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The Small Business Administration was created in 1953 to help Americans start, build, and grow. An SBA loan is not a direct loan from the SBA itself. A loan that has been made by a commercial lending partner but that the SBA has guaranteed for these partners and that has been structured according to SBA requirements. This helps reduce the risk for the borrowers and partners. Those without reasonable access to other funding sources are eligible for such a loan.
Types of Loans the SBA Offers
The SBA offers a number of loan programs and are divided into the following categories:
- Small business loans 7(a)
- Microloans
- Real Estate and Equipment Loans: CDC/504
- Disaster loans
Each of these categories has its own terms and will require an individual application. There are a number of governments grants available for non-commercial organizations like non-profits and educational institutions.
What You Can Use an SBA Loan for?
When you have decided that you would like to apply for an SBA loan, your next step is to figure out which type is right for you.
The following is a list of examples that you can use an SBA loan for:
- Purchasing a business or expanding your existing business
- Purchasing commercial real estate, including land and buildings
- New construction or improvements to existing commercial buildings
- Purchasing new or used equipment, supplies, machinery, etc.
- New business development
- Long-term and short-term working capital or debt consolidation
You can use a disaster loan for any unforeseen circumstances like a natural disaster as well as:
- Home and personal property repair or replacement (homeowners and renters are eligible)
- Business property repair or replacement
- Economic injury (businesses eligible)
- Military reservists’ economic injury (businesses eligible)
General Small Business Loan 7(a)
The 7(a)-loan category is the most common of all SBA loans. This loan helps you cover business needs such as purchasing equipment, refinancing debt, and paying for various operational expenses. Within this category are a number of specialized loans. They will cover such things as export and import business needs, rural business needs, short-term working capital needs and more.
If you operate a business, you are only eligible to apply for the general 7(a) loan if your business is an on-going for-profit business and your net worth does not exceed $15 million.
Microloans
Many small businesses turn to the SBA for a microloan which includes certain not-for-profit childcare centers too. A microloan is a loan that does not exceed $50,000.
These loans are typically used to help start a business or expand a business. There are other uses for microloans as well which include:
- Purchase of furniture, fixtures, equipment, and machinery
- Purchase of inventory and supplies
- Working capital
Microloans can be used to repay debt or to purchase real estate. Repayment terms are decided based on the following factors:
- Planned use of the loan
- The loan amount
- The requirements determined by the lender
- The needs of the small business owner
Real Estate and Equipment Loans: CDC/504
This loan is taken in order to purchase real estate or equipment, improve real estate/commercial property and construct, convert or renovate existing commercial property.
To apply for this loan, you will need a business plan, management expertise, and good character. You will also need to meet the following criteria.
- Operate as a for-profit company.
- Do business or propose to do business in U.S. Territories.
- Have a net worth of less than $15 million and an average net income of less than $5 million for the two preceding years, after taxes.
- Not be engaged in or looking to invest in rental real estate.
- An ability to repay the loan on time and based on the projected operating cash flow of the business.
- Plan to use the proceeds for the approved purpose like financing fixed assets.
- Not have funds available from other sources—either personal or business sources.
Disaster Loans
Disaster loans are low-interest loans provided to businesses of any size and type and homeowners and renters.
These loans can be used to repair or replace damaged or destroyed items in a declared natural disaster.
Some of these items include:
- Real estate
- Business assets
- Personal property
- Machinery
- Equipment
- Inventory
Natural disasters include events such as:
- Earthquakes
- Severe storms
- Flooding
- Wildfires and building fires
- Tornadoes
- Civil unrest
- Rockslides
- Gas explosions
- and more.
The Bottom Line
SBA loans are a great option to get funding from. As you can see, there are several of programs and loans available that are guaranteed by the SBA so before you apply, do your research so you can find the best one that suits your needs.
