Run a small business? Need financing for equipment, inventory, real estate, payroll or operations? For all of these purposes, small business owners have heard of SBA loans, but many people are confused by the question of: exactly what are SBA loans? We'll dive deep here and help you figure out if an SBA loan is right for your business in 2023.
TABLE OF CONTENT
Update - January 2023
What is an SBA loan?
An SBA loan is a small-business loan provided by a bank or other lender, with the government (specifically, the Small Business Administration, or SBA) guaranteeing part of the loan to reduce the risk to lender.
The SBA doesn’t actually fund small business loans directly. Instead, the SBA sets guidelines for SBA loans that are made by approved lenders. The SBA then guarantees a large percentage of those loans.
Where do you apply for SBA loans?
You apply for SBA loans through approved SBA lenders, like a bank or credit union or online lender. These SBA-approved lenders obtain partial guarantees from the government. This is important to the lenders because it means if you default on the loan, the government will help pay some of the loss.
This is perhaps the most confusing part of SBA loans to most businesses - to apply for SBA loans, you don’t apply to the SBA or the government. You have to apply directly with lenders.
How many lenders are approved SBA lenders? More than 750+ banks, credit unions and specialty lenders. And these lenders vary widely in a) what rates they offer, b) what businesses they prefer to work with, c) what size loans they make, and d) what states they lend in - even though the basic loon approval guidelines set by the SBA are the same.
Most businesses don’t have the time or expertise to research dozens of lenders to figure out who offers SBA loans and what each lender’s rates, terms and eligibility guidelines are. For this reason, online lenders and lending platforms have started offering a central place to apply, and they do the time-consuming work to match SBA lenders with businesses who want SBA loans.
What are the different types of SBA loans?
The SBA has setup a variety of SBA business loan programs for many different uses and funding amounts. If your business can meet the qualifications, loans from less than $10,000 to $5 million are available.
Below is a table outlining the most common SBA loan programs and sizes. Below that, we’ll provide a quick rundown of each of these SBA loan programs.
Table 1 – SBA Loan Programs – Loan Sizes and Allowable Purposes
Typical Loan Purposes
SBA 7(a) Loans
Up to $5 million
Working capital, real estate, business expansion, equipment purchases, partner buyouts.
SBA Express Loans
Up to $500,000
Fast funding for working capital, expansion and real estate and equipment purchases.
SBA 504 Loans
Up to $5.5 million
Purchasing long-term, fixed assets like buildings, land and equipment or machinery.
Up to $50,000
Working capital, inventory, supplies, equipment and machinery.
What is an SBA 7(a) loan?
The 7(a) loan is the SBA’s most common, well-known small business loan program. It can be used for short and long-term working capital, refinancing current business debt, partner buyouts, purchasing furniture, fixtures, supplies and real estate.
The maximum loan amount for the 7(a) loan is $5 million. Eligibility for getting SBA 7(a) loans depend on where the business operates, what industry the company represents, how much income the small business generates, and the business’s credit history.
In general, lenders will want to see a full two years in business, with good income for at least the last year and preferably two or more. Lenders will look to see that the owner has already put their own financial resources, such as personal assets, toward their business.
To qualify, personal credit of the owners is reviewed. You need fairly good credit scores for all owners of 20% or more of the business. Those owners will also have to provide a personal guaranty for the loans.
What is an SBA Express loan?
SBA Express Loans are technically part of the 7(a) SBA loan program, and currently, the maximum loan amount is $500,000. These SBA Express loans are called “express” because the lender must review applications within 36 hours from the submission of the application.
Applicants must have “reasonable owner equity to invest” and have already invested personal assets in the business. Typically, a FICO (credit) score of 650 or above and proof of a solid annual business income of two years or more are required.
What is an SBA 504 loan?
The SBA’s 504 Loan Program offers long-term, fixed-rate financing of up to $5.5 million for “major fixed assets that promote business growth and job creation.” What does that mean?
