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An In-Depth Guide to SBA Loans
What is an SBA Loan?
An SBA Loan, or Small Business Administration loan, is one of the more popular small business loan types.
What is the SBA?
The Small Business Administration (SBA) is a government agency in the United States that is in place to provide support for small business owners throughout the country.
Are You Qualified to Get an SBA Loan?
Small businesses that are having a difficult time securing bank loans are turning to SBA loans.
If you’re a small business owner, you’re probably constantly trying to find additional ways to get funding for your business. Applying for finance can be tough, especially if you’re trying to open a business for the first time. Lenders often prefer to work with business owners that have an established lending history and business credit score. But this isn’t always possible and it leaves potential new business owners with a lack of viable options.
If you’re looking for ways to add to your small business’ working capital or if you need to refinance debts, purchase new equipment or acquire real estate, among many other reasons, an SBA Loan might be the loan product that you’re looking for. This guide will give you all the tools you need to get an SBA loan.
What is an SBA Loan?
An SBA Loan, or Small Business Administration loan, is one of the more popular small business loan types. If you are having a hard time getting approved by your preferred bank for a loan, or if you’re simply not being awarded a good deal, then an SBA loan can be your ideal choice. With loan amounts between $5,000 and $5,000,000 that are payable from 5 to 25 years at interest rates as low as 6.5%, a SBA Loan is a safe choice as it is partially guaranteed by the government. This also means that lenders are more likely to approve you if you have a limited credit history – this is meant to spur investment in small business owners who have yet to start a business.
Loan Amount
$5,000 to $5 million
Term Length
5 to 25 years
Interest Rate
As low as 6.5%
Time to Process
As quick as 3 weeks
This type of small business loan can get approved in as little as 3 weeks’ time. You will be required to make very low down payments and can get a longer payment term compared to other loan types. Furthermore, interest rates remain fair and reasonable and you can use this loan for a wide variety of purposes.
However, it is good to know as early as now that this type of loan may require collateral at certain situations, can involve a lot of paperwork and requirements, and may take quite a bit of time to get approved. This is why it’s important to be aware of all the components of an SBA loan, and to approach the process with plenty of time on your hands.
Comparing Different Loan Types
SBA Loan
Minimum processing time: 3 weeks
Interest rates: Starting at 6.5%
Term Loan
Minimum processing time: 2 days
Interest rates: 7-30%
Equipment Finacing
Minimum processing time: 2 days
Interest rates: 8-30%
Business Line of Credit
Minimum processing time: 1 day
Interest rates: 7-25%
Invoice Financing
Minimum processing time: 1 day
Interest rates: 3% + %/week outstanding
Short-Term Loan
Minimum processing time: 1 day
Interest rates: Starting at 10%
Merchant Cash Advance
Minimum processing time: 1 week
Interest rates: 1.14 – 1.18
Small Business Startup Loan
Minimum processing time: 2 weeks
Interest rates: 7.9 – 19.9%
Personal Loan for Business
Minimum processing time: 1 day
Interest rates: 5.9 – 36% APR
What’s the Small Business Administration (SBA)?
The Small Business Administration (SBA) is a government agency in the United States that is in place to provide support for small business owners throughout the country. The agency was founded in 1953 and has since provided support and guidance to thousands of small business owners across the nation. The agency has an operating budget of over $700m, which it uses to support a variety of initiatives geared towards small businesses and entrepreneurship.
One of the most popular initiatives the government operates is the SBA loan initiative, but they also have a variety of other projects that help enrich the economy. They provide microloans, as well as disaster loan programs for businesses that have been impacted by natural disasters or other major events. In addition, they have special SBA programs geared towards individuals who are underrepresented in the business ownership population – minorities, women, and former military service members all have access to unique programs that are tailor made to help them get the most out of owning a business.
Are You Qualified to Get an SBA Loan?
Because small businesses that are having a difficult time securing bank loans are turning to SBA loans, many business owners are under the impression that the process must be very simple. Truth be told, it won’t be an easy journey for you; however, it doesn’t matter whether you own a small or very new business, as long as you meet the criteria and have complete documentation, you can be granted a SBA loan. This is why SBA loans have become such a popular financial product with business owners around the country.
