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Put simply, an SBA loan is a small business loan that is partially guaranteed by the government (the Small Business Administration), which eliminates some of the risk for the financial institution who is issuing the loan.
Therefore, it is not the SBA who is doing the lending. The SBA works with a network of approved financial institutions that lend money to small businesses more frequently and with better terms since the SBA partially guarantees the loans that these lenders extend to small businesses.
This means that the government will back up a portion of the loan that a small business receives, so if you’re unable to pay back your SBA loan, the lender knows that the SBA will cover the portion that they guaranteed.
SBA loans can be a little difficult to qualify for, but they come with some general minimum requirements that can help you decide if your small business is eligible for this desired source of funding.
If your business meets these following minimum requirements, then you should seriously consider applying for SBA funding.
SBA 7(a) loans are the most common type of SBA loan. These loans go up to $5 million and can be used for working capital, to refinance debt or to buy a business, real estate or equipment. Two popular loans, the SBA Express Loan and SBA Advantage Loan, are part of the 7(a) loan program.
SBA 7(a) loans are right for most businesses looking to finance their working capital needs. These loans are what most people are referring to when they ask about SBA loans and can be used for almost any business purpose. SBA loans are popular because of their long repayment terms and low interest rates, which make 7(a) loans one of the most affordable working capital solutions.
SBA Express Loan Program
One drawback of the standard SBA 7(a) loan is that the application process can take months. In order to address this problem, the SBA offers an expedited processing service called the SBA Express Loan, which guarantees a response to an application from the SBA within 36 hours. (Note: this means the SBA will notify your lender within 36 hours if your application has been approved, but it may take significantly longer for your lender to process and fund your loan.)
The SBA Express Loan generally follows the same guidelines as the standard SBA 7(a) loan, but the maximum loan amount is $350,000, and only select lenders are qualified to participate. The SBA guarantees a maximum of 50 percent for SBA Express loans, which means the interest rates on an SBA Express loan can be a bit higher than other 7(a) loans.
SBA 7(a) Advantage Loans
The Community Advantage Loans are SBA loans designed to help businesses in underserved markets get access to financing. These programs are available to borrowers who meet the SBA eligibility criteria but are not able to qualify for a standard SBA 7(a) loan because of low revenues, low collateral or other reasons.
Under the Community Advantage Program, the SBA offers the same expedited application and approval process that comes with an SBA Express loan, but they’ll guarantee 85 percent of loans up to $250,000. This further reduces the risk to lenders and gives them more motivation to lend these loans over the SBA Express program.
The CDC/SBA 504 loan program provides SBA loans to small businesses looking to buy or build owner-occupied commercial real estate. The program pairs two lenders together to fund these projects, a bank or traditional lender and a CDC. The bank lends up to 50 percent, and the CDC lends up to 40 percent while the remaining 10 percent of the project’s costs come from the borrower, typically in the form of a cash down payment.
CDC/SBA 504 loans require that the business occupy at least 51 percent of the commercial space. While this is a great opportunity to rent out 49 percent of your new building to tenants, it’s only right for companies that actually expect to occupy the space themselves. It’s also only right for small U.S. businesses that meet the SBA’s basic eligibility requirements, such as being for-profit.
The SBA CAPLines program has four SBA loan or line of credit products that are designed to provide up to $5 million to help small businesses meet their short-term and cyclical working capital needs. SBA CAPLines are best for businesses that need a revolving line of credit to make recurring payments or to prepare for unexpected expenses.
While technically SBA CAPLines can be issued as stand-alone products, typically these are only offered to borrowers in conjunction with a traditional SBA 7(a) loan or a CDC/SBA 504 loan. Well-qualified borrowers or those businesses that have potential to bring in a great deal of other business to a bank may be able to find a lender willing to issue a stand-alone CAPLines line of credit, but this is less common.
The four types of SBA CAPLines are:
1. SBA Seasonal Line of Credit Loan Program
A seasonal CAPLines is an SBA line of credit up to $5 million that can be used for seasonal increases in accounts receivable, inventory needs or related increased labor costs. To qualify, in addition to the standard 7(a) requirements your business needs to have been in operation for one or more years, and you need to demonstrate a pattern of seasonal activity.
2. SBA Contract Line of Credit Loan Program
A contract CAPLine is an SBA line of credit up to $5 million that can be used for the materials and labor associated with assignable contracts. To qualify, in addition to the standard 7(a) requirements, your business needs have demonstrated experience, profitability and ability to perform the work and complete the designated contract, subcontract or purchase order.
3. SBA Builders Line of Credit Loan Program
A builders CAPLine is an SBA line of credit up to $5 million for contractors and home builders who build or renovate residential or commercial buildings. To qualify, in addition to the standard 7(a) requirements, your business needs have demonstrated experience demonstrated experience, profitability and ability to perform the work and complete the project.
