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How to Find the Right SBA Loan for Your Small Business

Marci Martin
Marci Martin

When your small business needs capital and you don't qualify for a conventional business loan, SBA loans are an appealing option.

  • Small Business Administration (SBA) loans are backed by the U.S. government, but are provided by local lenders.
  • The SBA offers a wide range of loan types that can be used for a variety of purposes.
  • SBA loans are advantageous because they can be obtained with low credit scores and have lower interest rates than other types of loans.
  • This article is for small business owners who are looking to find out more information on obtaining an SBA loan.

Small businesses are the backbone of the U.S. economy: According to 2020 data from the U.S. Small Business Administration (SBA), there are 31.7 million small businesses registered in the United States, employing 60.6 million employees.

One function of the SBA is to help America's small businesses secure the funding they need to operate and grow. The federal agency does not lend small businesses money directly; instead, it sets guidelines for loans that are made by its partners, which include banks, credit unions, community development organizations and microlending institutions. The SBA guarantees a portion of these loans granted by these institutions will be repaid, eliminating some of the risk for lenders.

Kale Gaston, president of Lendstream Small business Finance, said SBA loans "do a great job of helping lenders say 'yes' to borrowers." He also noted that SBA programs provide better access to capital and credit enhancement for small business owners. For example, since the SBA guaranty lowers the risk in case of a loan default, lenders can provide funding when the down payment available is too low or the business's cash flow is not high enough for traditional lending options.

SBA lenders can provide longer terms as well. Instead of five or 10 years for a real estate purchase, with a balloon payment at the end, the lender can give 25-year terms, eliminating the balloon (i.e., final payment) or need to refinance every few years, Gaston said. For shorter-term assets, like equipment, terms could go to 10 years instead of the usual three to five years.

How do SBA loans work?

SBA loans and lines of credit are similar to conventional business loans from banks – business owners apply, secure funding, and then pay it back over time with interest. And, like conventional business loans, SBA loans are obtained through local.

Like other business loans, SBA loans come with costs – most notably interest. Borrowers pay several loan fees, including application fees, appraisal fees (if a loan is being collateralized by assets such as real estate), and perhaps a credit check fee.

In addition to conventional fees, SBA loans have a guaranty fee. This is what borrowers pay in exchange for the SBA guaranteeing a portion of their loan. The guaranty fee only applies to the portion of the loan being guaranteed by the SBA. [If your small business is in need of a loan, here is everything you need to know about how to choose which one is right for you.]

Key takeaway: SBA loans are guaranteed by the government, but are provided by traditional lenders, like banks. Like other types of loans, you pay interest and additional fees.

What are the different SBA loan programs?

The SBA's loan programs are designed specifically for small business owners who don't have access to other types of financing. There are four main loan programs:

7(a) loan program: This is the SBA's primary program to help startups and existing small businesses obtain financing. The money can be used for a variety of general business purposes, including working capital, machinery and equipment, furniture and fixtures, purchasing or renovating land and buildings, leasehold improvements and debt refinancing. Loan maturity ranges up to 10 years for working capital and up to 25 years for fixed assets. Borrowers can apply through a participating SBA lender.

CDC/504 loan program: This program provides businesses with long-term, fixed-rate financing for major assets, such as land and buildings. The loans are typically structured with the SBA providing 40% of the total project costs, a participating lender covering up to 50%, and the borrower putting up the remaining 10%. Funds from a 504 loan can be used to purchase existing buildings, land or machinery, and to construct or renovate facilities. These loans cannot be used for working capital or inventory. To qualify, a business must have a tangible net worth of less than $15 million and an average net income of $5 million or less after federal income taxes for two years before the application is submitted. The maximum amount of a 504 loan is $5 million.

Microloan program: This program offers very small loans to newly established or growing small businesses. The loans can be used for working capital or to purchase inventory, supplies, furniture, fixtures, machinery, or equipment. The SBA makes funds available to specially designated intermediary lenders, which are nonprofit organizations with experience in lending and technical assistance. Those intermediaries then make loans of up to $50,000, with the average loan being about $13,000. SBA microloans cannot be used to pay existing debts or to purchase real estate.

Disaster loans: The SBA offers this option to businesses that have been affected by a declared disaster. These low-interest loans can be used to repair or replace damaged real estate, personal property, machinery, equipment, inventory and business assets.