Typical Customers Who Received Approval
Annual Revenue
At least $180,000
Credit Score
At least $180,000
Time in Business
At least 4 years
Firstly, you must have a strong credit score. This is one of the most important factors considered by lenders. Your personal credit score can be very important as well. For most of our customers, those with a credit score average of about 640 to 680 had better chances of getting approved for a SBA loan.
While nothing is impossible, lenders also usually prefer higher annual revenue and a longer track record for a business. If you have a high credit score and you don’t mind spending a lot of your time and energy applying for this type of loan, there’s no harm in trying if your small business can actually get approved for an SBA loan.
SBA Loan Basics
Plenty of small business owners who haven’t tried loans yet are most often than not curious about SBA loans. Not only will this grant you longer payment periods, it is generally more affordable compared to other small business loan types. If you happened to chat with your other entrepreneur friends about loans, then you must have heard how great it is to be approved for an SBA loan. The question now is: are you eligible for an SBA loan? Is it truly worth your time and energy to find out? Read on and find more information about the basics of SBA loans.
SBA or Small Business Administration
They guide entrepreneurs on how they can spot and take advantage of opportunities and give them access to loans applicable for their small business.
Not the actual lender
Contrary to popular belief that an SBA is a place that can let you borrow money, the SBA only helps you out in securing a bank loan. Basically, you are still getting your money from the bank, except that the SBA, with the help of government funding, will help banks in getting a guarantee for the amount you’re loaning, hence less risk to them. Commercial lenders are effectively SBA loan brokers.
Minus the extra-strict bank criteria
Because of this, banks are less strict when loaning out money through the SBA. This is also the very reason why many business owners who are turned down by banks proceed to the SBA. You won’t be needing an extensive business ownership history like many commercial lenders will require for a traditional business loan – the backing of the government makes it easier for you to qualify as a new business owner.
Can be a slow and dragging process
Yes, it can be cheaper and yes, it will be more cost-effective in the long run, but as we already mentioned earlier, an SBA loan can take a whole lot of your time and energy. Remember, the SBA is just helping you out. The bank is still the one processing your request. You must know by now that they love taking their dear time and make things more complex than they should be. In some instances, we’ve seen loans take as much as a few months just to get approved. But with the low rates and the longer payment period? It is definitely worth all the time and energy.
A whole lot of documents
If you’re not keen on showing a lot of your business documents, and some personal documents in many cases, then an SBA loan might not be good for you. You will be asked to show a range of documents to prove that you are a worthy borrower. If you don’t have all of your businesses documentation you may find it hard to be approved for a SBA loan. SBA loan lenders are typically quite strict when it comes to requiring proper documentation. The government will not want to back a loan by a commercial lender if they feel you are unable to meet the demands.
You’re getting all the help you need
Despite the hard work, you’re still getting all the help you need from the SBA. If you don’t like dealing with banks directly or if you are simply being ignored by financial institutions, the SBA can and will help you out.
SBA Loan Documentation
As mentioned previously, there are a lot of documents involved in the entire SBA loan process. The various documents that are needed for the application are some of the most important aspects of an SBA loan that you need to understand before you apply. To save time, you should make sure that you have all the items mentioned in this article with you at the time of your application. The required documents are as follows:
Comprehensive Business Plan
Debt Schedule
Balance Sheet
Business Tax Returns (if business is already active)
Personal Tax Returns
P&L Statement
Voided Business Check
U.S. Driver's License
Bank Statements
Not having these documents with you at the time of application can massively prolong the process of receiving the capital you need – be prepared.
SBA Loan Types
There are quite a few SBA loans you can choose from and if we discuss them one by one right now, it can take a long while. However, if you finally decide on getting an SBA loan for your business, we are more than happy to help you out in choosing the right loan for you. To give you a brief background, here are some SBA loans that you might be interested in:
Microloan
The Microloan program is very popular among small business and new businesses that require loans usually less than $50,000. There are no additional fees associated with this type of loan., however interest rates can go anywhere from 8 to 13%. The maximum payment period though is usually only up to 6 years, and as most loans, there will be monthly charges on top of your loan payments.
