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Your Guide to SBA Loans and How They Work

Your Guide to SBA Loans and How They Work
Lantern
LanternUpdated February 9, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
When it comes time to finance your small business, you have many options from certain types of personal loans and a business line of credit, to equipment financing and small business loans. You may also consider using a combination of various financing options to achieve your business goals.One option that may be a good fit for your small business is an SBA loan, which is guaranteed by the U.S. Small Business Administration (SBA). With an SBA loan, borrowers can work towards their business goals, whether they’re a small business startup, or looking to expand.In addition to their traditional offerings, the SBA has provided coronavirus loan resources to help small businesses during this unprecedented COVID-19 pandemic. The SBA offers a number of funding options established in the CARES Act, including the Paycheck Protection Program (PPP) and SBA debt relief. Visit the SBA website to learn more about coronavirus relief options.Whether you’re just starting out, or need extra support, SBA loans may be a great fit for you. Let’s take a look at what an SBA loan is and how it works. 

What Is an SBA Loan?

An SBA loan is one guaranteed by the Small Business Administration (SBA) and offered by approved lenders such as banks, micro-lending institutions, and private lending companies. The SBA itself does not lend money directly but does help reduce risk to lending partners. With these types of loans, small business owners usually enjoy competitive rates and SBA loan terms, counseling, and education opportunities. To begin the process of applying for an SBA loan, you’ll need to find an SBA-approved lender; lenders will differ depending on which type of SBA loan you’re applying for. The lender will then assess your eligibility according to SBA requirements. If approved, you’ll receive a loan with a percentage of the amount guaranteed by the SBA. This means that if you default on the loan, the SBA guarantees repayment to the lender, making SBA loans relatively low-risk—and appealing—for lenders and borrowers alike.SBA loan eligibility requirements vary depending on the lender and the type of loan program. A few things lenders consider when assessing a potential borrower are:
  • How does the business receive income?
  • What is the character of its ownership?
  • Where does the business operate?
  • Does the business meet size standards?
  • Has the business received funds from another financial lender?
Additionally, lenders will look at a potential borrower’s creditworthiness. Personal credit and business credit (if the applicant has established it) are assessed to ensure that the potential borrower is able to responsibly repay the loan. It may be possible for those with less-than-optimal credit to qualify for startup funding with certain SBA loan programs and lenders. “Bad credit” business loans are offered by many lenders but typically carry higher interest rates because there is higher risk involved. 

SBA Loan Terms, Amounts, and Rates

SBA loans are generally designed to provide funding for small businesses over longer periods of time. However, the SBA loan terms, amount, and interest rates you receive will ultimately depend on your ability to repay the loan. While there are several different types of SBA financing programs, SBA 7(a) loans are the most common and include the following loan types:
  • Standard 
  • Small
  • Express
  • CAPLines
  • Export Working Capital
  • Export Express
  • International Trade
The information below is meant to give you a general understanding of typical SBA loan terms and characteristics.Recommended: SBA 504 vs. 7(a) Loans: What's the Difference?

SBA Loan Terms

Specific business loan terms under the SBA will depend on the lender and eligibility, but they generally fall between 5 and 25 years. Many SBA loan terms are based on the funding’s use. If you are using a standard 7(a) loan, 7(a) small loan, SBA Express loan, or Export Express loan for:
  • Working capital, the maximum maturity is 10 years. 
  • Equipment, the maximum maturity is 10 years as long as it does not exceed the life of the equipment.
  • Inventory, the maximum maturity is 10 years.
  • Real estate, the maximum maturity is 25 years.
Certain SBA loans have special terms that may not follow the above criteria. For:
  • 504 loans, the loan terms can be 10, 20, or 25 years. 
  • Microloans, the maximum maturity is 6 years. 
  • All CAPLine loans except the Builders CAPLine, the maximum maturity is 10 years.
  • Builders CAPLine loans, the maximum maturity is 5 years.
  • International Trade, the maximum maturity is 25 years. 
  • Export Working Capital, the maximum maturity is typically 1 year, but can be up to 3. 
Finally, the SBA offers longer maximum repayment periods on disaster loans: 
  • Economic Injury Disaster Loan (EIDL), the maximum maturity is 30 years. 
  • Business Physical Disaster Loan, the maximum maturity is 30 years.
  • Military Reservists Economic Injury Loan, the maximum maturity is 30 years.

