Meet the SBA, your small business ally.
The U.S. Small Business Administration (SBA) is a federal agency built solely for the purpose of helping small businesses get the funding they need—especially in times of economic hardship caused by events like the coronavirus (COVID-19) pandemic.
Contrary to what you might think, the SBA doesn’t actually foot any of the cash. Instead, it establishes the guidelines for loans and then guarantees a portion of those loans. Because lenders have much less risk in the case of a default, they’re more likely to provide funds to entrepreneurs like you.
Whatever your business needs, there’s an SBA loan for that.
Seriously. You can find an SBA loan option to cover just about every nook and cranny of your small business. Some of the most common SBA loans are the 7(a), 504, and SBA Express.
SBA 7(a) Loan
The 7(a) is one of the most flexible SBA loans. You can use it to:
- Buy land
- Cover construction costs
- Buy or expand an existing business
- Refinance your existing debt
- Buy machinery, furniture, supplies, or materials
SBA 7(a) loans of less than $25,000 may not require collateral but higher loan amounts likely will. For loans of $350,000 or higher, the SBA requires your lender to ask for the maximum possible amount of collateral to limit risk of default. If you don’t have enough business collateral to cover it, that’s okay – many forms of personal collateral will also help you qualify.
If you’re looking for a large amount of money, you can get a 7(a) loan for up to $5 million if you meet all the qualification requirements.
SBA 504 Loan
504 loans can be a bit more complicated than 7(a)s. Because you would use a 504 to fund a project, a thorough examination of your project costs will come into play. When your loan is funded, the lender will initially cover 50% of your costs and the SBA will cover 40% – that means you’re responsible for covering at least 10% right off the bat. You’ll also be required to personally guarantee at least 20% of the loan.
You must use your SBA 504 loan to finance fixed assets, although some soft costs can also be included. Examples of qualifying projects are:
- Buy an existing building
- Build a new facility or renovate an existing facility
- Buy land or make land improvements such as grading, landscaping, and adding parking lots
- Buy long-term machinery
- Refinance debt incurred through the expansion of your business or renovation of your facilities or equipment
There are some cool perks to the SBA 504 loan. For example, you’ll benefit from 90% financing, longer amortizations, no balloon payments, and fixed interest rates.
To qualify for an SBA 504 loan, your business must have a tangible net worth of more than $15 million and an average net income of $5 million or less for the two years prior to your application.
SBA Express Loan
If you need cash in a jiffy, the SBA Express is the loan for you. Unlike the somewhat slower review processes you might encounter with other SBA loans, SBA Express applications are reviewed within 36 hours. This doesn’t mean that you’ll get access to funds that fast though – it often still takes at least 30 days to get your SBA Express loan funded.
You can finance up to $350,000 with an SBA Express. If your loan amount is more than $25,000, your lender may require you to secure your loan with collateral. The loan can be used as working capital (5-10 year term) or a line of credit (7-year term), or as a commercial real estate loan (25-year term).
Are SBA Loans Paid for by the Government?
The short answer is, yes and no. Typically, because each type of SBA loan is government-backed, many people might think the government is funding your small business loans. While that’s usually not the case for traditional SBA loans, the adjustments made to EIDLs by the CARES Act and the creation of PPPs mean the funds for these loans come straight from the US Treasury. In the case of the 7(a), 504, and Express loans, the SBA guarantees the loans, limiting the risk for the lender and making SBA loans more appealing to lenders.
The Benefits of a Government-Backed Loan
SBA loans offer enviable rates and terms for small businesses that might not usually qualify for a traditional bank loan. The benefits don’t end there. These government-backed loans offer monthly payments, fixed interest rates, special-case principal amount forgiveness, and long repayment terms.
SBA loans are an excellent way to build and improve your credit, which puts you in a stronger position the next time you need financing. Better credit can qualify you for higher amounts and different forms of financing.
Qualifying for an SBA Loan
While traditional SBA loans are significantly easier to attain than your average bank loan, they’re still more difficult to acquire than most loans from non-institutional lenders. They’re known for being more paperwork-intensive with a much longer time to funds and a higher percentage of rejection than direct online lenders. However, due to the economic stress caused by COVID-19, some of the SBA loans have loosened their requirements to ensure aid reaches as many small business owners as possible.
How to Apply for an SBA Loan
You’ll need to provide enough information to assess your loan application for a pre-approval letter. In addition to providing the standard items like your business license, rounding up these documents can speed up the process and make it easier for you to get approved:
- 2 years of business tax returns
- 2 years of personal tax returns
- YTD P&L statement
- YTD balance sheet
- Debt schedule
While both Economic Injury and Disaster Loan and Paycheck Protection Program loans are easier to acquire than other SBA loans, they still have special requirements. In the case of an EIDL, you must provide evidence your business has suffered as a direct result of coronavirus. If you’re unable to do so, your business likely won’t qualify. But don’t sweat it! We’re here to help.
Lendio Makes SBA Applications Easy
Don’t worry—more paperwork doesn’t necessarily equal more hassle. Our proprietary application platform lets you upload copies of your documents with just a click, which means you don’t need to tote around a mountain of paperwork to get approved. And our personal funding managers can walk you through the whole process if you need a little extra help.
SBA Loan Interest Rates
SBA loan interest rates are some of the lowest in the business. Because SBA loan interest rates are based on the prime rate, SBA interest rates change whenever the Federal Reserve moves the needle. You can find current SBA interest rates on our SBA calculator page, where you can also calculate the estimated cost and monthly payments for your SBA loan.