These loans are mainly provided by community lenders – organizations set up with the purpose of providing small amount of finance to local business owners. Sometimes community lenders will require you to be of a specific background, or working within a specific industry. For example, there are SBA loans for women and SBA loans for veterans – there are even FEMA SBA loans. That’s why it’s important to research local lenders prior to going in an applying for microloan – you may be wasting your time if you don’t qualify for a specific lender.
SBA 7(a) Loan
A popular choice for those seeking loans for general purposes for their small business, you will be charged a guarantee fee based on the maturity of your loan and the guaranteed dollar amount. Another 0.25% will be charged if there’s a guaranteed portion above $1,000,000. To set your expectations, loan payment terms can be as long as 25 years if you’re using the money for real estate, 10 years if you are using it to purchase equipment and for working capital loans, you can get as much as 7 years. Note that the SBA 7(a) Loan can give you one of the longest payment period possible so it is definitely worth considering.
This form of SBA loan can come in either a fixed or variable interest rate. One of the major benefits of using this SBA backed financial product is that there is a ceiling on how much interest charge changes there can be. The SBA have imposed a restriction on how much a lender can increase your variable interest rate. This is great for small business owners who like to be fully aware of their potential costs. Often, lenders can spike an individual’s interest rate which can result in a business owner being unable to meet the debt obligations.
CDC/504 SBA Loan
The CDC/504 SBA Loan is usually availed for commercial real estate or equipment purchases. To secure this type of loan, you will be asked to make around a 10% down payment for your purchase. It is actually a very complex loan product but very worth it — the interest rate can only about 5 to 6%. You will only know about the exact rate though about 45 days after the deal has been closed with the CDC.
The CDC is the Certified Development Corporation that usually shoulders about 40% of the loan amount. The remaining 50% comes from a bank. The 10% remaining comes from your down payment. Since there are two separate loans here, it can take time. Payment terms can take as long as 10 or 20 years for this loan type. The long term times have made it extremely popular with companies that are looking to make large, long term investments in real estate of equipment. If you need to invest in a heavy machinery or land, this is probably the best government backed loan available to you.
Advantages of SBA Loans
After reading most of this article you are probably aware there are many advantages in getting an SBA loan. But sometimes it’s best to have full outline of the advantages so you can get a more concise understanding of the ways that you benefit from a particular form of finance. The advantages of an SBA loan are provided below:
Interest Rates
Depending on the type of SBA loan you’re applying for, you’ll most likely get very low interest rates. This is because the loans are backed by the government and lenders can afford to take larger risks with you.
Eligibility
One of the other primary advantages of an SBA loan is simply how easy it is to be eligible. You will need proper documentation and a deep understanding of the industry you’re working in, but you are much more likely to be approved for an SBA loan than almost any other loan on the market. This is especially true for those who have never owned a business before.
Build Credit Score
One of the primary reasons people apply for an SBA loan is because they have a lack of borrowing history. Your personal credit score may act well to help you secure certain forms of finance, but lenders who are offering big payments will often want business experience and lending history. One of the best ways you can get on the borrowing ladder and build a solid lending history is to get an SBA loan and begin making SBA loan payments on time.
Disadvantages of SBA Loans
Just as there are many advantages in obtaining SBA loans, there are also plenty of disadvantages depending on your particular situation. Here is a full list of the most prominent disadvantages associated with SBA loans:
Large Amount of Documentation
As mentioned previously, there truly is a large amount of documentation that needs to be filled out in order to be eligible for an SBA loan. This can be problematic for many business owners who may not have all this information on hand, or haven’t though through their entire business model yet. While it is easy to be eligible for an SBA loan, SBA loan requirements for documentation are very extensive.
Business Size Cap
Many SBA loans have a cap on the size that your business can be to be eligible. This may seem obvious, as SBA loans are geared towards small businesses. But the truth is that many people who consider their businesses to be small, especially in manufacturing or real estate, may actually be considered too large by the SBA. Make sure to ask you lender what the business size requirements are for your specific loan prior to making any applications.
