Getting loans is not uncommon for small businesses. Startup business ventures don’t always have enough funds to sustain operations or finance an expansion. The good thing is that many financial services companies are now providing loans specifically intended for small businesses. There are also Small Business Administration or SBA loans available.
If you are interested in getting an SBA loan, here are the most important details you need to bear in mind.
1. SBA loans are not from the SBA.
The Small Business Administration or SBA does not provide direct loans to entrepreneurs. What the SBA provides is the guarantee to banks and lending companies for the loans they extend to small business owners. This guarantee helps reduce the risk of lending to small business owners, reassuring lenders by promising to pay a portion of the loan in case the small business borrower defaults. Hence, a small business that applies for an SBA loan is actually applying for a commercial loan with an authorized SBA lender or a bank that has an agreement with the SBA. SBA loans are designed to help small businesses in obtaining loans that they otherwise cannot obtain from traditional lenders.
2. There are different types of loans available.
SBA loans can be for different purposes. They are not only for financing a business venture or an expansion. These different types of SBA loans are as follows:
- SBA 7(a) Loans. The most common SBA loan type, SBA 7(a) is a loan intended for those who need working capital for their business, funds for debt refinancing, and funding for buying a business, real property, or equipment. The loanable amount here is up to $5 million.
- CDC/SBA 504 Loans. This type of loan combines a loan from a bank and from a nonprofit community development corporation (CDC) to allow a small business owner to obtain a long-term loan with a low-interest rate. The maximum amount that can be borrowed for a CDC/SBA 504 loan is $20 million. It is intended for acquisition of commercial real estate and heavy equipment.
- SBA CAPLines Lines of Credit. This is a short-term loan created to address immediate or short-term funding requirements of small businesses. It can be a seasonal line of credit, a contract line of credit, builders line of credit, a standard asset-based line of credit, or a small asset-based line of credit. The maximum loan amount for the first four SBA CAPLines lines of credit is $5 million. For the last, the small asset-based line of credit, the maximum amount that can be loaned is $200,000.
- SBA Export Loans. Obviously, this is a loan created to aid exporting businesses. It can be used to expand business activities, gain entry to new markets, and engage in international transactions. There are three types of loans: SBA export express loan (maximum loan amount: $500,000), SBA export working capital loan (maximum loan amount: $5 million), and SBA international trade loan program (maximum loan amount: $5 million).
- SBA Microloan Program. As the name implies, this is a small SBA loan. However, it comes with a higher interest rate ranging from 8% to 13%. The loanable amount maxes out at $50,000 and a maximum term of 6 years. The SBA Microloan Program is mostly issued through nonprofit organizations. This loan cannot be used for real estate acquisition and debt refinancing.
- SBA Disaster Loans. Offered to help small businesses in recovering from a disaster, SBA disaster loans can also be used to help a business sustain itself after the loss of a key employee. The maximum amount that can be borrowed is $2 million for a 30-year term with interest rates ranging from 4% to 8%.
3. What are the eligibility requirements?
A small business borrower should be registered and operate a legal for-profit business and should be doing business in the United States or its territories and should have already exhausted traditional financing options. These are just the general requirements, though, for getting an SBA loan. The SBA partner banks or lenders impose their respective sets of other requirements, so you need to inquire about this with the specific bank or lender you chose.
4. What are the steps in applying for an SBA loan?
The first thing you need to do is to go to the SBA website to complete the loan application form. In completing this online application form, you will be asked for your details and documents that serve as proof of the legality of your business, your business history, and creditworthiness. You will get assistance from SBA for the succeeding steps you need to take.
5. Are there advantages to getting an SBA loan?
Yes, there are. These include competitive terms including rates and fees that are similar to those of non-guaranteed loans. Small business owners who obtain SBA loans are also provided continuing loan education and counseling. This is important to make sure that the loan proceeds are properly used instead of simply adding up to the debt burden of a struggling small business. Additionally, SBA loans can have flexible overhead requirements, and, in some cases, the loans may no longer require collateral.
6. What happens when you default on an SBA loan?
SBA loans are essentially government-backed loans intended to help small businesses. These loans have the SBA reassure lenders that the SBA will be paying a portion of the loaned amount in case of a default. However, this does not mean you will no longer have to worry about anything if you default on an SBA loan. The SBA loan agreement you would have signed is comparable to traditional loans. In case you can’t or you’re unwilling to pay, the lender will get the asset you used as collateral. If this is not enough, the lender can proceed to have your other business assets foreclosed. It is only after all of your business assets are liquidated as payment for the loan that the SBA enters the picture to pay for the remaining amount that may not have been covered by the asset foreclosure or liquidation.
SBA loans are an excellent financing option for small businesses. However, as mentioned, they are only extended to those who are unable to access traditional business loans. Most businesses would say it’s difficult to qualify for an SBA loan. While the loans have advantageous terms and the SBA guarantees the loans, you will still need collateral (except in some instances when the collateral requirement is waived by the lender) and the loan terms are still similar to traditional commercial loans. Your assets will still be foreclosed if you fail to pay the loan.
