What your small business should know about SBA loans

Growing small businesses often reach a point at which they need additional capital to expand. They may need money to buy new production equipment, purchase a building, finance raw materials or more inventory, or invest in marketing and promotion.

Small Business Administration (SBA) loans are a popular option entrepreneurs rely on to obtain the money they need.

What is an SBA loan?

The SBA is not a bank; it does not issue loans directly, and you don’t fill out an application at the SBA office.

You apply for an SBA loan through a bank or credit union identified as an SBA lender. The difference is that the lending institution then turns around and asks the SBA to guarantee the loan — meaning if you fail to repay the loan, the SBA will. This guarantee makes the loan less risky for the bank.

Of course, since the SBA effectively becomes your co-signer on that loan, if you default, the SBA will turn around and pursue you for the money still owed.

The good news about SBA-backed loans is that a majority of applicants get the money they request. The 2022 Small Business Credit Survey reported that 64% of applicants were at least partially approved. Granted, only 23% of small businesses applied, and that’s the bad news, but your odds of success are better with an SBA loan.

How SBA Loans are Different

Every bank and credit union has its own lending guidelines and requirements, but one commonality across all SBA loans is that you, the small business owner, must personally guarantee the loan if you own 20% or more of the business. If the business defaults or fails to repay it, the SBA will hold you personally responsible for repayment. Closing the business down will not erase the debt.

Within the SBA lending program, there are several different types of loans for small businesses. Each has different lending ceilings, rates, eligibility requirements, and approved uses, so evaluate each type carefully before applying.

The most common SBA loans include the following:

7(a) loans

The SBA 7(a) loan program is the most common, providing funds for working capital, expansion, equipment repair or replacement, business acquisition, and refinancing existing debt, as well as several other uses. The maximum amount you can borrow is $5 million.
Within the broader 7(a) program there are also several varieties of loans:

CAPLines

Small businesses trying to manage short-term cash shortages should consider an SBA CAPLine, which is essentially a revolving line of credit. Loans of up to 10 years and $5 million are primarily available to assist product-based or seasonal companies.

Community Advantage Loans

The Community Advantage (CA) loan is a pilot program designed to support small businesses operating in underserved communities by providing up to $350,000 in loans for startup or expansion. Approved uses of the funds are relatively unrestricted, and repayment terms are typically seven to 10 years.

Express loans

As the name implies, SBA Express loans are processed quickly and can be used for working capital, expansion funding, or the purchase of equipment or real estate. Because the loans are quickly approved or declined, the maximum amount available is lower at $500,000.

Export loans

The SBA has several different programs for small businesses looking to export their products or services, from the SBA Export Working Capital loan to Export Express loans, to SBA International Trade loans, which offer funding up to as much as $5 million.

504 loans

The SBA 504 loan program’s goal is to promote job growth through the purchase of property, plant, and equipment, or long-term fixed assets; money cannot be used for other purposes. The maximum amount available is $5 million, and repayment terms can range from 10 to 25 years. To qualify, companies must have a net income of $5 million or less for the prior two years and be worth less than $15 million.

Disaster loans

If your business needs funding due to an officially declared disaster area, you may want to look into an SBA Disaster loan, which can provide up to $2 million in financing and offer repayment terms of up to 30 years.

Microloans

Companies in need of a relatively small cash infusion may want to explore the SBA microloan program, which provides up to $50,000 with a fairly quick turnaround (the average amount is $13,000).

To decide which program to apply for, consider how you intend to invest the loan funds and how much you need. That should help trim your list.

How to Qualify

Although banks and credit unions have different eligibility requirements, most SBA loans require:

• Two or more years in business (startups generally do not qualify).
• Steady or increasing revenue track record.
• Personal credit score of at least 690.
• Business and personal tax returns for the last three years.
• Some require that you post collateral or invest a portion of the total project amount.

If you can't meet these requirements, you may want to explore options at non-SBA lenders, such as community banks or credit unions.

Advantages and Disadvantages of SBA Loans

Although your odds of getting approved for an SBA loan might be better than through traditional lending channels, there are still important pros and cons that you should be aware of.

Pros

Larger loan amounts. You still have to qualify, but the maximum amount available on SBA loans is generally higher than for conventional business loans.

Longer repayment terms. Depending on how you intend to use your loan funds, SBA loans can come due within 10 years for working capital, inventory, or equipment loans and 25 years for real estate purchases.

Lower interest rates. SBA lenders are required to keep interest rates on small business loans at prime plus a set rate, which is typically significantly lower than traditional small business loans.

Smaller fees. Banks typically charge an application fee for small business loans based on the loan amount and repayment term in addition to an annual loan service fee. Some SBA loans, however, have no application fees, and some have no annual service fees.

Cons

Slow responses. Because the bank where you apply for a loan is effectively a middleman, the turnaround time for a decision can take up to three months. For this reason, SBA loans may not be your best choice if you’re on a tight timeline.

Personal guarantee. As previously mentioned, all SBA loans require a personal guarantee of repayment. You may also be required to provide collateral or a deposit of up to 10% of the project value.

Choosing a Bank

With so many potential lenders to choose from, how do you know which will be most likely to be able to assist you? The SBA’s Lender Match tool helps identify which banks and credit unions in your area may be able to work with you.

If you know from the outset that you’ll be applying for an SBA loan, your best bet is to find a bank that has an active SBA lending group – meaning they routinely process SBA loan applications.

Better yet, look for an SBA Preferred Lender. Preferred Lenders can make loan decisions in-house, without having to take the extra step of running your application by the SBA. That can save you a lot of time.