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SBA Loans
The U.S. Small Business Administration, or SBA, offers a few different types of loans to help support small businesses. To qualify, a business must meet certain criteria for size, income, and purpose. Although these loans are backed by the SBA, they’re not always serviced through the SBA. This is where lending agencies and Certified Development Companies (CDCs) come in. These organizations operate at the local level to help businesses apply for SBA loans.
OVERVIEW
The two types of SBA loans covered here – the SBA 504 loan and the SBA 7(a) loan – are both aimed at helping small businesses succeed. They are restricted to for-profit businesses that have a net worth of $15 million or less and fewer than 200 employees among other criteria. The loan amounts for both are capped at $5 million unless the business is taking out the loan to improve a building’s environmental impact or construct a “sustainable” building. In that case, loans can be up to $5.5 million.
For an SBA 7(a) loan, the lender and borrower negotiate for a fixed or variable interest rate. If the loan is to be used for real estate, the loan period can be up to 25 years. For equipment, the term is 10 years and for working capital, it’s 7 years. Loan fees depend on the amount borrowed. Borrowers need to have a good credit score.
For a 504 loan, the interest rate is based on 3% of the loan amount. These loans mature at 10 or 20 years. The interest rates for 504 loans are based on the U.S. Treasury market rate plus a percentage. These loans can only be used for real estate investments and improvements. All applicants must have exhausted all other avenues of funding before applying to the SBA.
In both cases, there are a long list of business types the SBA will not grant funding to. They include those that operate primarily for religious instruction, gambling, speculation, nonprofit, or selling stamps and coins. If any major stakeholder in the company has a criminal record, that can come into play too.
LOAN HIGHLIGHTS
SBA 504 loans are for real estate building, acquisition, and improvement costs.
SBA 7(a) loans can be used for real estate, equipment, or working capital.
Loans are not serviced by the SBA, so applications are usually made through a local lender or loan broker.
A typical 504 loan is made up of a 50% contribution from a lender, a 40% contribution from the SBA, and a 10% down payment from the borrower.
The maximum loan amount for both types is normally $5 million.
PROS
- A small business can get financing for up to 90% of its project.
- There are caps on the amounts of interest and fees that can be charged to the borrower.
- They are typically less costly than most other business loans.
- Women-owned and minority-owned businesses are especially encouraged to apply.
CONS
- Both types of SBA loans can be very difficult to qualify for.
- Other financing options must be exhausted first, the SBA can’t be first on your list.
- Business credit qualification can be hard to meet, especially for brand new businesses.
- Some business types are not qualified for SBA loans.