What Is an SBA Loan?
An SBA Loan is a loan given through the Small Business Association. The SBA is a government agency built solely for the purpose of assisting small businesses acquire the funding they need. Recognizing the incredible importance of small businesses on the American economy (roughly 99% of all
American businesses are considered “small”) the SBA was formed to bolster the growth and prosperity of our nation by supporting the small businesses and entrepreneurs who keep the American dream alive and well.In that vein, an SBA loan is one that has been approved by the SBA, and in most cases co-sponsored by a traditional financial institution. The SBA provides some of the loan money, while the financial institution provides the remainder, together meeting the funding needs of the approved loan. Typically the SBA will take on a larger portion of the loan amount and guarantee the loan, leaving the financial institution with less risk.The 3 primary loans from the SBA are SBA 7(a), SBA 504, and SBA Express loans, each of which serve different purposes, with different terms, rates, and loan amount limits. Therefore, which SBA loan product you choose should depend heavily on what specific needs you have for your business.
Why Choose an SBA Loan?
While SBA loans are significantly easier to attain than a traditional bank loan, they still present the most challenges compared with other non-institutional lenders. For example, SBA loans are more paperwork intensive, typically have a much longer time to funds, as well as a higher percentage of rejection than direct online lenders.Still, SBA loans are some of the most sought-after loans for small businesses because of their benefits. The primary benefit of an SBA loan is that it allows you to get rates and terms that are comparable to bank loans even when you may not be able to secure a bank loan. The SBA does this by taking on a larger part of the loan and guaranteeing the loan, which makes the loan product significantly more desirable for banks than your loan itself. This encourages banks to fight for your business, which in turn gives you better rates and terms, while still being a very safe investment for banks themselves.SBA loans are an attractive option for other many other reasons as well. For example, SBA loans all carry monthly payments, fixed interest rates, long repayment terms, and generally make for an excellent step towards improving your credit so you can apply for a bank loan when you need your next round of funding.
SBA 7(a) Loans
Aside from having bank quality rates and terms, SBA 7(a) loans are some of the most versatile loans on the market. That means they have virtually no restrictions on usage, as long as the money is going to be used for business purposes. This includes (but is not limited to) acquiring a business, refinancing, startup funds, equipment, partner buyout, and the purchase of real estate. Because of its unparalleled flexibility, SBA 7(a) loans are by far the most common SBA loan on the market.Originally put together to help specific industries acquire financial help, the SBA 7(a) program comprises several other subsidiary programs:
- Export Loan Program
- Rural Business Loan Program
- Express & Pilot Programs
- Special Purpose Loans Program
The intention behind this loan product was to assist businesses with unique requirements meet their financial needs. SBA 7(a) loans are now available to nearly all types of businesses, and serve a vital role in sparking economic growth by committing more capital to small businesses and entrepreneurs in underserved communities.SBA 7(a) loans can range between $50,000-$5,000,000, with a loan term that ranges from 10 to 25 years depending on what the loan will be used for, along with other details. Also, your loan will be repaid monthly.
SBA 504 Loans
For all intents and purposes, SBA 504 loans are just like SBA 7(a) loans, only optimized around real estate. Because of this, SBA 504 loans are limited to real estate only. However, they are some of the best loans on the market when it comes to acquiring major fixed assets, expanding, or modernizing your current business property. For example, SBA 504 loans allows you to finance up to 90% of the appraised property value, or 100% of the outstanding principal, whichever is lower. They will also include eligible refinancing costs.There are a few eligibility requirements for this kind of loan however:
- Your business must operate for profit
- Your business must meet fit and size guidelines set by the SBA for the 504 program
- Tangible net worth can’t exceed $7.5 million
- Net income can’t exceed $2.5 million after taxes
- 504 loans can’t be given to businesses that speculate
- 504 loans can’t be given to businesses that invest in rental real estate
SBA 504 loans can range between $50,000-5,000,000. The loan term is also 20 years, to be repaid in monthly payments.
SBA Express Loans
In the same way the SBA 504 loans are basically an SBA 7(a) loan optimized for real estate, an SBA Express loan is the SBA loan fine-tuned for speed and efficiency. Typically, the more expediently a loan is processed, the worse the terms and rates, and the less desireable the lender. SBA Express loans function to offer funding for businesses that require fast financing while still providing bank-like rates and terms.In order to decrease approval time, the maximum amount of the loan is reduced, and the usage is limited to financing equipment, debt consolidation, and increasing working capital. Here are some good facts to know about SBA Express loans:
- Can be pre-approved in less than 2 days
- Maximum loan amount of $350,000
- Maximum SBA guarantee is 50%
- Interest rate is negotiable between borrower and lender
- Rates can be variable or fixed, tied to a prime rate, LIBOR, or the optional peg rate
- Rates may not surpass SBA’s maximum rates
- Lenders are not required to take collateral for loans up to $25,000
Additionally, you can get an SBA Express loan from as little as $5,000 up to $350,000, and the loan term is typically 10 years, repaid in monthly payments.