Length of Process
This is similar to the first advantage mentioned, but the length of due diligence effectively ensures that you won’t be able to get your money quickly. The SBA is especially careful that their borrowers fit all requirements, and therefore doesn’t rush to judgement. Many other lenders with higher interest rates may be able to get you money quickly if you’re in needy of quick finance.
Tips and Tricks
Firstly, you should begin investing heavily in ensuring that your credit score is as high as possible prior to applying for a SBA loan. Many people don’t think about their personal credit score when they begin applying for various business loans – this is a big mistake. If you have never owned a business before you will not have a business credit score, this means that lenders will use your personal credit score to help judge how suitable of a borrower you are. This poses a range of problems for people who have been irresponsible with lenders in the past. Make sure in the months prior to applying for a business loan that you pay down your debts and try and improve your score as much as possible.
Secondly, make sure that you don’t have any tax problems prior to applying for an SBA loan. Because SBA loans are backed by the government, they’ll want to make sure that you are full up-to-date with your taxation requirements. If you have any outstanding debts with the IRS, or a tax bill that is due soon, make sure that you’re paid up prior to heading to the bank to apply for a loan. You don’t want to get denied for something that could have been avoided. This won’t be a problem for most people, but if you have owed a business in the past, you may have some outstanding tax.
Lastly, make sure to invest heavily in having a comprehensive business plan. Above all else, lenders will want to know that your business is fully viable, and the best way to exhibit this is through a business plan. The SBA want you to have a three-year business plan that exhibits a clear understanding of the industry that you’re working within. You should be able to easily document the ways that you plan to generate revenue, as well as the associated costs that you will have along the way. You should also be prepared to show ways that you will respond to market forces should a problem arise. If you don’t have a business plan, you may want to consult with a professional in order to build comprehensive documentation for your company – accountants can often be a good first port of call for these types of plans. If you don’t want to spend money getting a business plan sorted, you should head to the SBA website for their ‘Build your Business Plan Tool’ – it’s awesome for anyone looking for a nice format for a business plan.
Verdict
After reading this article you should have a much better understanding of the basic principles behind what an SBA loan is. SBA loans may seem like an awesome option for your business, but if you have a great credit score and past business ownership experience, you may find better value in a traditional commercial loan. In addition, you may find that many of these traditional commercial forms of finance are much more flexible than government backed loans.
SBA loans are extremely regulated because they are backed by the U.S. Government. This makes them one of the safest financial products on the market. But this doesn’t mean you should be completely trusting of the entire process. You should ask your lender for a full break down of the costs associated with getting an SBA loan – the best way to do this is to ask for a total cost of the loan. You can also try a business loan calculator. This way you know exactly how much the finance will be costing you and you won’t be surprised by any hidden fees or charges.
You should make sure to put aside ample time to put together your SBA loan application. Rushing into a decision on any form of finance is one of the biggest mistakes that new business owners make when figuring out how to fund their operations. As a business owner, evaluating all the different finance options you have is best way to save your business money in the long run. Plenty of lenders provide SBA loan calculators to help their clients get a better idea of the full costs of this form of finance.
FAQ
SBA loans can be very important for owners who want to make their businesses grow. It has so many advantages in applying for one, but knowing the process can be tricky. The actual procedure is lengthy and it involves a bit of learning to effectively utilize it.
SBA Loan Basics
Learning about SBA loans and the application process can be daunting. So let’s start with the basics and know what SBA loans really are and what can you use them for:
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What is the purpose of the SBA?
How do SBA loans work?
What are the advantages of a SBA loan?
What is an SBA loan guarantee?
How much does SBA guarantee?
What is the maximum SBA loan amount?
How long does it take to get an SBA loan?
Are SBA loans hard to get?
How to get an SBA loan?
How to qualify for SBA loan?
The general SBA loan qualifications are: very good credit score, substantial collateral, a long time in the business, can repay the loan (checked using financial statements), commercial real estate loans must be majority owned, and no debts to the U.S. government like student loans. Also ask about business loans for minorities if you qualify for this.
