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SBA Loan Basics Borrowers Need to Know

Need small business financing but you’re not sure where to start? The Small Business Administration (SBA) may offer a way for you get the funding you need, whether you’re planning a business expansion or want to relocate to your own building.

Loans guaranteed by the SBA are flexible sources of funding that can be put toward virtually any business need. Designed specifically to help a small business get financing when it may be otherwise impossible, these government-backed loans provide peace of mind for lenders and borrowers alike.

SBA loans can be a viable option for small businesses looking to grow and develop since they offer significant funds at fair terms. If you’re considering SBA funding for your small business, understanding this SBA loan information is very important:

What Is SBA Financing?

The SBA, a government entity that supports burgeoning entrepreneurs, offers loans from specifically selected and approved lenders. Unlike other forms of business lending, there are very few limitations on how SBA loan proceeds can be used, opening the door to countless possibilities.

SBA loans differ from standard business loans because the government is involved. Up to 85% of an SBA loan is guaranteed by the government. This reduces risk to the lender, making lenders more likely to approve small businesses without a significant financial history or lots of revenue to qualify for a standard business loan. This guarantee means that if a small business can’t pay back the loan for any reason, like if the business files for bankruptcy, the government becomes responsible for paying back the guaranteed portion. The percentage that’s guaranteed depends on the lender and the business’ credit history, but it’s usually at least 50%.

While these numbers aren’t carved in stone, successful candidates for SBA loans usually have at least two years of business history, a minimum credit score of 680 and over $150,000 a year in revenue.

Where Do Loans Come From?

Despite the involvement of the Small Business Administration, these loans aren’t issued by the government itself. Instead, the loans are funded by a network of SBA-approved lenders, ranging from large national banks and private online finance companies to community development organizations. The SBA maintains a list of the top 100 most active SBA loan lenders on its website .

How Much Can You Borrow With an SBA Loan?

When applying for an SBA loan, eligible borrowers can request from $5,000 to $5 million with up to 85% guaranteed. It’s not likely that a younger business without much history and revenue will be approved for the maximum amount, but established companies can successfully borrow millions of dollars through SBA loan programs. Some lenders have a minimum loan amount; The Huntington National Bank, for example, has a bank minimum of $5,000.

Types of SBA Loans

The SBA offers six distinct types of loans to suit specific needs and purposes:

  • SBA 7(a) Loans: The most popular option, offering working capital of up to $5 million for a variety of purposes.
  • SBA CDC/504 Loans: Used to fund commercial real estate purchases.
  • SBA CAPLines: Provide businesses working capital through a fixed or revolving line of credit rather than a standard term loan structure.
  • SBA Export Loans: Offer working or expansion capital for businesses in the export industry.
  • SBA Microloans: Funds small business startups or expansions with amounts up to $50,000 through approved nonprofit lenders.
  • SBA Disaster Loans: Long-term, low-interest loans for businesses affected by a declared natural disaster that have experienced losses not covered by insurance.

The SBA Loan Application Process

With its high cap, low interest rates and flexible terms of use, an SBA-backed loan offers small companies an excellent opportunity to receive necessary funding. However, the biggest downside to SBA lending programs is the exhaustive application process.

Applying for Small Business Administration loans isn’t for the faint of heart. The application is very long and requires far more information than other types of business loans, largely because the government is involved. In general, it takes two to three months to complete the SBA loan approval process, and it may take longer depending on the lender.

Because the application process is so in depth, SBA-approved lenders generally want to see as much information as possible, so it’s important to gather all the documentation you need before you apply.

Information Required to Apply for an SBA Loan

To meet SBA loan program requirements, you’ll likely have to submit:

  • A driver’s license to prove identity
  • Bank statements from the last year, or possibly back to the start of the business
  • A balance sheet and profit and loss statement to provide a snapshot of revenue, expenses, assets and liabilities
  • Business tax returns to further provide insight into business trends
  • Personal tax returns to demonstrate what kind of money is being earned from the business
  • A comprehensive business plan outlining objectives, products and services, management and financial projections
  • A financial summary describing why you want a loan and how you plan to spend it
  • A personal credit report

Some lenders want more information than the minimum required. Live Oak Bank, for example, also wants Social Security numbers and employer identification numbers, a resume and any operating licenses. Wells Fargo Bank requires completed SBA forms including Form 1919 that summarizes the business’s history, Form 912 that details the borrower’s personal history, Form 413 that covers personal financial information and Form 159 that discloses all loan-related fees.

