SBA Loans – Everything You Need to Know 2023
September 17, 2023
- by iCapital Funding
If you’re a small business owner looking for loan options or an entrepreneur looking to begin a new business, then you’ve likely come across the term ‘SBA loan’. The U.S. Small Business Administration (SBA) offers various forms of business financing designed to assist business owners in acquiring necessary financing for their endeavors. But what exactly are SBA loans, and how can they benefit you?
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Understanding SBA Loans
SBA loans are not directly given by the Small Business Administration. Instead, the SBA guarantees a portion of the loan, incentivizing lenders to offer loans to businesses they might otherwise view as too risky. With the backing of the federal government, lenders – including banks, credit unions, and other SBA-approved institutions – can offer favorable terms to borrowers.
What Makes You Eligible for an SBA Loan?
Eligibility requirements differ slightly based on the specific SBA loan program. However, four primary factors are considered:
Nature of the Business: Your business must operate for profit and fit within the size standards set by the SBA.
Business Needs: Loans must be for a sound business purpose, such as working capital, equipment purchases, or real estate.
Business Location: The business must operate in the U.S. or its territories.
Investment: Business owners should have invested time or money into their business.
Decoding the SBA Loan Types
There are various SBA loan programs catering to different business needs:
SBA 7(a) Loans: The most popular SBA loan program, offering a maximum loan amount of $5 million. It’s versatile, catering to various business purposes from refinancing to purchasing real estate.
SBA Express Loans: A subtype of the 7(a) loans, these offer faster approval processes but lower maximum amounts.
CDC/504 Loans: Also known as SBA 504 loans, they focus on fixed assets like real estate or large equipment. A partnership between the borrower, an SBA-approved Certified Development Company (CDC), and a lender forms the loan’s structure.
SBA Microloans: As the name suggests, these are smaller loans (up to $50,000) given to startups and entrepreneurs, often through nonprofit lending organizations.
SBA Disaster Loans: For businesses affected by declared disasters, these loans provide low interest rates and favorable repayment terms to help businesses get back on their feet.
Crucial Points to Note Before Applying
Loan Amount: The maximum amount you can borrow depends on the type of SBA loan, but for the popular SBA 7(a), it’s $5 million.
Interest Rates: Generally, SBA loan interest rates are based on the prime rate plus a markup. They tend to be competitive, often lower than traditional bank loans.
Down Payment: When applicable, the down payment varies but expect anywhere between 10% to 30% for most SBA loans.
Application Process: Lenders will require a range of documents, including your business plan, financial statements, tax returns, and resumes of key business owners.
Timing: SBAs are notoriously slow. Be prepared to wait 60-90 days or more.
Benefits of SBA Loans
Flexible Repayment Terms: Depending on the loan type and use, repayment terms can range from short-term to up to 25 years for real estate loans.
Lower Down Payments: When applicable, Business owners should expect to pay an SBA loan down payment of 10% to 30%. While this may sound like a lot, regular business loans can go even higher.
Low Interest Rates: Competitive rates can ease monthly payments for borrowers.
While considering the benefits of an SBA small business loan, it’s worthwhile to note a few of the drawbacks as well.
Personal Guarantees: SBA loans typically mandate personal guarantees from individuals who hold over 20% ownership in a business.
Collateral: Lenders may request real estate collateral for SBA loans. Even with the SBA’s guarantee lessening the risk, many SBA affiliated lenders still require that borrowers offer real estate assets as security as well as provide a personal commitment to repayment.
Credit History: Unfortunately, credit score definitely comes into play when qualifying with SBA lenders. Underwriting will look at your SBA loan application but those with prior defaults, tax liens, or even a criminal record will have a hard time getting approved for large or small loans.
Understanding Fees and Differences
SBA loans may come with fees, which can include packaging fees, guarantee fees, origination fees, and more. It’s crucial to clarify these with your lender. When comparing SBA loans to conventional loans, the main distinction lies in the SBA’s guarantee, which often translates to better terms for borrowers.
What About Businesses That Don’t Qualify?
If your business doesn’t meet the eligibility requirements for an SBA loan or you need cash quickly, don’t despair. A great alternative to a small business loan is a merchant cash advance which offers a robust financing option, providing fast working capital based on future sales. It’s an excellent alternative for businesses needing a rapid influx of cash.
Conclusion
An SBA loan can be a game-changer for many small business owners, providing the financial backing required to grow and sustain their operations. As with any loan, it’s crucial to understand the terms, ensure you meet the eligibility criteria, and align the loan type with your business needs. For those who don’t qualify, alternative financing options like merchant cash advances can bridge the gap, ensuring businesses have access to the resources they need.
