Types of SBA Loans
The Small Business Administration (SBA) acts as a loan guarantor for loan proceedings granted by approved lenders. When considering the rigorous prescreening the SBA conducts on borrowers, it’s difficult to qualify for an SBA loan. SBA loans are popular for their low-interest rates and long maturity periods.
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The Various Types of SBA Loans
There are five types of SBA loans. These include:
- SBA 7(a) loans
- SBA community development corporation (CDC)/504 loans
- SBA microloans
- SBA disaster loans
- SBA veterans advantage loan
SBA 7(a) Loans
The SBA 7(a) loan is the most common of all SBA loans. It has a turnaround time of 5-10 days, but that can vary significantly depending on the SBA 7(a) loan you take.
SBA 7(a) loans have a limit of $5 million, and the SBA guarantees 85% of loans lower than $150,000 and 75% for loans that surpass the $150,000 mark. The interest rate is set upon negotiating and agreeing with your lender, but it must not exceed the limit set by the SBA.
To successfully apply for an SBA 7(a) loan, you need to have collateral that matches the loan amount requested in your application. However, if your business’s fixed assets fail to completely secure the requested loan amount, the lender can include trading assets.
There are several types of SBA 7(a) loan. These include:
- Standard 7(a) loans: These have a loan limit of $5 million and are best suited for business expansion purposes.
- 7(a) Small loans: They have a $350,000 loan limit and are mostly offered as working capital
- Express loans: Small businesses mostly take out the express loan to cater to their time-sensitive financial needs. They have a $350,000 limit.
- Export express loans: They are similar to the express loan, but they are meant for small export businesses. The loan limit is $500,000.
- Export working capital: They are suitable for small export businesses in need of working capital. They have a loan limit of up to $5 million.
- International trade loans: With a loan limit of up to $5 million, they help support businesses gain momentum and compete internationally.
- SBA CAPLines of Credit: With a limit of up to $5 million, these loans are suited for commercial builders, businesses whose cash flow experiences cyclical gaps, seasonal businesses, and those taking on government contracts.
SBA community development corporation (CDC)/504 loans
Commonly referred to as an SBA 504 loan, it is one of the fastest-growing types of SBA loans. You can apply for the SBA 504 loan if you need to buy real estate, heavy equipment, or any fixed assets your small business needs.
Below are some useful tips to help you understand the SBA 504 loan before applying for it.
- Loan size: The SBA 504 loan has a $5 million limit for small businesses. However, if you run a small manufacturing company, you can apply for up to $5.5 million.
- Loan Maturity Period: The maximum maturity duration for an SBA 504 loan is 20 years if you use it for real estate and 10 years for heavy equipment.
- Interest Rates: The interest rates vary, but for the CDC portion, the rates range from 2.08% to 2.18% in addition to the relevant US Treasury Index. The interest rates for a 10-year long loan is calculated using the 5-year Treasury Index, while the 20-year ones use the 10-year Treasury Index.
- Loan Purpose: Unlike the SBA 7(a) loan, the SBA 504 does not grant working capital loans. So only apply for this loan if you need money to buy heavy equipment, real estate, land, or fixed assets.
- Credit Score: The SBA has not set any standard credit score, but lenders look for a 680+ credit score.
- Down Payments: If you successfully apply for the SBA 504 loan, your lender will require you to make a minimum of 10% down payment.
- Timing: Loans used for real estate take a little longer to close, somewhere between 65 and 75 days. Fixed assets and heavy equipment loans, however, take a much shorter time.
Microloans are very small loans that range from $500 to $50,000. Microloans are granted by microlenders, who are SBA approved intermediary organizations. Microlenders can be individuals or private entities.
The SBA constructed microloans to support small businesses run by women, minorities, or veterans.
The SBA uses a different SBA loan platform to help eligible non-profit microlenders obtain loans and grants. These microlenders then use this money to provide microloans to small businesses that need money to cover start-up costs, employee training, or technical assistance.
The one downside to microloans is that they carry a higher interest rate than other SBA loans, ranging between 8% and 13%.
SBA disaster loans
The SBA disaster loan helps businesses stay afloat in the event of disasters, both physical and economic.
The SBA disaster loan differs from other SBA loans because it is granted directly by the government as opposed to approved third-party lenders. In the event of a catastrophe, you’d want to receive swift assistance to protect your business.
The SBA disaster loan offers three loan options that you can access simultaneously. These include:
- SBA Business Physical Disaster Loans: These loans have a limit of $2 million, a maturity period of 30 years, and interest rates ranging from 4% to 8%. As such, they are best suited for businesses that have incurred losses and damages due to officially declared disasters. You can also apply for an SBA business physical disaster loan if you want to repair the uninsured property.
- SBA Economic Injury Disaster Loans: If you need a short-term loan to keep your business or non-profit afloat in the face of substantial economic hardship, this is the loan for you. It offers a loan limit of $2 million, a maturity period of 30 years, and interest rates ranging between 4% and 8%.
- SBA Military Reservists Economic Injury Loans: These loans are designed to support businesses after losing an employee or employees to active military service. They have a limit of $2 million, a maturity period of 30 years, and interest rates ranging between 4% and 8%.
- SBA Home and Personal Property Disaster Loans: While it's not strictly meant for businesses, you can apply for this direct SBA loan if you need funds to repair or replace your home or personal property, including your condo unit or apartment building, following a disaster.
SBA Veterans Advantage Loan
The Veteran Advantage program aims to support small businesses partially owned (at least 51%) by a veteran, a member of the Active Duty service, their spouse, or widow.
Some specifics of the program change each year, but it always steers toward supporting veteran-owned small businesses to give them a financial advantage.
SBA veterans advantage loans of $125,000 and below garner no fees. They have a maturity period of up to 10 years if taken with the purpose of buying equipment, but up to 25 years if intended for real estate. The SBA guarantees 85% of the loan.
SBA Veterans Advantage loans ranging between $125,001 and $350,000 incur fees, but these fees are reduced by 50%. The SBA guarantees 75% of these loans.
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Applying for an SBA Loan
You will need to gather some important documents before applying for an SBA loan. The SBA will use these documents to assess your eligibility and make a loan approval decision.
Here is a list of the things you will need:
- A complete financial history of your business: Prepare a profit and loss statement and attach it together with a projected financial statement in your application. The financial statements must be current/recent (six months leading up to your application).
- A solid business plan: Exhaustively describe the nature of your business in writing and how you intend to use the money you receive from the loan. Use your imagination to elaborate on the various reasons that your business will achieve success in the long run. Details are very important here if you can consult with more experienced business owners to gather some insight.
- Collateral: Having valuable assets that can be used as collateral improves your chances for loan qualification.
- For-profit status: Your business must be registered officially as a for-profit. It would be difficult to get approved for the loan otherwise.
- A list of SBA lenders: Go to the SBA website to choose your preferred local SBA lender. You will deal with them before the SBA comes into play. If you can, hire an attorney familiar with your industry and have your accountant ready with the documents.
- Credit score awareness: Although not standard, lenders expect to see a FICO score of 650 and above. It is important that you keep tabs on your score to make sure that it’s above the 650 mark.