SBA Loans: Are They Right for Your Small Business?
SBA loans are federally backed and often represent some of the most flexible and affordable loans available to qualified business owners. Small business owners should consider an SBA loan before seeking alternative funding.
Small business owners have a lot of financing products at their disposal, but perhaps one of the best options are small business administration loans. The Small Business Administration, more frequently referred to as the SBA, offers qualified American borrowers access to federally backed loans that frequently have the most competitive rates.
Although SBA loans can be extremely beneficial, qualifying isn’t always easy. The application process can be complicated, and borrowers typically need to have good credit, a proven business model, and the ability to meet numerous other loan-specific requirements. This guide will walk you through the types of SBA loans available and help you decide whether applying for one makes sense for your business.
In this guide:
- Pros and Cons of SBA Loans
- Best SBA Lenders
- What Is an SBA Loan?
- Types of SBA Loans
- How to Get an SBA Loan
Pros and Cons of SBA Loans
When considering using an SBA loan for your business, it’s important to weigh the pros and cons. Check out the bullets listed below for some of these.
- Relatively low interest rates
- Low down payment
- Longer repayment terms
- Flexible use
- Complicated application process
- Slow funding
- May require collateral
- Typically requires good credit
If the pros listed above outweigh the cons, then the next thing you should do is compare the best SBA lenders to find a company and loan that meets your businesses’ needs.
Best SBA Lenders
Most SBA lenders are big banks and established credit unions since they can afford to offer lower rates to their clients. That said, there are also some good online lenders that may offer SBA funding more quickly than a traditional bank loan. Here are a few for you to consider.
SmartBiz is a platform that uses technology to match business owners with SBA lenders. After completing the online application, SmartBiz will evaluate your information and use it pair you with the lenders that are most likely to approve your loan request. Further, if SmartBiz algorithms determine you may not qualify for an SBA loan, they will also provide alternative term-loan options.
- Loan Amount: $30,000 to $350,000; commercial real estate loans up to $5 million)
- APR: 7.00% to 9.25%
- Loan Term: 10 to 25 years
- Funding time: As fast as 7 days after completing the application, but typically 14 to 21 days
Wells Fargo has long been a popular name among business and commercial lending, and today the financial institution is considered a leading SBA lender.
- Loan Amount:
- Up to $5 million for an SBA 7(a) loan
- Up to $6.5 million for an SBA 504 loan
- APR: 7.75% to 8.25% (based on the current prime rate)
- Loan Terms for SBA 7(a) Loans:
- Up to 7 years for working capital
- Up to 10 years for equipment
- Up to 25 years for real estate
- Loan Terms for SBA 504 Loans:
- Up to 10 years for equipment and machinery
- Up to 20 years for real estate
- Funding time: 60 to 90 days
Live Oak Bank
Live Oak Bank rivals Wells Fargo when it comes to SBA Lending. Though located in North Carolina, Live Oak funds SBA loans all over the nation and offers comprehensive tools and resources to help borrowers make the best decisions.
- Loan Amount: Up to $5 million
- APR: 5.50% to 8.25%
- Loan Term: 10 to 25 years
- Funding time: 45 days
What Is an SBA Loan?
SBA financing is very similar to traditional small business loans. In fact, the Small Business Administration does not even originate loans. Instead, SBA loans are originated by traditional commercial lenders, such as banks and credit unions, and guaranteed by the SBA.
When a lender enters into an SBA financing agreement, the SBA will guarantee a large portion of the loan amount. This mitigates most of the risk for the SBA lender, so it can offer more affordable rates and flexible repayment terms than standard small business loans.
SBA financing is available in numerous forms and can help small business owners manage a variety of business needs, including those associated with cash flow, real estate financing, and equipment purchases. In addition, business owners who need assistance due to natural disasters can also seek an SBA Disaster Loan through the FEMA.
Types of SBA Loans
There are several SBA loan programs available to small business owners; however, the following typically represent the four major SBA loan types.
SBA 7(a) Loans
SBA 7(a) loans are considered the most popular type of SBA financing. Loan amounts can go as high as $5 million and can typically be used to finance various business expenses, including:
- Construction, expansions, and renovations
- Equipment, inventory, or fixture purchases
- Land or building purchases
- Debt consolidation or refinancing
- General start-up costs
Most borrowers will receive a loan term between 5 and 10 years, although loans used for real estate may carry terms as long as 25 years.
