The Complete Guide to SBA Loans for 2019
It can be tough getting a small business up and running. You must consider licensing, insurance, staff, location, and a thousand other factors before opening your doors. However, one of the biggest considerations is financing. How are you going to pay for everything? Most entrepreneurs won’t have the funds to start a business outright, so they will need to go through a financial institution to secure the necessary funds. Many businesses that have been operating for years also need funds to renovate, expand, or enter new markets. This is where SBA Loans come in.
What is an SBA Loan?
An SBA Loan is simply a loan that has been guaranteed by the Small Business Administration. The SBA is a government entity whose mission is to assist small businesses through counseling, loans, and contracts. For many business owners, the SBA is a vital resource throughout every stage of the process, from planning your business to maintaining your brand image through the years. Typically, the Small Business Administration will guarantee up to 85% of a loan from an SBA-approved lender.
What are the Advantages of an SBA Loan?
You might be wondering, what’s so great about an SBA Loan and how is it any better than other types of loans? Well, let’s break it down point by point:
- Low Down Payments – Most lenders require a down payment that is between 15% and 20% of the principal balance. However, most SBA loans only require a 10% down payment. While there are other non-SBA loans that offer the same, this is one of the best options on the market if you don’t have much capital on hand.
- Risk Mitigation for Lenders – When shopping for a loan, business owners often find that lenders are hesitant to hand out large loans to businesses without much capital. However, when the government is willing to act as guarantor for up to 85% of the principal balance, this puts the lender’s mind at ease. This increases the chances of being approved for a loan.
- Low Interest Rates – Since SBA-guaranteed loans make lenders more willing to work with you, this can also lead to better loan terms and interest rates. Though rates will vary based on the type of loan you require, the maximize interest rates designated by the government usually fall between 7.75%-10.25% (including the prime rate).
What are the Disadvantages of an SBA Loan?
Though SBA loans are one of the best routes for small businesses, they also have a few drawbacks. Thankfully, small businesses agree that the pros outweigh the cons. Nonetheless, let’s take a look at the disadvantages of acquiring a small business loan:
- Collateral – Not all SBA loans require collateral. However, if you cannot show proof of sufficient capital, the SBA may request that you provide collateral like a house, car, or similar asset.
- Time-Consuming Process – SBA loans require a lot of paperwork and fees. Additionally, since the SBA is a government entity, there is more bureaucracy than with a regular loan, and you might have longer wait times once you apply.
- Personal Liability – For most loans, you can get a co-signer or guarantor to mitigate risk for the lender. Obviously, if you were to default on your loan, it would transmit the obligation to this person. However, when the SBA is your guarantor, the obligation falls on them, and they will come directly to you to collect their portion of the loan.
What Types of SBA Loans Are Available?
There are 6 primary loan programs provided by the SBA, each with their own purpose and requirements. Which loan you choose will depend on a variety of factors, from the amount you can pay upfront, to the nature of your business.
SBA 7(a) Loan
Who is it good for: Small business owners who need capital up to $5 million for working capital, refinancing debt, real estate, or commercial equipment.
What you can expect: SBA 7(a) loans are easily the most popular among all of the Small Business Administration’s loan programs. This is because they offer capital up to $5 million and this money can be allocated to various parts of your business. Additionally, they have flexible repayment terms. Two of the most popular loan types within this program are the SBA Express Loan and the SBA Advantage Loan. Here is what they each offer:
- SBA Express Loan: This loan program is perfect for those who need business capital fast. While most other SBA loans can take weeks or months to process, the SBA Express Loan can be processed within 36 hours (though it may take a bit longer before the money is in your account). However, Express Loans are not without their drawbacks. The SBA only guarantees up to 50% of the loan, with a maximum loan amount of $350,000. As a result, the interest rates are generally higher than average.
- SBA Advantage Loan: The Community Advantage Loan program offers the same expedited service as the Express Loan, but with a few major differences. The Advantage Loan guarantees 85% of loans up to $250,000, resulting in lower interest rates.
CDC/SBA 504 Loan
Who is it good for: The CDC/SBA 504 Loan program is designed specifically for small business owners looking to buy or construct commercial real estate.
What you can expect: The cost of the loan is divided between the SBA (50%), the CDC (40%), and the borrower (10%). This loan is only available to businesses that intend to occupy the majority of the commercial space. These loans can range from $14-$20 million, with an average interest rate of 4.5% + prime rate.
Who is it good for: The SBA CAPLines program encompasses several different loans that all focus on small businesses in need of capital for short-term costs and/or cyclical investments.
What you can expect: These types of loans can be stand-alone offers, or loans that work in conjunction with an SBA 7(a) loan. In either case, you can secure loans of up to $5 million with 5-10 year repayment terms. It will generally take 1-3 months to receive payment.
SBA Export Loans
Who is it good for: SBA Export Loans are great for any business that wishes to export products or initiate any kind international transaction.
What you can expect: There are numerous Export Loans with varied amounts, repayment terms, interest rates. The maximum loan amounts can range from $500,000 – $5 million, while the repayment terms can be anywhere between 1-25 years. Interest rates tend to be a bit higher than other SBA loan types, with some going as high as 11.75%.
Who is it good for: SBA Microloans are meant for small, for-profit businesses and nonprofit childcare centers in need of smaller amounts of capital.
What you can expect: SBA Microloans are managed through nonprofit, intermediary lenders, who then loan amounts under $50,000 to small businesses. The Small Business Administration does not guarantee any part of these loans, so the interest rates can go as high as 13%, with shorter repayment terms up to 6 years.
