What Are SBA Loans and How Do You Get One?
An SBA loan is a small-business loan that is partly guaranteed by the government and issued by banks and internet lenders.
SBA loans are small-business loans that are granted by participating lenders, usually banks, and are partially insured by the US Small Business Administration.
SBA loans have stringent lending requirements, but their flexible terms and low interest rates make them one of the most effective ways to fund a business. Here’s everything you need to know about SBA loans and how to improve your chances of getting approved.
What is an SBA loan?
An SBA loan is a sort of government small-business loan that is backed by the federal government but funded by lending institutions. The Small Business Administration (SBA) offers many loan programs, including 7(a) loans, 504 loans, and microloans (more on these below).
An SBA loan is obtained through a lending institution such as a bank or credit union. The lender then applies to the SBA for a loan guarantee, which means the government will pay the lender the guaranteed amount if you default on an SBA loan.
Everyone with at least 20% ownership in a corporation must provide an unqualified personal guarantee as business collateral, according to the SBA. If your business fails to make payments, this guarantee holds you and your personal assets liable.
Changes to SBA loans that are only temporary
Some SBA loan features have been temporarily altered as part of the current coronavirus relief package to promote lending and assist borrowers.
The following amendments took effect on Feb. 1 and are in addition to other small business relief programs such as the PPP (Paycheck Protection Program) and EIDL (Economic Injury Disaster Loans):
- Loan limitations have been raised. The borrowing limit for SBA Express loans has been increased from $350,000 to $1 million as of Jan. 1, 2021. On Oct. 1, 2021, the maximum amount will be permanently reduced to $500,000.
- Fees have been waived. The SBA will waive costs for both lenders and borrowers on 7(a) and 504 loans.
- Guarantees on loans have been increased. The SBA will guarantee 90% of 7(a) loans and 75 percent of SBA Express loans of greater than $350,000 through Oct. 1, 2021. For loans up to $150,000, the maximum SBA guarantee is normally 85%, 75%for loans beyond $150,000, and 50% for Express loans.
- Payments are taken care of. On qualified SBA loans, the government will make monthly payments of up to $9,000 per month. When your loan was accepted, issued, or disbursed, the number of payments you can get will be determined.
How many payments will you be able to cover?
On February 16, 2021, the SBA updated its guidelines on payment relief alternatives for qualified 7(a) and 504 loans:
- For loans granted before March 27, 2020: two months will be paid, with an additional three months possible for those in certain industries hit hardest by the epidemic.
- Three months paid for loans approved between March 27 and September 27, 2020, and disbursed on or after September 28, 2020.
- The SBA will cover six months of payments for loans approved between March 27 and September 27, 2020, and completely disbursed by September 27, 2020.
- Three payments are covered for loans granted between February 1 and September 30, 2021.
Payments are contingent on money being available, thus the number of people covered may fluctuate in the future.
Types of SBA loans
There are multiple types of SBA loans — each with its own set of terms and restrictions. The best SBA loan for you will be determined by your intended use of the funds.
|SBA export working capital loans||Up to $5 million||Cash to support export sales.|
|SBA export express loans||Up to $500,000||Expedited funding to help a business grow its exports.|
|SBA international trade loans||Up to $5 million||Long-term finance to increase export sales or modernize in order to compete against foreign competitors|
|SBA 7(a) loans||Up to $5 million||Equipment purchases, working capital and expansion|
|SBA Express loans||Up to $500,000 (Updated on Oct. 1, 2021)||Working capital, expansion, and real estate and equipment purchases fast funding.|
|SBA 504 loans||Up to $5.5 million||For long-term fixed assets, such as land, machinery, and infrastructure.|
|SBA microloans||Up to $50,000||For inventory, supplies, equipment, machinery and working capital.|
|SBA disaster loans||Up to $2 million||Repair physical damage as a result of a declared disaster, as well as cover running costs.|
|SBA Community Advantage loans||Up to $250,000||It can only be used for normal business operations; It cannot be used for revolving credit|
Veterans can also get help from the SBA through small-business grants and lending programs.
SBA LOAN ADVANTAGES
Participating lenders must base SBA loan interest rates on the prime rate plus a markup rate known as the spread, according to federal regulations.
The annual percentage rate (APR) of a loan is not the same as the interest rate. In addition to the interest rate, the APR is a percentage that incorporates all loan expenses.
APRs differ significantly between SBA and non-SBA lenders. An online lender that specialized in SBA loans, for example, may have an APR of around 10%, but large online small-business lenders that don’t offer SBA loans have APRs as high as 99%.
Typically fees for SBA loans consist of a guarantee fee depending on the loan amount and maturity, as well as a monthly service fee based on the guaranteed percentage of the outstanding debt. Every year, the SBA reviews its charge structure.
Fees on SBA loans are currently being waived.
Another advantage of SBA loans is that you have more time to repay them, which means you’ll have more money to spend on other aspects of your business. The length of the loan will be determined by how you intend to use the funds. The following are the current maximum maturities:
- The term of a working capital or inventory loan is ten years.
- Equipment is ten years old.
- 25 years in real estate.
How to get an SBA Loan
- Check to see if your company qualifies.
Lenders prefer to see at least two years in operation, significant yearly income, and a good credit score, which starts around 690, to qualify for an SBA loan.
An SBA loan is generally out of the question if your business is failing. You shouldn’t apply if it falls within one of the ineligible groups, such as charitable or religious organizations.
- Gather all of your application materials.
If you believe you qualify, the SBA website, which contains a loan application checklist, is the best place to start. This is where you’ll assemble all of your materials, including your resume.
Before you apply, you’ll need the following documents:
- Borrower information form from the Small Business Administration.
- Personal history statement
- Personal income tax returns.
- Personal financial statement.
- Business tax returns.
- And a business license is required.
- If applicable, a lease agreement.
- A one-year cash flow forecast is provided.
- Select a lender
The Small Business Administration (SBA) provides a handy Lender Match tool that matches potential borrowers with lenders within two days.
If you’re going through a typical bank, it’s best to go with one that has experience with SBA loans. These are some questions to ask a potential lender:
- What percentage of your loans are SBA-backed?
- How often do you get SBA loans?
- How experienced is your team with the process?
- What is the range of the loans you make in terms of dollar amounts?
In general, a bank with extensive SBA expertise will be able to better advise you, including estimating your chances of approval. Banks will follow SBA standards while evaluating loan applications using their own underwriting procedures.
The time it takes to secure an SBA loan depends on the lender you choose. The full process with a bank, from approval to funding, can take anything from 30 days to several months.
Are you short on time? SBA Express is a funding initiative run by the Small Business Administration that attempts to reply to loan applications within 36 hours. The maximum amount for this sort of financing is currently set at $1,000,000, with the SBA guaranteeing a maximum of 75%.
Your lender is responsible for finalizing the transaction and disbursing the loan cash once your application has been approved. You make direct payments to the lender, usually on a monthly basis.
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