You own a small business and have invested what you can afford of your own resources, but you still need funding. Could the U.S. Small Business Administration (SBA) and their SBA loan programs provide the help you need? Can you qualify?
“SBA loans are suited for most businesses,” says Chris Balestrino, managing partner at Madison One Capital, which provides government guaranteed loans nationwide. “Every business could benefit from an SBA loan (most businesses are eligible) and it can be an extra arrow in your quiver when evaluating your options.”
Learn what SBA loans exist, their eligibility requirements, and how to apply.
The role of the SBA
The SBA has created loan programs to help small business owners get the funding they need. However, if you are interested in these loans, you don’t go directly to the SBA. Andrea Roebker, Regional Communications Director from the SBA says, “It’s important to understand the SBA’s role. The agency doesn’t lend the money directly to entrepreneurs to start or grow a business.”
She explains, “It sets the guidelines for loans made by its partners (lenders, community development organizations and micro-lending institutions). The SBA guarantees that these loans will be repaid, which eliminates some of the risks to the lending partners.”
If you meet the eligibility requirements for a specific SBA loan and want to apply, you will need to find a lender or organization that offers that loan.
Now that you understand how SBA loans work, let’s look at the different types; 7(a), microloans, Certified Development Company (CDC)/504, and disaster.
General small business loans 7(a)
The 7(a) loan is the most common loan you will find from the SBA and the most popular, according to Roebker, who says, “They can be used for just about anything relating to a small business.” If approved, you can use the funds for establishing a new business as well as acquiring, operating, or expanding an existing business.
While the specific terms are negotiated between you and the SBA-approved lender, SBA loans can not exceed $5 million, they are assessed for a fee, and they have varying percentages of guarantee. For loans that are under $150,000, the SBA will guarantee up to 85%, while loans over $150,000 can be guaranteed up to 75%.
General SBA requirements
How do you qualify? Here are the general eligibility requirements according to the SBA:
- You must have a “small” business according to the SBA’s standards
- You must have a for-profit business
- Your business must operate in the U.S.
- You need to have used your own personal assets to gain funding before applying
- You should have a reasonable amount of invested equity
- You’ll need to show why you need the loan and how you will use it
- You must have a sound business plan
- You can’t be late on any debt obligations to the U.S. government
Roebker adds, “It’s ideal to have a solid credit score and be prepared to supply income tax returns, financial and bank statements, collateral and various legal documents, such as leases, business licenses, franchise agreements, etc.”
Beyond these requirements, this list from the SBA defines ineligible businesses and special considerations. The good news is, “Businesses do not necessarily need to be stabilized in order to obtain an SBA loan and can be underwritten based on projections.” says Balestrino.
If you want to apply, prepare your documents according to this loan application checklist. Then, you will need to find a lender. You can access a list of SBA lenders on Supermoney’s business review page by ticking the box on the left-hand menu for ‘SBA loans’.
OnDeck and SmartBiz are two recommended lenders that specialize in lending to small businesses, have good reputations for quality service, offer competitive interest rates, and have streamlined online applications.
Be sure to shop around, get a number of quotes, and compare the offers from various lenders to find the best one for your business.
The SBA also has the Microloan Program, which provides loans up to $50,000 to help small businesses start up or expand. Loan proceeds can be used for working capital, machinery, equipment, furniture, fixtures, inventory, or supplies.
They can not be used for purchasing real estate or paying existing debts. The maximum repayment period is six years and interest rates typically range from 8% to 13%, according to the SBA.
Similar to 7(a) loans, microloans are provided by intermediary lenders. However, the intermediary lenders for this type of loan are non-profit community-based organizations experienced in technical assistance and lending.
Eligibility requirements will vary by lender; however, most will ask for some type of collateral along with a personal guarantee.
You can find a microloan lender by contacting your local SBA district office or by visiting our business loans review page.
Certified Development Company(CDC)/504 loan
The CDC/504 is an SBA loan program where intermediary Certified Development Companies (non-profit corporations that are certified and regulated by the SBA) help you get loans. Roebker explains, “504 loans are for the purchase of or refinancing of fixed assets, such as equipment or real estate.”
The loan can not be used for working capital, inventory, paying, refinancing or consolidating debt, or investing in real estate. “504 loans are provided to support job creation, small manufacturing and public policy, such as rural development, energy reduction, and business district revitalization,” Roebker says,
“Depending on the goal the loan is supporting, the maximum SBA debenture is $5 million (job creation and public policy) or $5.5 million (small manufacturing, including if it relates to public policy).”
To be eligible for a CDC/504 loan, you must meet the following SBA requirements:
- You are a for-profit business
- You will do business in the U.S. (or its possessions)
- Your net worth is less than $15 million
- The average net income was less than $5 million after taxes for the past two years
- Your business can not be engaged in speculation or investment in rental real estate
- Your business has to be considered a business eligible for SBA financial assistance
- The purpose of the loan must meet eligibility requirements
- You need to have cash flow projections that show an ability to repay the loan in time
- Your business plan must be feasible
- Management experience and expertise is required
- You will have to have references that attest to your good character
To apply for a 504 loan, you’ll need to find a CDC in your local area. Then, apply with them and they will typically finance a percentage of your loan while finding a third party lender or bank to finance the remaining amount.
According to CDC Cen Cal Finance, a typical 504 loan is funded as follows:
- 10% from the borrower
- 40% from the SBA through a CDC
- 50% from a third party found by a CDC
If this is the SBA loan you want, prepare for the loan by collecting the necessary documents for your application.
Lastly, disaster loans are low-interest loans provided to businesses for the purpose of repairing or replacing real estate, machinery, equipment, inventory, business assets, or personal property destroyed in a declared disaster.
“These loans are meant to help spur economic recovery following natural disasters such as hurricanes, severe storms, etc. ” says Roebker.
To qualify, you must have incurred damages due to an event that was declared a disaster by the President. See current disaster declarations. Then, you must register with the Federal Emergency Management Agency (FEMA) and obtain a registration number.
If you qualify, you can easily apply for the loan online.
Now you know which SBA loans are available and what is needed to qualify for each of them. Next, you need to identify which one is best suited for your business needs, prepare your necessary documents, research lenders or other intermediary organizations, and select the best one for your situation. By doing so, you will ensure you get the best deal to fund your growing business.
I’ll leave you with this advice from Belstrino: “SBA loans take time and there is a lot of paperwork. It’s hard to run a business and work on getting a loan at the same time.” He advises, “Being patient and pro-active are the keys to success.” By doing so, you will ensure you get the best deal to fund your growing business. To review and compare SBA lenders head over to our business loans review page and tick the box in the left-hand menu for ‘SBA loan.’
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.