SBA Loans

7a

Without a doubt, Small Business Administration loans are one of the best ways to finance your small business. They’re guaranteed by the federal agency, which allows lenders to offer them with flexible terms and low rates. Getting one can help you grow your business without taking on possibly crippling debt.

SBA loans, as 7(a) loans are also known, are the federal agency’s most popular type of financing, but they’re not the only loans available.

There’s one big downside: It can be tough to get a loan from the SBA. The SBA’s requirements are stringent, and applicants must also meet the underwriting criteria of the bank providing the SBA loan. On top of that, the application is rigorous, funding can take months, and certain types of small businesses aren’t eligible. For these reasons, some entrepreneurs have grown disillusioned.

“I swore never to do it again,” says Donny Seyfer, owner of Seyfer Automotive in Wheat Ridge, Colorado. “It was just pulling teeth.”

Still, low annual percentage rates make the SBA program one of the smartest ways to fund your company.

504

Fees: 504 SBA loan fees are usually about 3% of the loan amount—and can sometimes be financed with the loan.

Also, be aware that you’ll need to put around 10% of your purchase down to secure 504 SBA financing.

Interest: The SBA’s 504 loan program is one of the most complicated financing products out there.

We’ll give you the short and long of it.

The short story: You can probably expect an interest rate of 5 – 6% on your loan. You won’t know the exact rate until roughly 45 days after the fact, though.

The long story, in case you’re curious: The 504 loan program involves two individual loans—one from a bank (which is 50% of the loan) and one facilitated by a Certified Development Corporation (which is usually 40% of the loan). The latter gets grouped together when all CDCs pool their projects, and through underwriters, auction the pool to investors.

On the one hand, that means you don’t get to know the exact rate until the sale of the pool, which is approximately 45 days after you’ve closed with the CDC.

On the other, historically speaking, you’re pretty set for a pool rate between 4 – 5%. When blended with your bank rate, the total should come out to around 5 – 6%.

Hey—we told you it was complicated. But you don’t really need to worry: it all gets handled automatically.

Repayment: You’ll find maturity terms of 10 and 20 years with the 504 SBA loan program.

Why SBA Loans Rock and How to Get One

Without a doubt, Small Business Administration loans are one of the best ways to finance your small business. They’re guaranteed by the federal agency, which allows lenders to offer them with flexible terms and low rates. Getting one can help you grow your business without taking on possibly crippling debt.

SBA loans, as 7(a) loans are also known, are the federal agency’s most popular type of financing, but they’re not the only loans available.

There’s one big downside: It can be tough to get a loan from the SBA. The SBA’s requirements are stringent, and applicants must also meet the underwriting criteria of the bank providing the SBA loan. On top of that, the application is rigorous, funding can take months, and certain types of small businesses aren’t eligible. For these reasons, some entrepreneurs have grown disillusioned.

“I swore never to do it again,” says Donny Seyfer, owner of Seyfer Automotive in Wheat Ridge, Colorado. “It was just pulling teeth.”

Still, low annual percentage rates make the SBA program one of the smartest ways to fund your company.

In this article, we answer these questions:

What is an SBA loan?
How do I apply for an SBA loan?
Where can I find SBA loans online, and why would I want to?
When is applying for an SBA loan not worth the time?
What are other types of SBA loans?

What is an SBA loan?

SBA loans are small-business loans guaranteed by the SBA and issued by participating lenders, mostly banks.

The SBA can guarantee up to 85% of loans for $150,000 or less and 75% of loans for more than $150,000. The agency says its average loan amount was $371,628 in 2015. The program’s maximum loan amount is $5 million.

If you’re looking to open a new location, hire employees or refinance an existing loan, SBA loans are a great financing option. SBA loan rates and terms typically are more manageable than those for other types of financing.

Interest rates: Participating lenders set the final interest rate in keeping with SBA rules, which are based on the prime rate, plus an additional markup rate known as the spread.

• If your loan is more than $50,000 and the term is shorter than seven years, the rate is based on the prime rate with a maximum spread of 2.25%. As of December 2016, that meant a maximum interest rate of 6%.

• If your loan is more than $50,000 and the term is seven years or more, the maximum spread is 2.75%. As of December 2016, the maximum interest rate was 6.5%.

Note that APR differs from the interest rate: It’s a percentage that includes the interest rate as well as all loan fees.

A couple of examples: SmartBiz, an online lender that specializes in SBA loans, offers APRs of 8% to 8.7%. Live Oak Bank, a nontraditional bank, offers SBA loans with APRs of 5.75% to 7.75%.

In contrast, major online small-business lenders offer financing with annual percentage rates that can be as high as the triple digits.

Repayment terms: Aside from the low APR, you’ll have more time to repay an SBA loan.

The term depends on how you plan to use the money, according to the SBA:

• If you use it for working capital or daily operations, you have seven years to pay it back.

• If you use it to buy new equipment, you have up to 10 years.

• If you use it for a real estate purchases, the terms go up to 25 years.

A longer loan term means a lower interest rate and lower regular payments. That means you’ll have more money available for other business needs.

SBA loans also can provide a way out of a damaging financial situation. Terry Trumbull, owner and president of Trumbull Meats in Hamburg, Michigan, got a SBA loan that allowed him to refinance much more burdensome financing. It was “killing me,” he says, and the SBA loan provided relief. But he did have to wait a couple of months and deal with many requirements, he says.