SBA Loan Amounts

SBA financing programs offer a variety of loan amounts for small business owners. The exact amount each borrower is approved for depends on the lender and eligibility. Below are the maximum loan amounts for different types of SBA loan programs:
  • Standard 7(a): $5 million
  • 7(a) Small loan: $350,000
  • SBA Express: $350,000
  • Export Express: $500,000
  • Export Working Capital: $5 million
  • International Trade: $5 million
  • 504 loan: Generally $5 million (qualified energy-efficient or manufacturing projects may receive multiple loans up to $5.5 million)
  • Microloan: $50,000
  • CAPLine loan: $5 million 
  • All disaster loans: $2 million

SBA Interest Rates

Ultimately, interest rates on SBA loans will be negotiated between the borrower and lender. The SBA provides some guidelines and rules around interest rates, which vary depending on the type of loan:
  • All 7(a) loans: Interest rates vary depending on the type of loan and what the daily peg rate is.
  • 504 loan: Interest rates are below-market and fixed for the life of the loan.
  • Microloan: Interest rates are typically between 8% and 13%.
  • Disaster loans: Interest rates are determined by law and each type of disaster loan has its own criteria:
    • Economic Injury Disaster Loan (EIDL): Maximum interest rate is 4%. 
    • Business Physical Disaster Loan: Maximum interest rate is 4% if you aren’t able to obtain credit elsewhere; otherwise, 8% maximum.
    • Military Reservists Economic Injury Disaster Loan (MREIDL): Maximum interest rate is 4%.

Who Offers SBA Loans?

Curious about who offers SBA loans? This sampling of lenders came from the Google search query “Banks who offer SBA loans”:
LenderMinimum Time in BusinessCredit Score RequiredMax Loan Amount
Celtic Bank2 years or moreA score of 700 and above is preferable, but Celtic will evaluate other factors to determine eligibility7(a): $350,001 to $5 million. 504: Up to $10 million
HuntingtonThe SBA does not set a minimum time in business but Huntington might. Contact Huntington directly for details.Typically good credit is required for SBA loans. Contact Huntington directly for more information.Up to $5 million
TD BankThe SBA does not set a minimum time in business but TD Bank might. Contact TD Bank directly for details.Typically good credit is required for SBA loans. Contact TD bank directly for more information.7(a): Up to $5 million for 7(a) loans. 504: 1st mortgage – no maximum loan amount. 2nd mortgage – maximum of $5 million –$5.5 million depending on industry
U.S. BankCan be less than 2 yearsTypically good credit is required for SBA loans. Scores 700 and above are considered “good.”7(a): Up to $5 million for 7(a) loans 504: Up to $12.375 million
Rates start at: 
  • 7(a): Fixed or variable. Varies by lender and pegged to the prime rate, LIBOR rate, or peg rate
  • 504: Correlated with the current market rate for 5-year and 10-year U.S. Treasury issues.
All information in the grid above was accessed 1/7/21.

Different Types of SBA Loans

Understanding what an SBA loan is and how to apply for a business loan can help you prepare to choose the right financing for your small business. Depending on the type of business you have and its goals, certain SBA financing options may be better suited for your needs over others. SBA loan types include:
  • 7(a) loan programs
  • 504 loan program
  • Microloans
  • SBA disaster loans

SBA 7(a) Loans

If you own a small business and you’re ready to open a new location, refinance or consolidate other loans, hire staff, or need to upgrade equipment, SBA 7(a) loans can be a great way to obtain manageable financing. Compared to other forms of financing, like credit cards or a business line of credit, SBA loans may offer more favorable terms, rates, and down payments for qualified borrowers. That said, they can also be more difficult to qualify for, especially if your business is young or your credit ratings are sub-par. For small business owners who need financing quickly, the SBA offers Express loans, which feature a turnaround time of 36 hours. Keep in mind, SBA Express loans do have a lower maximum loan amount ($350,000) compared to standard 7(a) loans. You may also want to consider CAPLines, which are a type of SBA financing designed to meet your business’ short-term funding needs with options for revolving financing. If you’re wondering how to apply for an SBA loan, the following sections go over details and tips to help you navigate the process.

