How to Use an SBA Loan For Equipment

Reasons to use an SBA loan to buy equipment.

Small businesses are the backbone of our economy, but they often struggle with limited resources and cash flow. This is especially true when it comes to purchasing expensive equipment. Traditional loans from banks or other financial institutions can be difficult to obtain, and they may come with high interest rates and strict repayment terms. In contrast, SBA loans offer favorable terms and lower interest rates, making them an attractive option for small businesses in need of equipment financing.

SBA loans are backed by the government, which means that lenders are more willing to take on the risk of lending to small businesses. This increased accessibility makes it easier for small business owners to secure the financing they need. Additionally, SBA loans typically have longer repayment terms and lower down payments compared to traditional loans, making them more manageable for small businesses with limited cash flow.

Types of SBA loans you can use to buy equipment.

The SBA offers several loan programs that can be used for equipment purchases. These include the 7(a) loan program, the CDC/504 loan program, and the Microloan program.

SBA 7(a) loan program

The 7(a) loan program is the most popular SBA loan and can be used for a variety of business purposes, including equipment purchases. The maximum loan amount is $5 million, and repayment terms can range from 10 to 25 years. The interest rates for an SBA 7(a) loan range from 3% to 8% above the base rate. The process of obtaining an SBA 7(a) loan can take between 60 to 90 days, depending on the complexity of the application and the responsiveness of the applicant in providing necessary information.

The SBA 7(a) loan program also includes the SBA Express Loan option. This subset of the program offers expedited loan approval and funding, typically within 36 hours of application submission. While the maximum loan amount is lower, capped at $500,000, the accelerated timeline can be especially beneficial for small businesses requiring immediate access to funds for equipment purchase.

Qualifications for an SBA 7(a) loan:

• The borrower must be a for-profit business operating in the United States or its territories.
• The business needs to have invested equity, meaning the owner has contributed their own time and money into the business.
• The business must have sought and used other financial resources, including personal assets, before applying for an SBA loan.
• The borrower must demonstrate a need for the desired credit.
• The borrower needs to provide a sound business plan, showcasing the purpose of the loan and a plan for repayment.
• Personal and business credit history of the borrower will be considered (generally a credit score of 650 or higher).
• The borrower must have the ability to repay the loan on time with the projected operating cash flow.

SBA CDC/504 loan program

The CDC/504 loan program is specifically designed for fixed asset financing, such as equipment purchases. This program allows businesses to borrow up to $5 million and has a longer repayment term of 10, 20 or 25 years. The interest rate typically totals 3% of the loan amount. The CDC/504 loan program is particularly beneficial for businesses looking to purchase long-term equipment, as it provides financing options that cater to the extended lifespan and usage of such assets.

The CDC in the name stands for Certified Development Companies, which are nonprofit corporations certified and regulated by the SBA, that work with participating lenders to provide financing to small businesses. This unique partnership between the CDC, the SBA, and lenders allows small businesses to access large amounts of capital with more favorable terms and conditions than traditional loans.

Qualifications for an SBA CDC/504 loan:

• The business must be a for-profit entity operating within the United States or its territories.
• The business’ net worth should not exceed $15 million, and it should have an average net income of less than $5 million after federal income taxes for the preceding two years.
• The funds obtained must be used for eligible business expenses, such as the purchase of long-term equipment.
• The borrower must not have access to other sources of financing on reasonable terms.
• The business must have a feasible business plan and the potential to create or retain jobs.
• The borrower’s personal and business credit history will be considered (generally a credit score of 650 or higher).
• The borrower must demonstrate the ability to repay the loan on time based on the projected operating cash flow.

SBA microloan program

The microloan program is ideal for small businesses looking to purchase smaller equipment with a maximum loan amount of $50,000. The terms vary depending on the lender, but typically range from five to seven years, and interest rates typically range from 8% to 13%. SBA Microloans are available through a network of intermediary lenders, typically nonprofit organizations with a mission to promote economic development within their local communities.

Qualifications for an SBA microloan:

• The business must be a for-profit enterprise operating within the United States or its territories.
• The borrower must demonstrate a need for the loan proceeds.
• The borrower must show a sound business purpose for the funds.
• A strong business plan is required, detailing how the funds will be used and the plan for repayment.
• The borrower’s personal and business credit history will be examined (generally a credit score of 620 or higher).
• The borrower must not have access to other sources of financing on reasonable terms.
• The borrower must demonstrate the ability to repay the loan from the business’ operating cash flow.

It’s important to remember that each lender will have its own specific qualification guidelines, in addition to the general SBA criteria, when determining loan eligibility. Therefore, the exact requirements may vary from one lender to another. Also, you should note that eligibility requirements for microloans can be less strict than other SBA loan programs, making them an attractive option for small businesses that might not qualify for larger loan amounts.

Where to get an SBA loan to buy equipment.

SBA loans are not directly provided by the government. Instead, they are administered through partnering banks and financial institutions. This means that you can apply for an SBA loan at any bank or credit union that participates in the program.

It’s important to note that the application process for an SBA loan may be more involved compared to traditional loans. The lender will require detailed financial information and may also ask for a business plan, personal credit score, and collateral. However, with the right documentation and a solid business plan, you can increase your chances of getting approved for an SBA equipment loan.

The first step is to research and find SBA participating lenders in your area. You can also use the SBA website to search for lenders based on your location and preferred loan program. Once you’ve identified potential lenders, it’s important to compare their rates, terms, and requirements before deciding on the best option for your business.