Unlike the 7(a) loan, a 504 SBA loan cannot be used for working capital, inventory, or refinancing debt. Eligible uses include:
The purchase or construction of existing buildings, land, and new facilities
The purchase of long-term machinery and equipment
The improvement or modernization of land, streets, utilities, parking lots, landscaping, and existing facilities
504 SBA loans are made available through SBA’s community-based partners called Certified Development Companies (CDCs). These CDC’s work in partnership with private lenders to make the SBA 504 loans. The SBA 504 loan is actually a combination of a 1st and a 2nd loan made through the CDC and a partner lender.
SBA 504 loans offer strong options for businesses buying long-term assets, like property and equipment, who have good net income and who can afford to wait awhile. These loans can offer long terms, up to 25 years, but they usually take several months to close.
What is an SBA Microloan?
The SBA Microloan Program provides startup and expansion loans up to $50,000. SBA microloans are offered through specially-designated intermediary lenders (nonprofit community-based organizations) rather than banks, and each intermediary lender sets its own lending and credit conditions.
Typically, for SBA microloans, collateral is required. Funds from SBA microloans can be used for various expenses such as working capital, inventory, supplies, furniture, fixtures, machinery, and equipment.
How do SBA loans actually work?
As mentioned before, SBA loan applications are run through approved SBA lenders and not the SBA directly. The SBA sets the policies for the minimum qualifications, loan amounts, terms, and maximum interest rates. The lenders actually supply the business loan, making sure the business and owners fall within SBA loan guidelines.
To get SBA loans, small business owners can find a list of SBA-approved lenders on the SBA website and use the website’s matching tool to find possible lenders for their purposes. You can have more than one SBA loan at a time; however, that’s dependent on the each lender’s rules and limitations.
Be forewarned: while SBA loans carry appealing interest rates and repayment terms, SBA loans are not easy to qualify for. Most SBA loans require at least two years in business with good cashflow; excellent credit scores for owners; lengthy application with cumbersome documentation requirements; and time to wait, as many loans can take several months to close. If you need money sooner, there are alternatives to consider.
SBA loan alternatives – lines of credit, equipment loans, cash advances and ACH loans
Lines of Credit
Lines of credit can be a great alternative to SBA loans. Lines of credit provide access to funds up to a set spending limit, and you only pay interest on the amount you draw from the line. Lines of credit can be flexible and often do not require collateral. They can particularly be good alternatives to traditional bank loans.
For a new or existing business, equipment you need can often be prohibitively expensive. Often, when a business needs to buy equipment, the sales stemming from the use of that equipment will come over many months or years into the future.
Equipment loans, or equipment financing, is a type of lending aimed at addressing this challenge. Equipment loans empower small business owners to buy a piece — or a number of pieces - of equipment today and pay for that cost over a period of time. Equipment loans, therefore, provide a way you can obtain equipment now without paying for it all upfront.
An appealing aspect of equipment loans is that the equipment being financed serves as collateral, so borrowers don’t have to sign over other assets as collateral. Another appealing aspect of this type of financing is that you can often borrow as much as 100% of the cost of the equipment being purchased.
Merchant Cash Advances (MCAs) and ACH Loans
Merchant cash advances (MCAs) and ACH loans are additional short-term financing options to the SBA loan. For a deeper dive on these, visit What is a Merchant Cash Advance?
Both options involve a simple application process and require very little documentation. Credit scores are not usually considered, and the applicant can find out if the loan is approved in a matter of hours instead of weeks or months.
A merchant cash advance (MCA) is financing based on a company’s future credit card sales. MCA companies offer you a lump sum based on your company’s credit card sales, then take a percentage of the credit card deposits daily or weekly until the loan is repaid.
Similarly, ACH loans are based on the small business’s average daily business checking account balance. Once a borrower gets approval for an ACH loan, the lender withdraws payments directly from the borrower’s bank account daily or weekly until the borrowed money is repaid.
To find out if an SBA loan, business line of credit, equipment loan, merchant cash advance, or ACH loan is right for your business, apply through a platform that can connect you with lots of options from dozens of lenders. Get started quickly with a simple online process.
About the Author
Rieva Lesonsky is the CEO and president of GrowBiz Media and SmallBusinessCurrents.com. She is an award-winning business journalist and the former editorial director of Entrepreneur magazine. Her work has appeared in numerous business publications, including MSN Money, Forbes, Success magazine, NerdWallet, and many more.