Eligibility Requirements

To qualify for an SBA 7(a) loan, a borrower needs to meet the following minimum requirements:
  • Be a for-profit business
  • Meet SBA size standards
  • Operate or propose to do business in the United States or its territories
  • Have ownership that has invested equity (time and money) into the business
  • Able to repay the loan
  • Already exhausted all other financing options

How to apply for an SBA 7(a) Loan 

The following loan application checklist can help you get a successful start on applying for your SBA 7(a) loan program.1. Fill out the SBA Loan Application. If your business is a corporation, stamp the corporate seal on your application.2. Fill out the Personal Background and Financial Statement, which further assesses your eligibility. 3. If you answered “Yes” to Questions 2 or 3 on the SBA Loan Application, fill out a Statement of Personal History. 4. While not required by the SBA, lenders may require a completed Personal Financial Statement upon application.5. Prepare the following business financial statements:
  • Year-end Profit and Loss (P&L) statement for the last 3 years
  • Year-end balance sheet for the last three years with a detailed debt schedule
  • Reconciliation of net worth
  • Interim balance sheet
  • Interim Profit & Loss statements
  • Projected financial statements with month-to-month cash flow projections for span of at least 1 year.
6. Gather: 
  • Your original business certificate or license.
  • The signed personal and business federal income tax returns from the past 3 years for all principal owners of the business.
  • Personal resumes from all principal owners of the business.
  • Your business lease or obtain a note from your landlord.
  • Records of past loans your small business has applied for
7. Write up: 
  • A business overview, detailing the business’ past, purpose, and what an SBA loan is needed for.
  • A list of ownership and affiliations to include names and addresses of any subsidiaries or affiliates. Also include concerns in which you hold interests or affiliations through stocks, franchises, or potential mergers.
8. If the SBA loan is for purchasing a business, include the following information:
  • Current balance sheet and P&L for the business to be purchased
  • Previous 2 years of federal income tax returns
  • Proposed Bill of Sale including Terms of Sale
  • Asking price with schedule of inventory, machinery and equipment, furniture and fixtures
Once you have all of the necessary documents and information, you can search for lenders using the SBA’s Lender Match portal. 

504 Loans

The 504 Loan Program is SBA financing specifically geared towards those who need long-term business loans to acquire fixed assets to expand and modernize their business. They are made available through Certified Development Companies (CDCs) who are SBA-approved, community-based partners.These types of loans have a different structure than other SBA loans with the SBA providing 40% of total projects costs, the lender covering 50%, and the borrower contributing 10%. These funds can be used for the following types of projects:
  • Purchasing existing buildings 
  • Purchasing or improving land
  • Constructing new buildings
  • Renovating or modernizing existing buildings
  • Purchasing long-term machinery, furniture, or equipment
  • Refinancing debt connected to the expansion of your business
The 504 loan program offers shorter and longer loan terms from 10 to 20 years at fixed interest rates.

Eligibility Requirements

To be eligible for a 504 loan, potential borrowers need to meet the following minimum requirements:
  • Be a for profit business
  • Meet SBA size standards
  • Cannot exceed $15 million in tangible net worth
  • Cannot have an average net income over $5 million in the 2 years prior to application

How to Apply

The first step to applying for a 504 loan is locating your local CDC using the SBA’s CDC finder. From there, you will work with a CDC member to complete and submit your 504 loan application, as well as go through prequalification for the 504 loan. If you have additional questions about 504 loans, contact your local SBA district office for assistance.

Microloans

Microloans are offered through nonprofit lending organizations (Intermediaries) to help small businesses and certain not-for-profit childcare centers. SBA microloans provide funding up to $50,000 for the purchase of:
  • Machinery
  • Equipment
  • Fixtures and furniture
  • Inventory or supplies
  • Working capital
Microloans cannot be used to pay off existing debt or buy real estate.Terms for microloans are short since the financing amount is quite low. SBA loan terms for microloans do not exceed 6 years and are often less than that depending on the loan amount. Interest rates vary depending on the lender, but are usually between 8% and 13%.

