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:

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What type of SBA loan do you need?

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.

SBA 7(a) Loans

Small Business Administration loans, commonly called SBA 7(a) loans, are geared toward business owners with less than 500 employees. The 7(a) loan program is the main program the SBA offers for small businesses. There are different types of 7(a) loans, including standard 7(a) loans and 7(a) small loans. Export loans are another example of 7(a) loans, but we'll cover those in detail later.

Before applying for an SBA 7(a), make sure you have the correct documents. You should also ensure you understand the funding timeline and repayment terms.

  • SBA loan application 
  • Borrower information form
  • SBA Form 912
  • SBA Form 413 
  • Profit and loss (P&L) statement
  • Projected financial statement
  • Ownership and affiliations 
  • Business certificate/license 
  • Loan application history
  • Income tax returns
  • Resumes 
  • Business overview and history
  • Business lease 
  • If purchasing an existing business:  
    • Current balance sheet and P&L statement of business
    • Previous two years of federal income tax returns
    • Proposed bill of sale with terms of sale
    • Asking price of sale with schedule of inventory, machinery and equipment, furniture and fixtures

To qualify for a 7(a) loan, you must be a for-profit business that meets the size and niche eligibility standards established by the SBA. The SBA also expects applicants to have good credit and show they can repay borrowed funds.

Don’t borrow funds if you aren’t okay with having a long-term payment plan. There are prepayment penalties for applicants who repay loans with maturities of 15 years or more within three years.

Here are the penalties:

  • 5% for repayment after one year
  • 3% for repayment after two years
  • 1% for repayment after three years

Requirements for 7(a) small loans are the same. All loan applications will be credit scored by SBA. If the score isn’t accpetable, the loan can be submitted via full standard 7(a) or Express.

The maximum loan amount is $5 million for a standard 7(a) loan. The maximum loan amount is $350,000 for a small 7(a) loan. 

Both the standard 7(a) loan and the small 7(a) loan take 5 to 10 business days to fund. 

The maximum maturity is 25 years and varies by loan type. The maximum maturity for equipment and working capital or inventory loans is 10 years. The maximum maturity for real estate loans is 25 years.

SBA CDC/504 Loan

The SBA CDC/504 loan helps small businesses grow by creating jobs and expanding operations. You can use the 504 loan for renovations, commercial property purchases, furniture, equipment and land. The financed project assets are often used as collateral along with a personal guarantee from business owners.

  • Business and tax returns for the last 3 years
  • Personal credit history
  • Personal and business financial statements
  • Personal budget analysis 
  • Business debt schedule
  • Complete business plan
  • Purchase agreement 
  • Documentation that shows you can meet job creation or public policy goals 

The credit requirements for an SBA CDC/504 loan are the same as the SBA 7(a) requirements. 

To qualify, you must be a for-profit business with less than $15 million in tangible net worth. Also, your average net income for two full fiscal years should not exceed $5 million. The business must occupy at least 51% of the space to be bought. Loans cannot be made to businesses engaged in speculation or investment in rental real estate. You’ll also need to make a 10% down payment. 

The maximum loan amount is usually $5 million. Some energy-efficient or manufacturing projects may qualify for loans up to $5.5 million each. 

A 504 loan typically takes 30-45 days to fund. 

The loan term for machinery and equipment loans is 10 years. The loan term for real estate loans is 20 years. 

SBA CapLines

SBA CapLines are revolving or fixed lines of credit for small business owners. These funds are designed for short-term working capital needs, such as a need for extra inventory during busy seasons. Applicants can choose from a contract loan, seasonal line of credit, builders line or working capital line of credit.

Documents required for SBA CapLines vary but may include:

  • SBA Form 912
  • SBA Form 919
  • Executive summary
  • Financing breakdown
  • Ownership breakdown
  • Repayment plan

The credit requirements for SBA CapLines are the same as the requirements for SBA 7(a) Loans. Typically, a FICO score of 620 or higher is preferred. Lenders must also complete Form 750 and 750B.

To qualify for a seasonal line of credit, you must have been in business for at least 1 year and be able to demonstrate a pattern of seasonal activity. 

To qualify for a contract CapLine, you must demonstrate the ability to profit from similar contracts in the past. You must also demonstrate the ability to accurately bid and project costs and perform the work required under the contract. You must also possess technical knowledge and financial ability to complete the contract during the time required and with profit. 

To qualify for a builders CapLine, you must be a contractor or homebuilder. You must also demonstrate experience managing and profitably performing construction or renovation work and have past experience promptly paying suppliers and subcontractors. You must have the ability to physically perform the construction or renovation work, the ability to manage the construction or renovation job with at least one employee on-site during the entire project. Finally, you’ll have demonstrated the ability to accurately bid and project costs of comparable size and type to the proposed project. 

To qualify for a working capital line of credit, you must be a business with accounts receivable or physical inventory. 

The maximum loan amount is $5 million. 

Funding timelines vary based on the loan you choose.

The maximum maturity is 10 years for seasonal, working capital and contract CapLines. The maximum maturity is 5 years for builder CapLines. 

