What is an SBA loan?
You’ve probably heard your fellow business owners talk about an SBA loan. But what is an SBA loan? SBA loans are some of the most desired loans available, with some of the best repayment terms, highest capital amounts, and the lowest interest rates available. There are multiple programs under the SBA loans umbrella, which means that you can pick and SBA loan type to match your business needs.
The most important thing you should know about SBA loans is that they’re provided in partnership with the US Government’s Small Business Administration (hence, SBA). As we’ll go into in depth, the SBA doesn’t provide borrowers with capital; rather, the SBA guarantees the loan up to a certain percentage, based on the amount of capital you borrow.. That’s what enables the lenders who do facilitate these loans to offer such favorable loan terms.
We’ll talk about the different types of SBA loans, their uses, and how to qualify for SBA loans.
An overview of SBA loans
- Used for substantial investments in fixed assets or working capital
- Meant to finance the business needs of existing businesses
- For business owners with a strong track record in business success and financial responsibility
- Repaid on a set schedule of monthly payments
- Either issued as a term loan or business line of credit
- Strong credit and financial history required
- Intensive application process with a long lead time for financing
SBA Loan Qualifications
An important thing to know about the SBA is that they don’t technically require a certain credit score or financial profile to qualify. Instead, the institutional partners who provide the actual capital (often traditional banks) set requirements for borrowers, since they’re the ones assuming the risk. Therefore, qualification requirements for SBA loans are generally taken as average or aggregates of information from past qualified applicants.
One thing they do have in common, however, is that these stats are strong. You don’t need to be profitable to qualify for an SBA loan, but your financial profile should be healthy, and you should have some experience and growth under your belt.
In general, here is what you should expect to find for SBA loan requirements to qualify:
- $50,000 to $150,000 minimum annual revenue
- 650-675 personal credit score
- At least two years in business
- Positive cash flow
How to apply for an SBA loan
Applications for SBA loans are generally completed in conjunction with the lender if you are going directly to a financial institution, or in partnership with a company that matches you with a lender and helps you compile your application in advance.
Documents you need
As we’ve mentioned, there’s a lot of paperwork involved in SBA loan applications. Luckily, you don’t have to remember everything that’s involved; instead, you can use the SBA loan application checklist that the SBA furnishes.
To provide contrast, some faster-moving small business loan applications only require bank statements, tax returns, cash flow statements, and ID. But here’s what’s required in an SBA loan application:
- Application form
- Personal background and financial statement
- Business financial statements
- Profit and loss
- Financial projections
- Business licenses and ownership documentation
- Loan application history and outstanding debts
- Personal and business income
- 3 years of tax returns
- Business plan, including overview and history
- Business lease
You will find that your application includes slightly different documentation depending on which program you apply for.
How SBA loans work
SBA loans work differently than other types of business loans because of the Small Business Administration’s guarantee on these loans (in other documentation, you may see “guaranty”—it’s the same). Essentially, this means that the SBA will ensure that, depending on the amount of capital you borrow, 75% to 85% of your loan amount is covered by the SBA in the case of default.
This is important because it mitigates risk for the financial institutions—typically traditional banks, microlenders, or community development organizations. When they take a risk to give you a loan for several million dollars, for instance, they have security knowing that they’ll get at least 75% of their money back from the SBA should you not be able to pay. This lowered risk is actually passed onto you as the borrower, as lenders are able to offer better loan terms as a result of this guarantee.
Again, you won’t be borrowing money from the SBA—they’re merely there in partnership with the lending institution from whom you’ll be accessing capital.
SBA loans come in several different forms through several different programs, which we review below. Generally, however, these loans come in the form of term loans or business lines of credit. Some are working capital for general purpose use; others have specific use cases applied to them.
Additionally, SBA loans generally require collateral. A significant portion of lenders will also expect that you offer something to secure your loan. You’ll be asked to provide information on your collateral during the application process. Most SBA loans also require a personal guarantee from anyone who owns 20% or more of the business. In case of default, these guarantees only kick in if the business assets aren’t enough to cover the outstanding debt.
SBA loan rates and fees
Different SBA loans have different interest rates—but all are highly competitive compared to other business loans. Oftentimes, SBA loans have the lowest interest rates on the market, which explains why they’re so desirable.
You should expect to incur certain fees for the loan as well as provide a down payment and personal guarantee. In exchange, though, you’ll get access to longer terms and comparatively low interest rates. Here are the fees you should expect to pay with an SBA loan:
Interest fees: Unlike other loans, SBA loan interest fees are dependent on the market Prime Rate. The prime rate is generally 5 to 10%. Any additional interest is set by the lender.
Guarantee fee: The SBA also charges a guarantee fee, which is determined based on the cost of your loan. These fees range from 2 to 3.75%. Borrowers of microloans do not incur fees.
Down payment: Again, based on the principle of the loan, you’ll be required to provide a 10 to 20% deposit. You’ll also need to provide collateral. For loans under $25,000, collateral is not required.