4. SBA Working Capital (Asset-Based) Line of Credit Loan Program
A working Capital CAPLine is an SBA line of credit up to $5 million that allows small businesses to convert short-term assets like pending invoices into cash. To qualify, in addition to the standard 7(a) requirements, your business must generate accounts receivable and/or have inventory. The working capital CAPLine provides financing that might not otherwise be available.
4. SBA Export Loans
Export loans are SBA loans up to $5 million designed to help American small businesses expand their export activities, engage in international transactions and enter new foreign markets. They’re best for businesses engaging in international business and growing their businesses in those areas.
SBA Export Loan Types
In summary, the SBA has three export loan types that provide businesses with export working capital and international trade financing. With SBA financing, businesses can get funding that may not otherwise be available from a traditional loan or other sources. The three SBA export loan programs are Export Express, Export Working Capital and International Trade.
1. SBA Export Express Loan
The SBA Export Express loan program offers streamlined funding up to $500,000 in working capital to promote small businesses with export activities. The simplified application process and the quick approval turnaround time make this loan appealing for export businesses needing smaller funding amounts.
The typical SBA Export Express loan rates and terms are:
Loan Amount: Up to $500,000
Interest rates: 9.75 -11.75%
Terms: Up to 7 years for a line of credit; same as 7(a) for term loans (10 – 25 years)
2. SBA Export Working Capital Loan
The SBA Export Working Capital loan program provides funding up to $5 million in working capital. These funds can be used to finance export transactions when the small business has a purchase order from a foreign customer. It can also be used for letters of credit and for working capital when the payment cycle is long.
The typical SBA Export Working Capital loan rates and terms are:
Loan amount: Up to $5 million
Interest rates: 6 – 10% (no SBA limit but monitored for reasonableness)
Terms: Up to 3 years (12 months typical)
3. SBA International Trade Loan Program
The SBA International Trade loan program provides financing up to $5 million to small businesses that want to enter or expand into international markets. The eligibility and qualifications for the International Trade program generally mirror those of the SBA 7(a) loan program.
The typical SBA International Trade loan rates and terms are:
Loan amount: Up to $5 million
Interest rates: 7.50 – 10.00%, same as SBA 7(a)
Terms: Up to 10 – 25 years, same as SBA 7(a)
5. SBA Microloan Program
The SBA Microloan program provides SBA loans to nonprofit intermediary lenders that, in turn, lend amounts under $50,000 to for-profit small businesses and nonprofit child care centers. The SBA does not guarantee any portion of the loans made under the SBA Microloan program. Microloans have terms up to 6 years, and the average size is about $13,000.
SBA Microloan qualifications will vary from intermediary to intermediary. Unlike most of the SBA loan programs, the SBA leaves qualifications up to the intermediary, which sets all eligibility requirements and makes all credit decisions.
The basic requirements to qualify for an SBA Microloan are:
Credit score: 640+ (check yours for free)
Collateral: Some required, but the amount varies by lender.
Personal guarantee: Required
6. SBA Disaster Loans
SBA Disaster loans are SBA loans used for recovery from a declared physical or economic disaster. Each Disaster loan can be used differently, and you can apply for multiple types of loans at the same time to meet your needs. These are best for businesses that have been negatively impacted by a disaster and those that can provide evidence of the negative impact.
In summary, there are three types of SBA Disaster loans that provide borrowers with a source of gap funding once other resources like insurance have been exhausted. Businesses of all sizes and most private nonprofit organizations meeting basic qualifications, such as good credit — 660+ credit score — and an ability to repay are eligible to apply for funding of up to $2 million.
The three types of SBA Disaster loans you can apply for are:
1. SBA Business Physical Disaster Loans
Long-term, low-rate loans designed to help businesses that suffered physical losses and damages due to a declared disaster replace or repair that property not covered by insurance up to $2 million. You may be eligible for an SBA Business Physical Disaster loan (BPDL) if your business has been physically damaged by a disaster that is in a declared disaster area.
2. SBA Economic Injury Disaster Loans
Short- to medium-term working capital loans to help businesses that have suffered significant economic injury meet normal operating expenses up to $2 million. You may be eligible for an SBA Economic Injury Disaster loan (EIDL) if your small business has suffered substantial economic injury as a result of a disaster and are unable to meet your normal operational expenses.
3. SBA Military Reservists Economic Injury Loans
Short- to medium-term working capital loans to help businesses that lose an essential employee due to being called up for active military service meet normal operating expenses up to $2 million. You may qualify for an SBA Military Reservists Economic Injury loan (MREIDL) if an essential employee is called for active military duty and the loss results in an inability to meet normal operating expenses.