How do you apply for an SBA loan?

The best place to start is the SBA website, which includes a loan application checklist. Use this to gather your documents, including your tax returns and business records.

Here are some of the documents you’ll need to gather before applying:

• SBA’s borrower information form.

• Statement of personal history.

• Personal financial statement.

• Personal income tax returns (previous three years).

• Business tax returns (previous three years).

• Business certificate/license.

• Business lease.

• Loan application history.

Then ask your local SBA district office for the names of a few approved lenders. The agency also recently set up the SBA LINC tool to match potential borrowers with lenders. Banks follow SBA guidelines but use their own underwriting criteria to evaluate loan applications.

The SBA has an additional financing program called SBA Express, which aims to respond to loan applications within 36 hours. If your credit and small-business finances are in excellent shape, the wait may be shorter. The maximum amount for this type of financing is $350,000, and the maximum amount the SBA could guarantee is 50%.

If you’re applying through a traditional bank, it helps to work with a lender that has a track record of processing SBA loans. Patty Staples, chief credit officer at California Business Bank, suggests you ask your potential lender:

• How many SBA loans do you make?

• How often do you fund SBA loans?

• How experienced is your staff in the process?

• What is the dollar range of the loans you make?

In general, a bank with multiple years of experience processing SBA loans would be able to provide you guidance, including letting you know your chances of being approved.

“If you choose the right bank,” she says, “the lending staff will facilitate that process and make it as easy as possible.”

Where can I find SBA loans online, and why would I want to?

Banks are still the most popular place to get SBA loans, but you can now access SBA financing through your computer. Online platforms have made applying for SBA loans easier and faster.

We compare two top options: SmartBiz, an online lender based in San Francisco, and Live Oak Bank, a nontraditional bank based in Wilmington, North Carolina.

You must have an established business and solid personal and business finances to qualify.

Live Oak Bank is second only to Wells Fargo in dollar volume loaned through the SBA program. Its APRs range from 5.75% to 7.75%. Loan amounts range from $75,000 to $5 million, but the average in 2015 was $1.1 million.

To qualify, your business must be in one of the 13 industries the bank funds: agriculture/poultry, dental, family entertainment, funeral service, hotels, insurance, investment advisory, medical, ophthalmic, pharmacy, self-storage, veterinary and wine/craft beverage. You can read more in our Live Oak Bank review.

If you’re looking for SBA loans of less than $350,000, SmartBiz is a good choice. SmartBiz works with partner banks to underwrite SBA loans of $30,000 to $350,000, with APRs of 8% to 8.7%. Read more in our SmartBiz review.

When is applying for an SBA loan not worth the time?

Applying for an SBA loan can take weeks, even months.

Your chances of being approved are greater if your personal and business finances are in good shape. “If a company has been in business for at least two years, is profitable and has cash flow to support loan payments, it’s likely a good candidate for an SBA loan,” SmartBiz CEO Evan Singer says.

But if your business is struggling, an SBA loan is probably out of the question. And if it falls into any of the prohibited categories the SBA spells out on its site, don’t bother applying. For example, SBA loans aren’t for your company if it’s in the lending business, presents live performances “of an indecent sexual nature” or earns more than one-third of its gross revenue from legal gambling activities.

Remember, applying for an SBA loan is a time-consuming process that might take your focus away from running your company. So for some small-business owners, especially those just starting out, it might not be worth the hassle.

What are other types of SBA loans?

Loan type What you need to know
7(a) loan program (SBA’s flagship loan program)
  • Federally guaranteed term loans of up to $5 million.
  • Funds for working capital, expansion, equipment purchases.
  • Processed through banks, credit unions, specialized lenders.
504 loan program
  • Federally guaranteed loans of up to $5 million.
  • Funds for buying land, machinery, facilities.
  • Processed through private sector lenders and nonprofits.
Microloans
  • Loans of up to $50,000.
  • Funds for working capital, inventory, equipment, starting a business.
  • Processed through community-based nonprofits.
Economic Injury Disaster loans
  • Loans of up to $2 million.
  • Funds for small-business owners affected by natural disasters and other emergencies.
  • Processed through the SBA.

MICROLOANS

The SBA offers microloans of up to $50,000 with a maximum term of six years. You can use the loans, which are administered through community nonprofits, for such business needs as working capital, inventory or supplies, and machinery or equipment. You can’t use the funds to pay an existing debt or buy real estate.

REAL ESTATE AND EQUIPMENT LOANS

The SBA guarantees loans of up to $5 million to help small-business owners with major investments. These include buying land, machinery and equipment and building new facilities. Each loan is structured with a private sector lender, such as a bank or a credit union, covering 50% of the project cost and the borrower covering 10%. A certified development company, which is a nonprofit corporation that addresses economic development issues in a community, covers 40% of the cost, and the SBA serves as guarantor.

DISASTER LOANS

• The SBA also offers loans that help small-business owners affected by natural disasters and other kinds of emergencies.

• Home and personal property loans are available for individuals, including small-business owners, in a declared disaster area.

• Business physical disaster loans are available to small-business owners in declared disaster areas who suffer property damage.

• Economic Injury Disaster loans of up to $2 million are available to entrepreneurs in declared disaster areas who are injured economically by the calamity.

• Military reservists economic recovery loans are available to small businesses with an essential employee who is a military reservist called to active duty. These small businesses can apply for loans intended to help ease their operating expenses.

• All loans are processed through the SBA.