Every year, thousands of entrepreneurs in the US use business loans from the Small Business Administration (SBA) to start or grow their small businesses.
Of the many different kinds of small business financing available, SBA loans often are among the most favorable in terms of repayment conditions. This can make them harder to qualify for than other financial products that a commercial bank might offer, but they’re well worth exploring before submitting an application or committing to a significant financing decision.
The Small Business Administration operates several different small-business loan programs and also works with approved lenders all over the United States to provide small businesses with the funding they need to thrive.
In this post, we’ll cover the basics of SBA financing and the kinds of businesses that are eligible to apply, as well as what is needed to submit an SBA loan application.
What are SBA loans?
As their name implies, SBA loans are a form of business debt administered by either the Small Business Administration or a member of its network of approved private lenders (with SBA-backed loans).
Some SBA loans offer fixed sums at a specific interest rate over an agreed repayment period and can be used to pay for a broad range of expenses. Other SBA loans help business owners make specific kinds of investments with loan proceeds, such as commercial real estate or equipment purchases. Certain SBA financial products, such as the CAPLines small business loan program, are often bundled as part of another primary loan, such as a 7(a) loan.
Knowing the difference between the various types of financing available through the SBA can save entrepreneurs time and effort, allowing them to apply for the right kind of financing for their business.
Types of SBA loans
There are six different types of financing available via the SBA, as well as a handful of additional programs. These are:
- 7(a) loans
- (a) Small Loan
- SBA Express
- CDC/504 loans
- Disaster loans
- Economic Injury Disaster Loans
Let’s take a look at each type of SBA loan.
The SBA 7(a) loan program
Of all the types of business loans offered by the SBA, the 7(a) loan program is the most popular, thanks to its longer repayment periods and lower interest rates. Unfortunately, these favorable loan terms are also what make 7(a) loans highly sought after and typically harder for many small businesses to qualify for.
Here are a few important details about the 7(a) small business loan program:
- The maximum loan amount a business can apply for via the 7(a) loan program is $5 million.
- Interest rates vary, but typically fall within 7.5% to 10%.
- Working capital loans usually are repaid over a period of up to 10 years, or up to 25 years for commercial real estate loans.
- Applicants should have a credit score of at least 680 and no recent bankruptcies or liens.
While there are no minimum loan amounts under the 7(a) program, it’s highly unusual for the SBA or its network of private lenders to approve applications of less than $30,000.
There are several subtypes of loans available via the 7(a) program, including Express and Small Loans. Both the Express and Small Loan programs offer borrowers a maximum loan amount of $350,000 and feature repayment and credit terms very similar to the primary 7(a) program. Using an SBA loan calculator will help estimate the loan terms and rates.
Ordinarily, 7(a) small business loan applications take between five and 10 business days to process, but express loan applications typically are processed within 36 hours because they require less documentation. Note that these estimates refer only to initial application processing and are based on complete applications with all required supporting documentation. The actual time it takes for funds to be dispersed can be weeks, if not months, so prospective applicants should bear this in mind before submitting an application.
Another popular SBA program is the CDC/504 loan program. This type of loan is designed for businesses seeking to construct or purchase commercial real estate. Businesses can also use this loan to modernize their existing spaces, via renovations or the installation of new furnishings or equipment.
These SBA-guaranteed loans are funded in partnership with the SBA and Certified Development Companies (CDCs), from which these loans take their name. CDCs are nonprofit organizations that work with the SBA to fund business growth in their communities.
Typically, the SBA guarantees up to 40% of a CDC/504 loan, with a CDC shouldering 50%. The borrower usually has to fund the remaining 10% of project costs, though this can increase to 20% in some cases.
To qualify for a CDC/504 loan, a business must:
- Be a for-profit business (note that certain types of “passive or speculative” business, such as some financial investment activity, are ineligible for CDC/504 financing)
- Not have fixed assets of more than $15 million
- Have an average net income of no more than $5 million (after federal tax deductions) for the previous two years of operation
There are also several other criteria small businesses must meet in order to qualify for a CDC/504 small business loan, many of which are set forth by the participating CDC. These include community-development and public-policy goals, such as creating jobs, improving the local economy, and expanding economic opportunities to disadvantaged or underrepresented communities.
CAPLines are a type of financing that offers borrowers access to revolving credit for covering short-term expenses, such as payroll obligations, paying overdue contracts or invoices, or purchasing seasonal inventory, among other costs.
There are several different types of CAPLine products:
- Builder’s CAPLines, which cover expenses directly related to the construction or significant renovation of commercial property, such as labor, building materials, and permits
- Contract CAPLines, which finance specific contracts for general administrative expenses or operational overheads
- Seasonal CAPLines, which provide a small business inventory loan for seasonal increases and accounts receivable
- Working Capital CAPLines, which fund a range of short-term operational costs for small businesses, such as accounts payable and inventory purchases
Although the SBA and private lenders can and do issue CAPLines as stand-alone small business loan products, they’re usually offered alongside mainstream SBA loans, such as the 7(a) loan program.