Further details on each type of SBA loan program can be found on the SBA's website.

Key takeaway: There are several types of SBA loans you can apply for, including long-term fixed-rate loans, microloans and disaster loans.

What can SBA loans be used for?

Most commonly, SBA loans are used to purchase or improve real estate or equipment. However, funds can also be used to make payroll, finance exports, add inventory, or provide working capital. Each SBA loan program stipulates how funds can be used.

SBA loans, however, cannot be used speculation, including:

  • Floor-plan financing, such as for retailers or auto dealers
  • Real estate development or investment (like buying a rental property)
  • Lending money to other businesses or individuals

In addition, businesses in the gambling industry are not eligible.

Key takeaway: There is a lot of flexibility in what SBA loans can be used for. They can be used to purchase real estate, pay employees, increase payroll or add working capital.

What are the pros and cons of SBA loans?

The benefits of an SBA loan are that:

  • Credit score requirements are lower with SBA loans versus the standards for conventional business loans.
  • SBA loans typically have lower interest rates than other types of loans.
  • The minimum down payment is 10%.
  • An SBA loan can last 10 to 25 years – longer than many traditional business term loans.
  • Business owners can work with local lenders to get funding.

The downsides of funding from the SBA include:

  • It can take 60 to 90 days to close on the loan – much longer than loans from an alternative lender.
  • Your business must be operating for at least two years to qualify.
  • A personal guaranty is required from all partners who own 20% or more of the business.
  • A guaranty fee is charged for the portion of the loan being guaranteed by the SBA.

Key takeaway: The benefits of SBA loans are that they have lower interest rates and credit score requirements than traditional loans. However, SBA loans can take a long time to obtain, and you need to have been in business for a substantial length of time.

What you'll need to apply

When applying for an SBA loan, you'll need to fill out forms and provide supporting documents for the specific loan you're trying to get. The following items are usually required:

  • Personal background and financial statements
  • Business financial statements
  • Profit-and-loss statement (three years)
  • List of debts
  • Projected financial statements
  • Business certificate/license
  • Income tax returns
  • Résumés for key team members
  • Business overview and history
  • Business lease

The SBA also advises small businesses applying for a loan to answer several questions, including:

  • Why are you applying for this loan?
  • How will the loan proceeds be used?
  • What assets need to be purchased, and who are your suppliers?
  • What other business debt do you have, and who are your creditors?
  • Who are the members of your management team?

Key takeaway: There are several key documents needed when applying for an SBA loan, including financial statements, profit and loss statements, existing debts owed and previous tax returns.

Why your business plan matters

Whether you're a new startup or an established company, you have a higher chance of having your application approved if you have a well-written business plan.

"The business plan not only is the road map that will guide the business from planning to startup to (hopefully) success, but also will show any potential lender that the potential business owner does have a clear view and understanding of the business, how to run it and, most importantly, how the loan will be repaid," David Hall, a public affairs specialist with the SBA in Washington, D.C., said in an email interview with Business News Daily.

Gaston agreed, noting that lenders want to know how knowledgeable you are about your business and the market.

"The concept may be great, but what the lender is looking for is that the individual is driven, capable and determined," Gaston said. "You really need to understand what you are doing every step of the way and be able to convey that to the lender during the application process."

Hall also recommended that business owners take full advantage of the business planning resources offered by the SBA and its partners, such as SCORESBDCs (Small Business Development Centers) and WBCs (Women Business Centers).

Key takeaway: To improve your chances of being approved for an SBA loan, you need a well-written business plan that outlines how your business is run, the current market landscape and how the loan will be repaid.

Finding a lender

While Gaston acknowledged that applying for an SBA loan is a prolonged process, working with a lender that has experience can make that process a lot easier, he said. To find experienced SBA lenders in your area, Gaston recommended talking to other small business owners in your area and looking for a lender using the SBA's Lender Match tool on its website.

Key takeaway: You can search for SBA lenders in your area on the SBA website.

Additional reporting by Dock Treece and Elizabeth Palermo.

Image Credit: Kerkez / Getty Images
Marci Martin
Marci Martin
Business News Daily Contributing Writer
With an associate's degree in business management and nearly 20 years in senior management positions, Marci brings a real-life perspective to her articles about business and leadership. She began freelancing in 2012 and became a contributing writer for Business News Daily and business.com in 2015.