Eligibility Requirements 

To be eligible for a microloan, you will typically be required to provide the Intermediary with some form of collateral. Additionally, potential microborrowers must:
  • Be a newly established or growing for-profit business, or non-profit childcare center.
  • Be located in the Intermediary’s approved region of operation.
  • Meet the SBA’s size requirements.
  • Never have been debarred from receiving federal funding, with verification via a completed SBA Form 1624.
  • Not have a business owner (owns 50% or more) who is more than 60 days late on child support payments.

How to Apply

To apply for an SBA microloan, you’ll need to contact your local SBA district office for assistance finding an Intermediary in your area. You will then fill out an SBA microloan application and may be required to meet certain training or planning requirements before your loan application is considered.Recommended: Microloans for Women-Owned Small Businesses

Disaster Loans 

If your home or business has been affected by a recent disaster, the SBA offers low-interest disaster loans to help businesses recover. There are three main types of SBA disaster loans as they directly relate to small businesses:
  • Business Physical Disaster Loans: SBA financing designed to help businesses in declared disaster areas recover from physical damage to their property. These types of loans can be used to repair or replace:
    • Machinery
    • Inventory
    • Real estate
    • Business assets
  • Economic Injury Disaster Loans (EIDL): SBA loans designed to help businesses in declared disaster areas that have suffered substantial financial loss.
  • Military Reservists Economic Injury Disaster Loans (MREDL): SBA funding for small businesses who have suffered financially because an essential employee was called up for service. 

Eligibility Requirements

Disaster SBA loans are offered to businesses, renters, private nonprofit organizations, and homeowners who operate or reside in regions affected by declared disasters. To be eligible for a disaster loan, you must:The SBA also has a Disaster Loan Assistance website where you can apply, check declared disasters, and check the status of your application.

How to Apply 

You will need the following information to complete the SBA's online application for disaster loans:
  • Contact information for all applicants
  • Social security numbers for all applicants
  • FEMA registration number
  • Deed or lease information
  • Insurance information
  • Financial information (e.g. income, account balances, and monthly expenses)
  • Employer Identification Number (EIN) if you are a business applicant
  • Signed and dated IRS Form 4506-T (permission for IRS to provide tax information to SBA)
You can also apply by mail or in person at a Disaster Recovery Center.

CAPLines

CAPLines are part of the SBA 7(a) loan program. They offer up to $5 million and are designed to help small businesses with short-term business loans that meet cyclical working capital needs. To apply for a CAPLine, follow the process laid out for 7(a) loans above.Under the CAPLine name there are four specific loan programs small business owners like you can access:

Contract Loan

Contract loans offer short-term financing to contractors and subcontractors who cannot access funding elsewhere. These types of loans have the option to be revolving. Contract loans can be used to fund purchase orders, contracts, or subcontracts which may include administrative expenses and general overhead. With this type of loan, SBA loan payments are made when payment for the activity is made to the business. Maximum loan amount: Up to $5 million. You can also use a single Contract CAPLine loan to fund single or multiple projects. Loan term: 10 years maximum.Eligibility: Borrowers need to meet eligibility requirements for standard SBA 7(a) loans and demonstrate:
  • The ability to operate profitably based on past completion of contracts.
  • The ability to bid and perform the work required by the contract.
  • Financial capacity and expertise to execute the contract on time and profitably.

Seasonal Lines of Credit

Seasonal lines of credit can be used to finance seasonal increases of accounts receivable, inventory, or labor demand for your small business. SBA loan payments are paid at the end of the season for which the loan was needed.Maximum loan amount: Up to $5 million with a max guarantee of $3.75 million. Loan amounts are determined by cash flow projections and correlate with the costs associated with seasonal increases in inventory or receivables. Loan term: 10 years maximum.Eligibility: Borrowers need to meet eligibility for standard SBA 7(a) requirements and:
  • Have been in operation for at least 1 calendar year.
  • Be able to show a definite pattern of seasonal activity.

Builders Line

These short-term SBA loans are for direct expenses related to construction or “substantial” renovation costs for  eligible projects, such as residential or commercial buildings for resale. Land costs may also be eligible if they don’t exceed 20% of the total project cost. Builders lines have the option to be revolving. Repayment for a project’s funding is required within 36 months of the project’s completion, or at the time of sale (whichever is sooner). Maximum loan amount: $5 million maximum.Loan term: 5 years maximum. Eligibility: Borrowers need to meet eligibility requirements for standard SBA 7(a) loans and:
  • Be construction contractors or homebuilders who have managerial and technical ability.
  • Be performing the construction work or manage alongside at least one supervisory employee on the job site over the course of construction.
  • Plan for “prompt and significant” renovations.
  • Show prior successful performance in bidding and finishing construction/renovation on a similar project.

