When most people think of business loans, the Small Business Administration (SBA) is inevitably brought up.
To clear up, a common myth or misconception is that the SBA does not directly provide financing with the exception of their Disaster Loans. What the SBA does provide is a guarantee to the bank that if the business owner defaults, the bank will recover a portion of the money that was borrowed. The guarantee to the bank varies depending on the program but is typically between 50% – 85% of the loan.
Another misconception of SBA loans is that they are cheaper than conventional loans. Think of the SBA loan as an insurance policy backed by the Federal government, and as with any insurance policy, there is a cost associated with it. The costs to the borrower include typically slightly higher interest rates than conventional loans on top of fees for the guarantee, which vary depending on the loan amount:
- 1% if the guaranteed portion is $150,000 or less
- 3% over $150,000 up to and including $700,000
- 3.5% for loans greater than $700,000
Typically, a bank is going to want an SBA guarantee if they see some risk in the project like insufficient collateral or equity. While the SBA makes more capital available for small businesses by taking some of the risk away from the bank, the business must meet the underwriting requirements of the bank and SBA’s stringent requirements. Another thing to note, as one would expect, anytime the government gets involved, there will be a great amount of paperwork and can add several months to get approval, depending on the program. On the plus side, however, you can get a longer-term and lower the monthly payment.
There are a few ineligible types of businesses, and the most common ones include:
- Financial businesses primarily engaged in the business of lending, such as banks, finance companies, payday lenders, some leasing companies, and factors (pawn shops, although engaged in lending, may qualify in some circumstances)
- Businesses owned by developers and landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds (except when the property is leased to the business at zero profit for the property’s owners)
- Life insurance companies
- Businesses located in a foreign country (businesses in the U.S. owned by aliens may qualify)
- Businesses engaged in pyramid sale distribution plans, where a participant’s primary incentive is based on the sales made by an ever-increasing number of participants
- Businesses deriving more than one-third of gross annual revenue from legal gambling activities
- Businesses engaged in any illegal activity
- Private clubs and businesses that limit the number of memberships for reasons other than capacity
- Government-owned entities
- Businesses principally engaged in teaching, instructing, counseling, or indoctrinating religion or religious beliefs, whether in a religious or secular setting
- Consumer and marketing cooperatives (producer cooperatives are eligible)
- Loan packagers earning more than one-third of their gross annual revenue from packaging SBA loans
- Businesses in which the lender or CDC, or any of its associates owns an equity interest
- Businesses that present live performances of an indecent sexual nature or derive directly or indirectly more than 2.5 percent of gross revenue through the sale of products or services, or the presentation of any depictions or displays, of an indecent sexual nature
- Businesses primarily engaged in political or lobbying activities
- Speculative businesses (such as oil exploration)
Related: What are the 5 C’s of credit?
There are a few different types of SBA loan programs that fit a wide variety of businesses.
SBA Advantage Loan 7(a)
The SBA Advantage Loan 7(a) is the SBA’s primary small business loan program, as it applies to a wide variety of businesses and projects, both startup and expansion. The 7(a) program can be used for working capital, refinancing machinery, equipment, furniture and fixtures, and the purchase and/or renovation of a building. There is a limit to the size of an SBA loan of $5 million, with the SBA guaranteeing 75% or $3.75 million. Loan terms can be for up to 7 years for working capital, 10 years for equipment, and up to 25 years for real estate.
To be eligible for an SBA Advantage Loan, a business must be considered small by the SBA (which is actually pretty generous). This link will provide the SBA Size Standard List by industry.
7(a) loans can be fixed or variable, and the bank decides the rate it will offer, however, the SBA limits the lender to how much they can put on top of the loan’s base interest rate. For loans under 7 years, the bank can only mark up the loan by 2.25% and longer terms by 2.75%.
Here is a link for the loan application checklist to see the paperwork the SBA is going to ask for.
SBA Express Loan
SBA Express is a subset of the 7(a) program that is for loans under $350,000. The benefit of the SBAExpress program the lender can use most of their forms and procedures for processing, resulting in less overall paperwork. Typically, a response from SBA will be provided within 36 hours.
The guarantee percentage is reduced to 50%, and SBA does not require collateral loans for up to $25,000, however that is up to the lender.
504 Loan Program
Another program, the 504 Loan Program, is primarily for larger projects involving major assets. These programs are a little more complex where the SBA guarantees 40% of the total project costs, the lender providing 50%, and the business owner investing the remaining 10%.
504 loans are administered by Certified Development Companies (CDCs) through commercial lending institutions.
Funds from a 504 loan can be used to refinance or expand a business through the purchase, construction, or renovation of buildings or to purchase land or machinery. Inventory or working capital may not be used in a 504 loan.
The maximum amount of a 504 loan is $5.5 million and can be set up to 10 or 20-year terms.
SBA Microloan Program
The SBA makes funds available to specially designated intermediary lenders, which are nonprofit organizations with experience in lending and technical assistance. Those intermediaries then make loans of up to $50,000.
Related: Find microloan programs near you.
SBA also offers programs for businesses exporting or planning to export. If your business falls into this category, there are some good reasons to consider these programs. Exporting by U.S. businesses is a priority from the federal government and offers some benefits over the SBA Advantage 7(a). These programs are typically best suited for existing businesses that have their domestic operations under control.
To see if your business qualifies, here is a list of U.S. Export Assistance Centers.
SBA loans under the export program include:
International Trade Loan Program
The International Trade Loan Program provides loans for fixed assets and working capital for up to $5 million.
This loan is for businesses in a position to begin marketing to or expanding into new export markets. This loan can also be used for businesses that have been negatively impacted by import competition.
Funds can be used to acquire, construct, renovate, modernize, improve, or expand facilities and equipment to be used in the United States to produce goods or services involved in international trade and develop and penetrate foreign markets. Funds also may be used to refinance an existing loan. Any lender that can do SBA Advantage 7(a) loans can also provide the International Trade Loan. This program, while more beneficial to a business than the 7(a), is not used as often, and lenders sometimes will overlook it. If your business can qualify for it, be sure to ask.
SBA Export Express Loan Program
The SBA Export Express Loan Program offers to finance up to $500,000, and like the SBAExpress, a response is typically given in 36 hours.
A business has to have been in operation (not necessarily exporting) for over 1 year unless the owner’s experience would suggest they have expertise in exporting.
Funds can be used to improve the company’s ability to export for such things as foreign trade show expenses, marketing, inventory for export orders, expansion of facilities, equipment, and real estate.
Export Working Capital Program
The Export Working Capital Program is a program that not all SBA lenders are able to provide, but it provides advances of up to $5 million to fund export transactions from purchase order to collections. Benefits to this program are low guarantee fees and quick processing time.
Funds can be used for suppliers, inventory accounts receivable, and back up to a letter of credit for export-related activities.
How long does the SBA application process take?
To get an SBA guarantee, you have to first meet with an SBA lender. They will review your project and decide if a loan guarantee is necessary. Then there will be quite a bit of paperwork and financial documents to gather in preparation for the loan. This will generally take 2 weeks to 3 months. Once all the documents are prepared and sent to the SBA, expect another 2 weeks to 3 months for SBA approval.