SBA Disaster Loans
Who is it good for: SBA Disaster Loans are reserved for business owners in need of relief from economic or physical disasters. Businesses will generally need to provide evidence of the negative impact of a disaster.
What you can expect: Needless to say, SBA Disaster Loans generally come into play when your business has hit a rough patch. As a result, these loans offer relatively high loan amounts, low interest rates, and long repayment terms. You can expect loans of up to $2 million, interest rates between 4-8%, and repayment terms of up to 30 years.
Who Qualifies for an SBA Loan?
So, now that you have a basic understanding of the most common SBA loans, let’s discuss who can actually qualify for them. While each loan varies somewhat in its requirements, the majority of loans provided by the Small Business Administration require applicants to meet the same general standards:
- Must have a credit score of 680 or above; some loan types will accept credit scores as low as 660 or even 640, but the vast majority of loans, including SBA 7(a) Loans, require a minimum score of 680.
- Must be able to provide a downpayment of at least 10% of the principal amount; some of the most common loans also require collateral. A few loan types require as much as 20%, but the majority will only need you to pay 10% upfront.
- Must have a business size of less than 150 employees and annual revenue below $38.5 million.
- Must have spent at least 2 years in business.
- Must have sufficient equity, which generally means $1 in cash for every $3-$4 in debt.
- Must show evidence of your ability to repay the loan; this generally requires that you have enough cash flow and equity to cover your new debts and any new loans that you wish to acquire.
- You may need to have some collateral, though SBA loans do not need to be fully collateralized.
- In addition to the basic requirements above, each loan type has its own specific requirements:
- SBA 7(a) Loans: No recent bankruptcies. Startups will need to provide a business plan and financial projections in writing, in addition to having better credit (700+) and making a larger down payment (20-30%).
- SBA CDC/504 Loans: Must meet job creation/public policy goals and occupy at least 51% of the commercial real estate.
- SBA CAPLines: Depending on your specific program and needs, you will need to: a) be in operation for at least year, b) generate accounts receivable, c) demonstrate the ability to complete the contract, or d) be construction or homebuilding business that can demonstrate the ability to complete the contract.
- SBA Export Loans: Must be involved in exporting goods or services internationally for at least one year.
- SBA Microloans: Generally need to provide some collateral
- SBA Disaster Loans: Must have suffered physical or economic damage as the result of a disaster and must be located in an SBA declared disaster area.
What is the Application Process Like?
Aside from the need to have good credit, the greatest barrier to getting an SBA loan is the paperwork. Since SBA loans are guaranteed by the government, they have a lot more red tape than traditional loans. However, with a little patience, you can get through the process with relative ease. In order to apply for an SBA loan, you will need to do the following:
- Make sure you are eligible. This is probably the easiest step, because you can check the requirements listed above to see if you will qualify. Generally, if you have good credit and enough capital to make the initial payment, you can qualify.
- Choose the loan/program that is best for you. Some SBA loans are catered to very specific industries and business needs, while others are more general loans for small businesses. You must evaluate your business’s needs and qualifications to determine which loan is right for you.
- Choose your lender. While the SBA guarantees a loan, it does not provide the lender. Therefore, you will need to find your own. Shop around to find the best rates and loan terms. Additionally, you will need to ensure that the lender you choose offers the SBA program that you need. Most lenders offer 7(a) and CDC/504 loans, but lenders who offer other SBA loans might be harder to find.
- Collect the Information. You will need to provide certain documents to the SBA and lender in order to qualify. These documents may include, but are not limited to: a cash-flow statement, a P&L statement, a current balance sheet, proof of ownership, a business plan, tax returns, and any state or federal business licenses.
- Fill out the lender application. Needless to say, the forms will vary between lenders, however most will ask for similar information. You will generally need to provide details about your business, existing debt, how you plan to use the SBA loan, and how you plan to pay it back.
- Fill out the SBA forms. The kind of forms you need to fill out will depend on the loan program you choose. For the most common 7(a) loans, you will need to submit SBA Form 1919 (Borrower Information Form), 413 (Personal Financial Statement), 159 (Fee Disclosure Form), and 912 (Statement of Personal History).
- Wait for the Letter of Intent. Lenders will need to review your forms and then send you a Letter of Intent (if you qualify), which details the rates and terms of your loan. If you accept their offer, you must sign and return this form so that they can underwrite the loan. It generally takes lenders a few weeks to send a Letter of Intent.
- Wait for the Commitment Letter. It will take a few more weeks for lenders to fully underwrite your loan and send you a Commitment Letter. You can then sign and return this letter. This step generally requires payment of a deposit (5% of the principal amount).
- Close the Loan. The lender will then finalize every detail and send you the loan agreement. At this point, you simply need to sign the agreement, pay any lender fees, SBA fees, and the remainder of your down payment. Once the lender receives this agreement and payment, you will get your funds.
Is an SBA Loan Right for You?
Every business is different, so it is difficult to determine if an SBA loan is best for you and your small business. Some businesses cannot afford to take on anymore debt, while others may not have the credit or capital to qualify. However, if you do meet the SBA requirements and are in need of more capital to renovate or grow your small business, then an SBA loan is one of the best options on the market.
Contact the Small Business Administration for more information.
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May 14, 2019
Matthew is an experianced FiGuides writer and researcher. He holds B.A. in Philosophy from the University of Georgia and enjoys taking a deep dive on personal finace projects.