What are the terms of an SBA loan?
How does SBA define a small business?
Do SBA loans require collateral?
What is the minimum credit score for SBA loan?
How much down payment is required for an SBA loan?
What is the interest rate for SBA loan?
Is an SBA loan a good idea?
What is the success rate of SBA loans?
Studies have revealed that 1 out of 6 successful loan applicants for SBA loans fail. Thus, getting an SBA-backed loan to fund your business is no guarantee of success. You may want to look at the current business line of credit interest rate as another option.
What does it mean when the SBA guarantees a loan?
How does the SBA help entrepreneurs?
Can you have multiple SBA Loans?
What is SBA 8a certification?
Types of SBA Loans
Knowing that you want to apply for a SBA loan is the easiest part of the process. The tricky part is knowing what type of business loan you need and what is the best for your business.
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What is a SBA 7(a) loan?
How to get a SBA 7(a) loan?
What is an SBA Express loan?
How do SBA disaster loans work?
When a calamity strikes in an area, low-interest SBA disaster loans become available to those who are affected. These funds will help business owners recover from the calamity. Remember there are also other special programs you may qualify for such as women business loans.
What can SBA disaster loan be used for?
How are SBA disaster loans disbursed?
How hard is it to get a SBA disaster loan?
How long for SBA disaster loan approval?
Can an SBA disaster loan be forgiven?
Can you get a SBA disaster loan with bad credit?
Yes. Although the SBA still conducts credit checks, if majority of your accounts are in good standing, you can get a SBA disaster loan. You can also check out small business loans for bad credit from private lenders.
What is SBA 504 loan program?
What is SBA 8(a)?
What is SBA certification?
How to get SBA certified?
How hard is it to get SBA 7a loan?
How to Apply for SBA Veterans Advantage Loan?
To apply and get approved for SBA Veterans Advantage Loan, you must be a veteran, service-disabled veteran, active duty military service personnel, or National Guard members. Spouses of veterans or active duty military service personnel are also qualified. You must submit proper documentation as proof along with other requirements for a traditional SBA loan. Learn more about veteran small business loans.
How do SBA 504 loans work?
What is the difference between SBA 504 and 7(a)?
How to get SBA microloan?
Application for SBA Loans
Now that you know the type of SBA loan you want to get, have you checked if you’re even eligible? If you are, how do you navigate the lengthy process? Use this information to find out:
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How do I apply for a SBA loan?
How to apply for SBA loan online?
How to fill out SBA personal financial statement?
How to get an SBA loan to buy a business?
How to fill out SBA Form 413?
How to fill out SBA form 601?
Who signs SBA form 601?
What are the characteristics of successful SBA loan applicants?
How to write a business plan for SBA?
How to get an SBA loan for a startup?
The SBA offers loans to help business startups get off the ground. It works the same way as the traditional 7(a) loan from the SBA, although there is a higher risk involved. This will often require 25 to 30% down payment, along with collateral. Don't forget to also look at grants for small business startup.
Can a non-profit get SBA loan?
What are OCONUS requirements for SBA loan?
Can you get an SBA loan with no money down?
How to get SBA loan for a franchise?
How do I check the status of my SBA loan?
How long do I have to appeal SBA loan?
SBA Loans Specifics
Still have inquiries in your mind? Maybe these specific questions will provide the answer you are looking for:
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What banks do SBA loans?
What happens if you default on SBA loan?
Can you refinance an SBA loan with another SBA loan?
Can you get an SBA loan with a bankruptcy?
Can SBA loans be discharged in bankruptcy?
Can an SBA loan be paid off early?
Is SBA loan interest tax deductible?
Are SBA loans non-recourse?
Are SBA loans assumable?
How to get a SBA grant?
What is SBA Direct?
What happens if you don't pay an SBA loan?
Is SBA loan worth it?
How to get SBA loan without collateral?
The SBA typically requires collateral for small business loans. However, in the absence of no collateral (and if it is the sole unfavorable factor against the borrower), they will most likely approve the loan application provided that you satisfy all other eligibility requirements. You can also take a look at the best small business credit card to fund some of your operation.