Everything You Need to Know About SBA Loan Programs

Are you planning to launch a small business but having difficulty raising the necessary capital? Or perhaps your small business is looking to expand but needs a cash infusion to fund it.

The United States Small Business Administration (SBA) is a valuable financing resource. Last year, the SBA doled out over $30 billion in small business loans.

This financing is critical to the success of America’s 30 million small businesses. Read on to explore SBA loan programs. In addition, learn more about how the SBA can help your business succeed.

What Is the SBA’s Mission?

The SBA was established in the 1950s to help America’s small businesses effectively compete in the global economy. Regardless of the industry, small businesses face substantial barriers to entry.

Large businesses enjoy many advantages including name recognition and broad access to capital, amongst many others. The SBA removes one of these barriers to entry by providing access to loan programs. Without the SBA, many great business ideas launched by small businesses would not see the light of day.

The SBA was created to protect the interests of small businesses throughout the continental United States and overseas territories. Furthermore, the SBA levels the playing field for minorities and other disadvantaged businesses.

What Are the Benefits of an SBA Loan?

Financing guaranteed by the SBA is more affordable than traditional lenders. For starters, the SBA negotiates favorable loan terms that are unlikely to be matched by a credit union or local bank.

One favorable element of an SBA loan is low-interest rates. SBA loans also offer long-term financing, with the ability to spread payments out over 7 years or more.

Another advantage of SBA loans is that the federal government is partially guaranteeing the loan. This reduces the risk for the preferred lenders that work in conjunction with the SBA.

What SBA Loan Programs are Available to Small Business?

There are three primary SBA loan programs that are commonly utilized. These financing options include Microloan, 7(a), and 504 loan programs. In unique circumstances, the SBA offers natural disaster relief loans.

The type of loan that your company will apply for varies based on circumstance. The purpose of the loan and the financing amount dictate what the appropriate program is.

Below you will find a summary of these SBA loan programs. Learn more about who is eligible to apply for SBA financing and what the standard terms and conditions are.

7(a) Loan

The 7(a) program is far and away the SBA’s most popular loan. Of the $30 billion in SBA loans last year, $25 billion came from approved 7(a) loans.

The program’s popularity hit a fever pitch in 2017. The total amount of capital loaned increased 5 percent from the year prior and registered a new SBA record.

Under the 7(a) program, applicants can seek up to $5 million in capital. In order to apply, your company must demonstrate a legitimate need for funding and clearly articulate what the loan will be used for.

The loan applicant must meet several other criteria to be eligible. Most importantly, the small business needs to meet the SBA’s size standards.

According to SBA rules, each industry has a different size standard. On its website, the SBA has a size standard table based on the North American Industry Classification System (NAICS). In order to receive loan approval, the size of your company cannot exceed the threshold set by the SBA.

In addition to size standards, business operations have to take place in the United States. Lastly, your company must demonstrate that it attempted to use other financing options. This criterion includes the potential use of personal assets to finance the proposed business operations.

After approval, the next question is how can your company use the loan? 7(a) funding is often used for startup costs such as purchasing land or an existing business.

In other cases, businesses use 7(a) funds to purchase equipment like production machinery. Lastly, another common use of funding is to restructure debt and lower financing costs.

504 Loan

One major difference between the 504 and 7(a) SBA loan programs is how the funding comes together. Unlike the 7(a) program, the 504 loan is partially funded by a Certified Development Company (CDC). A CDC is a non-profit corporation that works with local lenders to promote economic development within a community.

The CDC secures 50 percent of the loan amount by working with participating lenders. The SBA chips in another 40 percent of the total project costs. Lastly, the loan applicant is responsible for the remaining 10 percent.

The eligibility requirements are different than other SBA loan programs. First off, your small business cannot have a net worth exceeding $15 million.

The SBA also looks at your company’s earnings over the prior two years. During that period, average net income must be less than $5 million.

There are also more limitations on how the loan is utilized. 504 loans are primarily used for tangible assets, like purchasing land or equipment. Unlike the 7(a) program, 504 loans cannot be used for restructuring debt, inventory, or speculative real estate investment.

A major benefit of the 504 loan program is the longer repayment terms. While terms vary depending on the business purpose, the loan term for land and buildings is 20 years.

Microloans

Amongst SBA loan programs, microloans provide the smallest funding amounts. The average Microloan is for $13,000 and cannot exceed $50,000.

Microloans are a great option for home-based businesses or freelance workers. This type of loan cannot be used to purchase any form of real estate.

Rather, Microloans are used for furniture, inventory, and business equipment. There are a couple of other difference between Microloans and the other SBA loan programs.

One major difference is a maximum repayment term of 6 years. Another difference is that the SBA does not directly provide any of the funding.

Instead, the SBA directs you to intermediate lenders that work within the community. These lenders are non-profits and will have separate lending and credit requirements.

Wrapping It Up

SBA loan programs are a great resource for small businesses that need access to capital. These SBA loan programs create millions of jobs and help level the playing field in an uber-competitive economy.

There are different types of SBA loans for the various scenarios that confront American small businesses. The greatest benefit of an SBA loan is trust. You can rest assured that your company received favorable loan terms that are at least partially guaranteed by the U.S. government.

If you need help looking for a local lender that specializes in small business loans, please check out our website for assistance.