The SBA’s disaster loans program helps small businesses affected by natural disasters, such as hurricanes, earthquakes, and floods.
Businesses can apply for an SBA disaster loan only for incidents officially declared disasters by the president of the United States, the secretary of agriculture, or the SBA itself.
There are four primary types of Disaster Loans administered by the SBA:
- Home and personal property loans
- Business physical disaster loans
- Economic injury disaster loans (EIDL)
- Military reservists economic injury loans
Alongside these specific disaster loans, the SBA also offers financial support to businesses affected by the COVID-19 pandemic, some of which are extensions of existing SBA loan programs:
- The Paycheck Protection Program (PPP), an extension of the 7(a) loans
- Economic injury disaster loans, offering eligible businesses advances of up to $10,000
- SBA Express Bridge Loans, offering up to $25,000 for borrowers with an established relationship with an SBA Express lender
- SBA debt relief, a short-term program where the SBA will pay six months of principal, interest and associated fee payments on existing 7(a), CDC/504, and microloans (new applications received before September 27, 2020, will also be eligible for this program)
The SBA offers several business loans designed for businesses that need help exporting their goods overseas or expanding into new markets beyond the United States.
The SBA offers three main types of export loans:
Because of all the complexities of international trade, the specifics of the SBA’s export loans deserve their own article. That said, a business owner interested in this kind of financing may want to contact an SBA export finance manager or get in touch with SBA’s Office of International Trade for more information.
The SBA Microloan program is intended to help entrepreneurs from traditionally underrepresented groups secure funding when other financing options have been exhausted or do not apply.
As their name suggests, SBA microloans are much smaller than other SBA loans. Borrowers can apply for as much as $50,000, but the average SBA microloan is around $13,000. Nonprofit organizations that serve specific geographic regions administer the loans themselves and can have stringent eligibility criteria, depending on the borrower’s situation or business purpose.
Specifics of SBA microloans include:
- SBA microloans typically have interest rates of between 8% and 13%.
- Loans can be repaid over a maximum repayment term of six years.
- Applicants should have a credit score of at least 640 and may need collateral to support their application.
- SBA microloans cannot be used to refinance business debt or purchase real estate.
Although much smaller than other types of SBA loans, microloans can take several weeks or even months to process, so a business owner seeking this kind of financing may want to consider the timeframe before submitting an application.
To apply for an SBA microloan, contact an SBA-approved intermediary lender in your area.
Applying for an SBA loan
With the exception of its COVID-19 disaster and 7(a) Express loans, the SBA loan programs above all have similar application processes.
First, applicants should ensure they meet the basic criteria for an SBA loan. This includes:
- A credit score of at least 680 (unless otherwise specified)
- A profitable business that has been in operation for at least two years
- No defaults on debt obligations owed to the federal government, including student loan repayments
- No bankruptcies or business liens
- A business debt-service coverage ratio of at least 1.25 to demonstrate that the business can comfortably repay a loan
- A potential down payment of between 10% and 30%, depending on the type of loan application being submitted
Note that the SBA requires a personal guarantee from anyone with upward of 20% ownership in order to apply. This guarantee puts you and your personal assets on the hook for payments if your business can’t make them.
Some lenders may also require collateral, such as vehicles or property, before considering a loan application. That isn’t always the case, but sufficient collateral can reduce interest rates and may help make a favorable loan decision more likely.
Response and processing times vary depending on the type of loan. Some applications, such as those for 7(a) Express loans, are typically processed within 36 hours. Others, such as traditional 7(a) loans, can take months.
An alternative for Shopify store owners is a merchant cash advance or working capital loan with Shopify Capital. Unlike an SBA loan which requires the business meet a set of basic criteria to qualify, Shopify uses the data from previous sales to see how much money the merchant is qualified to borrow. Repayment is made through the merchant’s future sales.
Consider speaking with an SBA adviser
Small Business Administration loans can help entrepreneurs hire more staff, purchase additional inventory, secure new commercial space, and keep the lights on during difficult times. That said, applying for an SBA loan is a significant financial decision that should not be taken lightly.
If you’re concerned about how business financing might affect your business, or you want to learn more about the loan programs discussed above, you can contact a Small Business Development Center in your area to arrange a meeting with an SBA adviser. Free advice is also available via the SBA’s SCORE program, which has hundreds of chapters nationwide to support entrepreneurs at every stage of their journey. Or, if you’re ready to make your application, learn how to get a small business loan.