Out of all the types of small business funding, Small Business Administration loans, also known as 7(a) loans, are a great way to finance your business. This type of loan offers flexible terms and low annual percentage rates; however, it can be tough to get an SBA loan since the requirements are hard to meet and the application process can be time consuming. In most cases, for most borrowers the effort is worth it due to the access of low-cost loans they are unable to get anywhere else. Whether you are starting up or expanding your business, SBA loans will help your business succeed.
What is an SBA loan?
SBA loans are issued by participating lenders, mostly banks. The down payment for an SBA loan can be as low as 10 percent, whereas conventional loans are up to 35 percent. The repayment period of the loan is a longer period which allows business owners to make low monthly payments. SBA loans are a great option if you’re looking to open a new location, hire a team, or refinance an existing loan.
There are several different types of SBA loans to consider.
7(a) loan: this is the most common type and can be used for equipment purchases, working capital, revolving funds, refinancing existing debt and more. Interest rates are negotiable, and loans are up to $5 million with terms of 10 years for equipment, working capital and inventory or 25 years for real estate.
504 loan: the funds can be used for buying land, machinery, and facilities. These are offered in partnership with CDCs and banks. The length of the term is 10 years for equipment and machinery and 20 years for land.
Microloans: these are loans of up to $50,000 and fund are for working capital, inventory, equipment and starting a business. These typically have term lengths of a maximum of six years.
Disaster loans: the disaster loans are processed through the SBA and are for business owners who are affected by natural disasters or other emergencies. If any of your equipment, inventory, machinery or other business assets have been destroyed by a disaster this is the loan you should apply for.
Rates for 504 loans, microloans, and disaster loans are fixed but 7(a) loans have variable interest rates. Also, the type of interest rate you get depends on how much you are borrowing. On top of the interest rates, there may be other fees associated with the loan such as processing fees, guarantee fees, and packaging fees.
How to apply for an SBA loan
You will need to show that you are willing and able to repay your loan in order to receive an SBA loan. There is a lot of paperwork involved and you will have to wait a fair amount of time for the SBA to process your application.
You can expect to fill out forms and have documentation of the following:
- Federal business and personal tax forms
- Balance sheets
- P & L statements
- Business debt schedule
- Business license
- Business lease
- Forms about the history of your business
- Project-specific information
- Statement of personal history
- Loan application history
SBA loans require all business owners to sign a personal guarantee which simply states you are responsible for repaying the loan if your business is unable to. After the information is received the SBA will determine if you are eligible for the loan. They may ask for additional paperwork during this period and will also look at your credit history to help make their decision. A minimum score of 680 is ideal and higher scores have a better chance of approval. It usually takes a couple of months to obtain an SBA loan.
The borrowers should meet these requirements for an SBA loan:
- Location: the business must be located and operated in the United States and run by a United States citizen.
- Business type: to qualify the business must be for-profit and in an eligible industry,
- Investment: the borrower needs sufficient invested equity.
- Size: only small businesses qualify. Size requirements depend on the type of industry and employees or annual receipts.
Is an SBA loan best for you?
Sounds like an SBA loan is a great option considering they have great term lengths and low interest rates. However, it may not be a good option for you if you are in need of a quick loan or you cannot qualify for a loan. If you apply and do not qualify for an SBA loan, you can look into applying to an online lender even though they have higher rates and fees, they do have fewer requirements and a shorter application process.