Overview
If you want to launch or grow a business, SBA loans should be on your radar. Guaranteed by the U.S. Small Business Administration, they’re issued by approved lenders, like banks, credit unions, and online lenders.
Since SBA loans are backed by the government, they also offer lower interest rates and longer repayment terms than many other types of business loans. Below, we’ll break down the different types of SBA loans available, the pros and cons of each, and how you can apply.
Key Takeaways
SBA loans come with competitive rates and lengthy terms you might not find elsewhere.
Depending on the loan type and your unique situation, you may borrow between $500 to $5.5 million to cover business-related expenses.
The ideal SBA loan depends on your specific business and goals, so it’s a good idea to compare all your options.
What are the Different Types of SBA Loans?
There are three main types of SBA loans, including 7(a) loans, 504 loans, and microloans. Here’s a closer look at each one.
7(a) loans
7(a) loans, the most popular SBA loan program, go up to $5 million with repayment terms of up to 25 years. You can use them for commercial real estate acquisitions or improvements, working capital, machinery, equipment, furniture, and more.
Eligibility requirements
To qualify for an 7(a) loan, your business must:
Be an officially registered, legal, for-profit business located in the U.S.
Meet the SBA’s size requirements
Operate in an SBA eligible industry
Prove it can pay back the loan
Not be delinquent on existing government debts on taxes, student loans, etc.
Pros
Competitive rates
Flexible use of funds
Available to startups and newer businesses
Cons
Potential fees
Funding takes time
Might require collateral and/or a personal guarantee
504 loans
504 loans are offered through Certified Development Companies (CDCs), which are SBA’s community-based nonprofit partners who support economic development. They cap out at $5.5 million and may be used to cover the purchase or construction of buildings, land, new facilities, machinery, and equipment. A 504 loan can also help you consolidate, repay, or refinance debt.
Eligibility requirements
To qualify for a 504 loan, your business must:
Be an officially registered, legal, for-profit business located in the U.S.
Meet the SBA’s size requirements
Operate in an SBA eligible industry
Have a net worth of less than $20 million
Have an average net income of less than $6.5 million for two years before you apply
Share a business plan
Prove it can pay back the loan
Pros
Low, fixed rates
High borrowing limits
Low down payment requirements
Cons
Strict eligibility requirements
Lengthy application and approval process
Limited use of funds
Microloans
While microloans can go up to $50,000, the average microloan is around $13,000, according to the SBA. These smaller loans are for qualifying businesses and not-for-profit childcare centers who want to launch and grow.
The SBA provides microloan funds to intermediary lenders that may distribute them to borrowers. You may put the funds towards working capital, inventory, supplies, machinery, and equipment.
Eligibility requirements
Each intermediary lender has its own requirements for microloans but most ask for collateral and a personal guarantee.
Pros
Flexible use of funds
Available for startups and newer businesses
Often comes with mentorship and education opportunities
Cons
Loans are capped at $50,000
May not be used used for real estate or debt repayment
Eligibility criteria varies by intermediary lender
How to Get an SBA Loan
If you’re interested in securing an SBA loan, follow these steps.
1. Figure out your needs
First, determine how much capital you need and what you’ll do with it. For example, do you need a smaller loan to launch your business? Or are you looking for a larger loan to acquire real estate or expand your current venture?
2. Choose the right SBA loan
Once you zero in on your loan purpose and desired borrowing amount, match it to the ideal SBA loan, which may be a 7(a) loan, 504 loan, or microloan. Then, review the eligibility requirements to make sure you meet them.
3. Organize your documents
Next, gather the documents you’ll need to apply. In most cases, lenders will ask for personal and/or business tax returns, a business plan, legal documents like articles of incorporation, and financial documents such as balance sheets and bank statements.
4. Find an SBA-approved lender
You can apply for an SBA loan through SBA-approved banks, credit unions, and online lenders as well as Community Development Financial Institutions (CDFIs). Do some research to find the ideal lender for your particular loan type, goals, and preferences.
5. Fill out the application
Most lenders will let you apply online. Be prepared to answer questions about yourself and your business. Also, keep the documents you gathered on hand as you’ll likely need to submit them to complete your application.
6. Close on the loan
Most SBA loans get approved within 2 to 8 weeks but some might take longer. Upon approval, carefully review and sign the loan documents. Depending on the lender and loan type, it may take a few weeks to several months to recieve your funds.
The Point
In addition to competitive rates and longer terms, SBA loans may also offer the professional mentorship you need to set your business up for success. If you have any questions about the three types of SBA loans available or need some guidance with the application process, don’t hesitate to visit the SBA website or contact a local SBA office near you.
by your friends at The Daily Navigator