Working Capital Line of Credit

Working capital lines of credit are revolving, short-term financing options for working capital and operating needs. This type of SBA loan cannot be used to pay delinquent withholding taxes, trust funds, or floor planning.Maximum loan amount: $5 million maximum.Loan term: 10 years maximum.Eligibility: Borrowers need to meet the eligibility requirements for standard SBA 7(a) loans and must generate accounts receivable or have inventory.

Export Working Capital Program

Since many banks in the U.S. don’t offer working capital advances for export orders, receivables, or letters of credit, some small businesses don’t have the needed capital to support export sales. With an SBA Export Working Capital loan, exporters have more flexibility to negotiate export payment terms.With an SBA Export Working Capital loan, lenders are provided with a 90% guarantee from the SBA, which acts as a credit enhancement. This allows lenders to make export working capital available. In partnership with SBA Senior International Credit Officers, the SBA can deliver these loans. These officers are experts in trade finance and can offer in-depth understanding about the SBA’s programs and other relevant information.

Guaranty Coverage, Rates, and Terms

Guaranty coverage for export loans are as follows:
  • Maximum loan amount is $5,000,000 
  • 90% of principal and accrued interest up to 120 days
  • Low guarantee fee of ¼% of the guaranteed portion for loans with maturities of 12 months or less
  • Loan maturities are generally for 12 months or less
The SBA will not subsidize or establish interest rates for export loans. Rates can be fixed or variable and are negotiated between the borrower and the lender.

Eligibility Requirements

To be eligible for an SBA Export Working Capital loan, borrowers need to:
  • Meet the standard SBA requirements for 7(a) loans.
  • Be a business that engages in export development.
  • Have at least 12 months of operating experience prior to applying (which can be waived with demonstrated expertise and previous business experience).

How to Apply

SBA loan applications for export loans are made directly to your lender. To get more information on these specific types of loans and determine if your small business is eligible, contact a U.S. Export Assistance Center (USEAC).If you own a small business and are wondering how business loans work, starting with SBA loans may be a great option. While there are alternatives, an SBA loan provides small business owners with competitive rates and terms, and offers various loan programs to suit the unique needs of different types of businesses and communities. Ultimately, you have to assess your needs, timing, business type, and alternative funding before applying, but here are some pros and cons of SBA loans for you to consider.

Pros of SBA Financing

The following list are reasons you may want to consider pursuing an SBA loan:
  • They are designed specifically for small businesses, including those owned by women, veterans, and underserved communities.
  • Secured loans have a percentage of each loan guaranteed by the SBA to reduce risks to lenders and provide potential borrowers with relatively favorable terms and rates.
  • You can use funds for a variety of business purposes from start-up costs and inventory, to real estate and working capital. See individual loan conditions to learn more.
  • May offer more competitive interest rates than a non-SBA business loan.

Cons of Choosing an SBA Loan

While there are many positive aspects of SBA loans, there a few cons to consider before applying: 
  • Application and approval processes can be longer than non-SBA loans because SBA financing is highly competitive and has strict eligibility requirements.
  • You may need higher personal and/or business credit to qualify when compared to other online business loans. While having a lower credit score doesn’t necessarily disqualify you for an SBA loan, the minimum credit score generally falls around 620-640, but this will vary by lender.
  • Some programs have restrictions on how you use funds.
To receive further information about specific SBA loan programs and to check if there’s one that is right for your small business, you can use the SBA assistance locator to find Small Business Development Centers in your area.

Alternative Lending Options

If you’d like more options for small business loans, there are a number of alternatives that may be useful:

Save Time by Comparing Your Options in One Place

Running a business can be rewarding, but it also comes with challenges. When you need financing, it can be overwhelming trying to find small business loans or additional funding. At Lantern Credit, we want to help simplify the process so you can have more time to manage your business. By filling out one simple form, you are matched to small business financing options for your business’ individual needs. Whether your business is brand new or growing rapidly, we’re here to provide resources to help you achieve your goals. 
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.SOLC20006

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