $50,000||Over 7 years||Prime rate + 2.75%|
|SBA 7(a) Loan||Under $25,000||Under 7 years||Prime rate + 4.25%|
|SBA 7(a) Loan||Between $25,000 and $50,000||Under 7 years||Prime rate + 3.25%|
|SBA 7(a) Loan||Over $50,000||Under 7 years||Prime rate + 2.25%|
|SBA Express Loan||Up to $350,000||Up to 7 years||Prime rate + 4.5% to 6.5%|
|SBA 504/CDC Loan (CDC portion)||Up to $5.5 million||10 years||5-year Treasury rate + 2% to 4.322% in fees|
|SBA 504/CDC Loan (CDC portion)||Up to $5.5 million||20 or 25 years||10-year Treasury rate + 2% to 4.322% in fees|
|SBA Microloan||Less than or equal to $10,000||Up to 6 years||Cost of funds + 8.50%|
|SBA Microloan||Over $10,000||Up to 6 years||Cost of funds + 7.75%|
SBA loans are designed to make it easier for small businesses to get funding. If your business has exhausted all other financing options, you may be able to get an SBA loan. What’s more, the government caps interest rates on SBA loans, meaning you’ll never have to pay the high interest rates often associated with other types of business loans.
Max rates are pegged to a base rate, using the prime rate, LIBOR rate, or an optional peg rate—but usually the prime rate published by the Wall Street Journal. In general, the prime rate is 300 points above the federal funds rate. As of the start of 2019, the target federal funds rate was 2.50%, and the prime rate was 5.50%.
This table shows the maximum loan amounts:
|Loan Amount||Max Rate (< 7 years)||Max Rate (> 7 years)|
|$25,000 or less||Base rate plus 4.25%||Base rate plus 4.75%|
|$25,000 to $50,000||Base rate plus 3.25%||Base rate plus 3.75%|
|$50,000 or more||Base rate plus 2.2%||Base rate plus 2.75%|
SBA loans can be used for the following purposes:
Cover construction costs
Purchase or expand an existing business
Refinance existing debt
Purchase machinery, furniture, supplies, or materials
Small business owners may only apply for an SBA loan after exhausting all other options. Here are a few loan types to think about first.
Business line of credit: Arrangement whereby a lender agrees to supply credit to a business owner.
Business term loan: These include secured and unsecured business loans. Unsecured loans typically come with lower APRs, but require the business owner to have very good credit.
Invoice factoring: This is a type of advance on your outstanding invoices, where the lender effectively purchases your business’s accounts receivable.
Merchant cash advance: These involve borrowing a lump sum and repaying it by withholding a percentage of daily, weekly or monthly sales.