Personal guarantee: Any business owner who owns 20% of the business or more will be required to provide a personal guarantee for the SBA loan. At least one owner must provide an “unconditional” guarantee, which means that a lender can recover 100% of the unpaid balance of the loan through personal assets in case of default. Some lenders also may require other stakeholders who own less than 20% of the business to provide a personal guarantee as well.
Types of SBA loans
Standard SBA 7(a) loan program
The SBA’s 7(a) loan program is its most popular. It’s not surprising since this is the most flexible loan among the programs for general business capital. They are often used for general working capital expenses, investments, refinancing more expensive debt, and more.
- Used for general business expenses
- Amounts up to $5 million
- Repayment terms of 7 years through 25 years, depending on how you use the capital
- SBA 7(a) loans interest fees: Prime Rate + maximum 2.75%
SBA 7(a) Small Loan program
Under the umbrella of SBA 7(a) programs, the SBA 7(a) Small Loan program enables small business owners to obtain up to $350,000 of capital. The amount is smaller than the standard SBA 7(a) loan, but turnaround for approval is generally quite a bit faster with Small Loans—sometimes as few as five days. The paperwork is also less voluminous, making this a more streamlined application process. An important thing to note here that eligibility decisions are made by the SBA, not lenders.
SBA Express loan program
Like SBA 7(a) Small Loans, Express loans enable borrowers to obtain up to $350,000 in capital. This can be structured as either a line of credit or a term loan. As you might expect with “express” in the name, these loans have approval periods of 24 to 36 hours, which is quite a contrast to the long SBA loan approval timeline. Paperwork is not as intensive as well, and lenders make the decisions on which candidates qualify.
SBA CDC/504 loan program
If you’re looking for commercial real estate loans, look toward SBA CDC/504 loans as your top-tier option. The SBA CDC/504 loans are specifically made for major fixed asset purchases, such as machinery and commercial real estate. The “CDC” in SBA CDC/504 loan means “certified development company.”
This is the SBA’s second most popular program. With SBA CDC/504 loans, the money is financed through a lender in partnership with a certified development company, or community development company (CDC), which is a non-profit with a special designation that provides a significant portion of the loan. You don’t have to worry about seeking out certified development companies for the loan; it’s part of the program through the SBA.
- Used for large fixed assets and real estate
- Amounts up to $5 million
- Repayment terms of 10 to 25 years
- SBA CDC/504 loans: Generally 5 to 6% including bank rate
Technically, these loans can have unlimited capital amounts, but the SBA will only back up to $3.75 million, so most lenders max at out $5 million in order not to take on extra risk.
For the most part, SBA CAPlines are business lines of credit for specific types of instances and small business owners. These are mostly meant to help out seasonal business owners and others with cyclical capital requirements.
The four types of SBA CAPlines are:
- Contract loan: Loans for contracts or purchase orders, due when contract is repaid
- Builders line: Loans for construction, or “substantial” renovations of commercial real estate
- Seasonal line of credit: Loans for seasonal activities, to be paid off at the end of the high season
- Working capital line of credit: Loans to provide businesses that operate on credit access to capital for operating expenses
Some of these are potentially revolving, too, which means that you’ll have access to the full business financing amount again once you’ve paid off your loan.
- Used for cyclical cash flow
- Amounts up to $5 million
- Repayment terms of 5 to 10 years, depending on your program
- SBA CAPlines interest fee: Prime Rate + maximum 2.75%
SBA microloan program
SBA Microloans are part of a special program meant to help business owners starting up who need to access a small amount of capital. Microlenders are non-profit community entities who facilitate capital, and generally cater to small or solo enterprises. Capital amounts offered are substantially lower than other SBA loan programs.
- Used for new businesses and startups, or expanding small enterprises
- Amounts up to $50,000
- Repayment terms up to 6 years
- SBA Microloan interest fees: 8 to 13%
How long does it take to get an SBA loan?
We’ve talked about the fact that SBA loans take longer than traditional loans—but how long do SBA loans actually take to finance? Generally, SBA loans can take anywhere from 60 days through 180 days. Your timeline depends on a few factors, including the speed at which your lender works, and how prepared you are with the requisite documentation.
Where to find the best SBA loan option
SBA Lender Match
SBA loans are facilitated through lenders, not the SBA. But the SBA has a program, Lender Match, that can help you identify the lender through which you can apply for an SBA loan. To get a match, you’ll need to fill out a form through the SBA, which will contact you with potential options and next steps.
Many alternative (or online) lenders offer a conduit to matching with SBA lenders. Again, the alternative lenders don’t provide the loans, but they act as a third-party resource to enable you to both apply for and gain approval for SBA loans. Generally, these lenders will take a commission from the lender that issues the loan, and therefore the cost isn’t passed onto you as the business owner.
Working with an alternative lender can have many benefits, which include working with a representative to prepare that big SBA loan application; for instance, they can advise you on what documents are missing, how much capital you should apply for, and which program you should pursue.
Bluevine doesn’t currently offer SBA loans. However, if you’re looking for capital in the meantime, Bluevine can help business owners with a line of credit or term loan. The quick application process is much faster than what’s required for an SBA loan, and approval is easier, too.