Improving Your Odds of Getting Approved

To improve your odds of getting approved for SBA financing, it’s important to learn what potential lenders are looking for and take steps to meet these expectations before you apply. When evaluating applicants, lenders typically look at the following three factors:

Personal Credit Score

There are logical reasons why a lender wants to see your personal credit history and score. If you have a good credit score, lenders are more likely to trust that you’ll make wise financial decisions for your business. A low credit score can discourage a lender from approving your loan, especially if it’s been dragged down by frequent late payments or closed accounts.

If your score is below 650 or you have some issues on your report, such as collection accounts or high credit utilization, it’s wise to fix these problems before completing an application. Most black marks eventually fall off a report, but this can take several years.

Cash Flow

If your business doesn’t have enough cash coming in every month, you may not be able to make loan payments, and that’s a red flag for lenders. If your business is spending as much as it’s bringing in, you’ll have difficulty demonstrating how you’ll make your loan payments. Unless you have net positive cash flow each month, focus on boosting your business’s revenue without increasing expenses to improve your approval odds.

Length of Time in Business

The length of time a company has been in business matters a lot. Not all small businesses survive long-term, so showing several years of stability can assure lenders that your company has the potential to be successful in the future.

Ideally, you should wait as long as possible before applying for a loan. The longer you’ve been in business, the more likely it is that you’ll be approved. Waiting just one more year can significantly increase your approval chances, so don’t jump the gun if it’s not necessary.

The Cost of Borrowing Money with SBA Loans

Business loan interest rates vary, ranging anywhere from 5% to 25%. On the whole, SBA commercial loans tend to have much lower rates than other alternatives, with an average around 6.5%. This means you’ll owe $6.50 in interest on each $100 borrowed, which is added on top of monthly principal payments.

Say, for example, you borrow $25,000 at an interest rate of 6.5% with a five-year repayment plan. This means that you’ll pay $489.15 each month — $416.66 toward the principal and $72.49 in interest. Over the life of the loan, this adds up to $4,349 in total interest paid.

Loan interest rates can vary based on the state of the lending market. In general, interest rates for SBA loans are a maximum of 2.75% plus the current prime rate, which can vary from 3% to 10%. Prime rate refers to the best rate available to banks, which is based on the federal funds rate set by the government. Some lenders may also charge packaging or origination fees.

Unlike most loans, SBA lending programs also include what’s called a guaranty fee. This is an extra fee paid to the government at closing because it’s guaranteeing the loan. Loans under $150K have a guarantee fee of 1.7%, while loans over this amount have a fee of 2.25%.

SBA Loan Terms

The terms available with SBA loans are very appealing, with repayment time frames that are much longer than most other types of business financing. The repayment term is up to 10 years for working capital loans and 25 years for commercial real estate loans. These lengthier terms can be a big benefit for companies that need a significant amount of money and particularly those buying business property. Companies that choose Small Business Administration loans can pay back borrowed funds slowly over time and use the money that’s saved every month to grow the business.

Pros and Cons of Small Business Administration Loans

SBA loan programs can provide funds for everything from renting a storefront to buying equipment. However, there are pros and cons to consider before taking on this type of loan

  • A new business line of credit comes with many advantages, including:
  • SBA loans have a lot of advantages, and the government guarantee is arguably the largest one. Because the government guarantees a portion of the loan, lenders are willing to lend larger amounts at lower interest rates than virtually any other option allows. The high cap is also a plus — with an upper limit of $5.5 million, it's possible for any company that makes it through the application process to get all the funding they need — far surpassing the financing available with a traditional loan.
  • Interest rates are also comparatively low, giving companies that wouldn't ordinarily qualify for low APR an affordable way to access needed cash. Repayment terms are much longer than average, too, which further reduces the amount borrowers have to pay out on a monthly basis.
  • In spite of the benefits, there are some downsides to choosing a new business line of credit, like:
  • No loan is perfect, and there are disadvantages to SBA loans that potential borrowers should know.
  • The Small Business Administration is only willing to guarantee loans to companies that are unlikely to default, so the application process is long and detailed. Those that can't wait two to three months for necessary funding aren't good candidates for SBA loans. Timeliness in business can be a big factor in getting approved, so brand new businesses that need start-up capital probably won't be approved for a loan.

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