SBA Export Loans

SBA export loans help businesses fund overseas operations, such as marketing or shipping. Funds are processed quickly, and there is a low guaranty fee. Loan recipients can use funds for inventory, production of exported goods, foreign accounts receivable, down payment guarantees or supplier financing.

Numerous documents are required for SBA Export Loans, including:

  • IRS Form 4506-T
  • Cash flow projection
  • Lender’s credit memo
  • Export license
  • Income statements and balance sheets for your business
  • Franchise documents

Export Working Capital Program is the same as SBA 7(a) Loans Plus. Loan recipients can request short-term working capital for direct or indirect expenses for exported goods or services.

With the Export Express loan, borrowers must show that the loan will help them enter a new market or expand existing operations. The business must have been open for at least 12 months, even if the entire 12-month span was not spent in the exporting business.

The maximum loan amount is $5 million for the Export Working Capital Program loan. The maxim loan amount is $500,000 for the Export Express loan.  

The Export Working Capital loan and the Export Express loan take 1 to 3 months to fund. 

The maximum maturity is up to 3 years for the Export Working Capital Program loan. The maximum maturity is up to 7 years for a working line of credit or 10- to 25-year term loans for the Export Express. 

SBA Microloans

SBA Microloans are for women, veterans, minorities and low-income entrepreneurs. Some businesses use microloans as working capital, while others use them to fund machinery, equipment or other supplies. You can request a microloan if you are a newer business or an established company.

Documents required for an SBA microloan application may include:

  • Business and/or personal income tax returns for the last couple years
  • Profit and loss statements
  • Balance sheets
  • Business plan
  • Business permit or license
  • Financial projections

This is not a complete list, as document requirements vary by lender.

The credit profile for SBA microloans is the same as the profile for SBA 7(a) loans, but microloans are not geared toward for-profit businesses. You must be a nonprofit business that meets the size and industry standards set forth by the SBA. The SBA also prioritizes applicants with good credit and a demonstrated ability to repay borrowed funds. However, applicants with FICO scores as low as 575 may still get approved for a microloan from the SBA.

The maximum loan amount is $50,000, with the average microloan falling around $14,000.

The funding timeline is anywhere from 1 to 3 months. 

The loan maturity varies and is typically between 3 to 6 years. The maximum loan maturity is 6 years. 

SBA Disaster Loans

The Small Business Administration provides disaster loans for companies facing a financial hardship during a natural or economic disaster. Loan options include the following:

Documents vary based on which loan you choose. After completing the initial application, you may also need:

  • IRS Form 4506-T
  • Tax returns from the last few years
  • A personal financial statement (SBA Form 413)
  • Schedule of liabilities and/or SBA Form 2202
  • A year-end profit and loss statement for the last couple years
  • Insurance information verifying disaster relief payments
  • Certified statements from business owners or employees regarding your loan intentions

Having a strong credit history improves your chances of getting an approval. The U.S. Small Business Administration simply states that applicants must have an acceptable credit history, leaving many potential loan recipients confused by the requirements. Research indicates that applicants should have a credit score of at least 620 to 640, and your recent payment history plays a role as well.

The maximum loan amount is $2 million. 

Funding can take up to 5 days after approval. Approval may take 4 to 8 weeks, sometimes longer if there is a backlog of applications.

This is a long-term loan and the maturity is up to 30 years. Economic Injury Disaster Loans are automatically deferred for 12 months. 

Comparison of SBA Loans

Each SBA loan offers different pros and cons. Before selecting a loan, consider the following factors:

We've compiled data about popular small business loans in this convenient chart:

Type of LoanCredit RequirementsAmount ProvidedFunding TimelineRepayment Terms
SBA 7(a) LoansMust have a favorable credit history$350,000 to $5 million maximum5 to 10 business days after approval10 to 25 years depending on loan type
SBA CDC/504 LoansMust have a favorable credit historyUp to $5 million; some industries may qualify for $5.5 million 30 to 45 days10 to 20 years
SBA CAPLinesFICO score of 620 or higher Up to $5 millionVaries 5 to 10 years
SBA Export LoansMust have a favorable credit history$500,000 to $5 million 1 to 3 months3 years, 7 years, 10 years or 25 years
SBA MicroloansMust have a favorable credit history Up to $50,0001 to 3 months3 to 6 years
SBA Disaster LoansA FICO score of at least 620 is helpful$2 million4 to 8 weeks, sometimes longer Up to 30 years

Compare this data so you're prepared for the SBA loan application process from start to finish. This information will help you determine whether your credit score qualifies, as well as whether your preferred loan offers the funding amount and repayment terms needed.

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:

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.

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.

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.

The Pros and Cons of a Business Line of Credit

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.

Pros

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.

Cons

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.

Ready to Take the Next Step?

If you’re considering an SBA loan or any kind of loan for your small business, finding the right lending assistance is essential. When you’re hunting for the perfect resource, Lendzi can help. With clear-cut terms, flexible lending options and a simple application process that empowers business owners with a custom approach to financing, we can help you get the financing you need to keep reaching for the stars. Contact us today to learn more or to start an application!

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