The SBA guarantees up to 85% of a 7(a) loan for loans up to $150,000 and 75% for loans greater than $150,000.
All SBA 7(a) rates are based on the prime interest rate at the time of approval. Loans with terms shorter than seven years typically carry an interest rate between 2.25% + the prime rate and 4.25% + the prime rate. Loans for seven years or longer typically carry interest rates between 2.75% + the prime rate and 4.75% + the prime rate.
SBA Express Loans
SBA Express Loans are a type of 7(a) loan. While many SBA loan programs are specifically designed as short or long-term lending products, SBA Express funding can be used as a revolving line of credit or as a term loan. Like a 7(a) SBA loan, SBA Express financing can be used to maintain working capital and cash flow or to purchase equipment, inventory, or other common business expenses.
SBA Express loans cannot exceed $350,000, and the SBA will only guarantee up to 50% of the loan amount.
Interest rates generally fall between 4.5% + the prime rate and 6.5% + the prime rate. If issued as a line of credit, this SBA lending solution will have a term of up to seven years. If, however, it is issued as a term loan, the terms are the same as those for a 7(a) loan.
SBA 504 Loans
SBA 504 loans are provided by Certified Development Companies (CDCs), which are non-profit organizations that have been certified to issue this particular type of SBA financing. Frequently referred to as “SBA real estate loans,” this is a long-term financing option used to purchase commercial real estate, equipment, and upgrades or improvements to an existing structure. These loans are available for up to $5 million (or $5.5 million if the project relates to certain energy policies).
Typically, the assets being financed are used as collateral on the loan, and you can obtain a loan term of 10 or 20 years. Loan rates fluctuate based on the 5-year and 10-year U.S. Treasury bonds, but they typically fall between 4% and 5%.
An SBA microloan can be used to access working capital, purchase equipment and machinery, or to refinance debt. It cannot, however, be used to finance real estate purchases.
>> Read More: Compare microloans for small businesses
Microloan rates and terms are dependent on a variety of factors including the loan amount, intended use, and lender requirements. However, this type of SBA loan typically carries an interest rate between 8% and 13%, and all loans must be repaid in six years or less.
How to Get an SBA Loan
If you’re considering an SBA guaranteed loan, you can either begin your application on the SBA website or work with a traditional bank that has been certified as an SBA lender.
If you choose to begin the application on the SBA website, you will be required to answer a few simple questions, the answers to which will be used to pair you with an appropriate lender. If working directly with a bank or other lender, it’s important to identify the type of SBA loan you wish to apply for and to verify that your chosen lender offers that particular type of SBA financing.
It’s important to shop around to compare rates and loan terms. However, regardless of what lender you choose, you can usually expect the SBA loan application process to take anywhere from 60 to 90 days.
You can improve the speed and efficiency of the loan application process by being prepared with all of the required information. In most cases, you will need to provide the following documentation:
- Basic business information (e.g., name, address, years in business, number of employees, etc.)
- Personal credit score
- Background and financial statement (SBA Form 912 and SBA Form 413)
- Business plan and history
- Profit and loss statement
- Projected financial statements
- Business tax returns
- Business certificates and license
- Ownership & affiliation statement
- Loan application history
- Business lease, if applicable
Ask the Expert
President of the Excelsior Growth Fund
SBA loans are a great way for businesses that are starting or expanding to access affordable loans. SBA microloans up to $50,000 can provide support for almost any business purpose. Larger SBA loans up to $5.5 million are also available and come with the support of a government guarantee, which makes them perfect for small businesses that might have difficulty getting more traditional financing.
The SBA has a great tool called Lender Match that makes it easy to find a SBA lender in your area.
At Excelsior Growth Fund, we always encourage small business owners to understand the true cost of financing and what the APR, or annual percentage rate, will be on a loan before borrowing. Today’s small business owner has access to hundreds of loan options that range from local banks to online lenders. Always read the fine print and ensure that you can handle the monthly (or daily) payment terms and that the APR is not predatory.
SBA loans are often more affordable than traditional business loans, so you should consider them when comparing your financing options. However, it’s important to note that the application process can be complex, and therefore, it’s important to thoroughly review the various SBA lending options, gather all pertinent information and documentation, and provide adequate time for funding to take place.