A Small Business Administration (SBA) loan is a government-backed loan that can guarantee billions of dollars each year. Under the SBA’s various loan programs, funds are available for purchasing inventory or equipment, adding to working capital, buying real estate, funding the acquisition of other businesses, or even refinancing other debts.
Even if you’ve heard of SBA loan programs and understand that securing one can greatly help your business, you may not know how they work.
And let’s be honest, there’s quite a bit involved in the process.
Let’s break it down to make it easier to understand.
SBA loans allow you to borrow money for many different business purposes, from purchasing real estate or office buildings to machinery and equipment.
These are designed to help growing businesses (like yours!) get their hands on capital.
SBA programs cater to business owners who, for one reason or another, might not be eligible for a loan through other lending institutions.
Most banks and alternative lenders participate in an SBA loan program, which makes them readily available for most business startups and allows businesses to work with their preferred lender.
We touched on this in the overview, but growing businesses can secure an SBA loan through various institutions, including banks, credit unions, or online lenders.
You may want to work with an institution you’re familiar with or compare multiple lenders for the best rates.
Remember, a small business loan is going to be a long-term part of your business plan, so working with a financial institution you trust and an interest rate you can manage is ideal.
One big distinction to make is that the Small Business Administration does not extend financial help to businesses directly.
It helps businesses secure funding through outside lenders who are legally obligated to adhere to the SBA loan requirements.
There are several loans available through the Small Business Administration…
So how do you know which one is right for you?
Let’s start by taking a quick look at the most common SBA loans, and from there we can go into the specific costs associated with each loan type.
Learn more: The Entrepreneur’s Guide to SBA Loans
Let’s talk fees and interest rates, because how much your SBA loan costs you will affect your cash flow, your bottom line, and ultimately, your business.
Have a look below at the typical loan terms and general fees that are associated with each type of loan.
Fees: 7(a) loans come with a fee that is based on your loan’s maturity. The lender will initially pay the fee, but they do have the option to pass that fee on to the borrower. These fees can range from 0 percent for loans under $150,000 to 3.5 percent for loans over $700,000. There’s an additional 0.25 percent fee on any guaranteed portion over $1 million.
Interest: Interest rates can be fixed or variable like other conventional loans. Your lender will determine the rate, but the SBA protects businesses by putting a cap on 7(a) interest rates, thereby restricting how much your lender can make off your loan.
Repayment terms: In general, you can expect payments to last up to 25 years for a commercial real estate loan, 10 years for an equipment loan, and 7 years for working capital. These are the longest terms, so your repayment period could be shorter.
Learn more about SBA Advantage Loans
Fees: 504 loan fees are about 3 percent of the loan amount and can be financed along with the loan. Be aware that for real estate loans, the project being financed is often used as collateral. Personal guarantees are also required.
Interest: Typically, these types of loans cost somewhere between 3 percent and 6.5 percent. Interest rates are fixed, and they are set at an increment above the current market rate. The 504 loan program is actually a combination of two loans: One from your bank and one from the Certified Development Corporation, which get pooled together and auctioned to investors. *You won’t know your exact rate until that CDC pool closes about 45 days after your loan closes.
Repayment terms: You can expect payments to last from 10 years for a major fixed asset purchase to 20 years for a commercial real estate purchase.
Learn more about SBA Grow Loans
Interest: The rate varies and depends on the lender and the costs to that lender. Typical interest rates range between 8 percent and 13 percent.
Repayment plans: The maximum repayment term is six years. The actual term varies according to several factors, such as the amount of the loan, how you plan to use the funds, and specific requirements that your lender sets forth. Like many small business loans, you can expect to make monthly payments.
Learn more about SBA Microloans
Fees: The Small Business Administration determines whether an applicant has credit available elsewhere. For applicants unable to obtain credit elsewhere, the interest rate will not exceed 4 percent. For those who can obtain credit elsewhere, the interest rate will not exceed 8 percent.
Interest: Interest rates for SBA disaster loans can be as low as 4 percent for businesses and 2.625 percent for private nonprofit organizations
Repayment terms: SBA offers loans with long-term repayments in many cases up to 30 years. Terms are determined on a case-by-case basis, based upon each borrower’s ability to repay.
Learn more about Disaster Loans for Small Businesses
Now that you know that securing an SBA loan isn’t going to be a walk in the park, how do you know if you will even qualify?
The truth is that many businesses— big, small, old, and new— can qualify for a small business loan.
As with any commercial loan, your credit score is the biggest determining factor.
In addition, your business needs to have been turned down for other private financing.
According to the law, the Small Business Administration can’t guarantee loans to businesses that can obtain a loan on their own.
The biggest question on your mind is probably about the SBA application requirements.
We aren’t going to lie— the application process is a bit lengthy.
You may want to start by filling out an SBA loan application.
You will need to complete additional forms, including a Statement of Personal History and a Personal Financial Statement.
The information that you provide will help the SBA determine your eligibility.
Lenders will ask you for proof that you have the ability to repay the loan.
You will need to submit current financial statements, such as profit and loss statements, and projected financial statements.
Also, be sure to prepare projected financials to illustrate future growth.
You may be asked to include a list of any affiliates and subsidiaries, a copy of your business license, your loan application history, tax returns, your resume, your business inventory, and your business lease.
Use this checklist to help you figure out what documents you may need to complete the application process.
If you’re purchasing an existing business, you may also be required to submit a current balance sheet, a profit and loss statement, and past federal tax returns of the business you want to purchase.
You should include the bill of sale and the asking price with your application.
We’ve already told you that the biggest factor in determining your eligibility for an SBA loan is your credit score, so don’t forget about that.
Check it to see if there’s anything you can do improve your score.
Don’t let lenders catch you off-guard.
Have a well-developed business plan prepared and use it to carefully detail what you plan to do with the loan.
Even if you don’t need it, creating a business plan is a great exercise for any business owner.
You may need to submit a personal guarantee to secure your business loan.
This guarantee basically states that if you can’t repay the loan for any reason, your lender can come after your personal assets.
Whether or not lenders require you to sign a personal guarantee will depend on the age of your business, credit history, and eligible collateral.
Your repayment terms will be dependent upon your loan terms, loan amount, and interest rate, but SBA loan repayment terms are usually longer than most commercial loans.
Be sure to read any fine print before signing a business loan, no matter who your lender is.
The purpose for which you plan to use SBA loan funds and the total amount you need will weigh in heavily in determining which loan is the best fit for you.
You should also look over the specific terms for the type of loan you’re considering, because the SBA provides different loan guarantees for different business purposes.
We’ve talked about the advantages and disadvantages of SBA loans. We’ve looked at fees, interest rates, and repayment terms.
But why should you choose an SBA loan?
Backed by the US government, SBA loans offer flexible down payment options, low interest rates, and longer repayment terms for small businesses compared to other financing options.
In order to expedite the process, you should have certain documents ready before applying for a loan.
Here’s just some of what you’ll need to apply for a small business administration loan: