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The U.S. small business administration (SBA) offers a range of attractive loan options to start or expand your small business. The SBA helps small businesses get funding via SBA-approved lenders by setting guidelines for loans to reduce lender risk. There are three main SBA loans that we will focus on in this article: 7(a), 504, and Microloans; we will briefly touch on disaster-relief loans as well. The SBA has qualification criteria for each of these loans that you will need to meet to be approved for funding. We also cover loan qualification requirements that your SBA-approved lender will be looking for.
What is the SBA?
The SBA is a federal agency that provides loan programs and other services to support and encourage the growth and development of small businesses (that meet the SBA size standards) across the United States. The SBA guarantees a portion of the loan.
The SBA offers counseling, education, and support for small business owners that can help start or run a business. SBA loans generally have lower down payments, flexible overhead requirements, and no collateral needed for some loans. These benefits are typically not offered by traditional lenders.
Overview of SBA loans
From $500 to $5.5 million to fund a business, there are several types of SBA loan programs designed specifically for small businesses including microloans, 7(a) loans, and 504 loans:
- Microloans: The smallest type of SBA loan, providing $50,000 or less to help businesses start up and expand.
- 7(a) loans: A group of SBA loans that guarantee portions of the total amount, cap interest rates, and limit fees. The maximum loan is $5 million.
- 504 loans: Long-term, fixed-rate financing to purchase or repair real estate, equipment, machinery, or other assets. The maximum loan is $5.5 million.
The SBA microloan program provides loans up to $50,000 to help small businesses and certain not-for-profit childcare centers start up and expand. The average microloan is about $13,000.
The SBA provides funds to specially designated intermediary lenders, which are nonprofit community-based organizations with experience in lending as well as management and technical assistance. These intermediaries administer the Microloan program for eligible borrowers.
SBA 7(a) loans
The SBA 7(a) loan program is the SBAâs most common loan program which includes financial help for small businesses with special requirements. This is the best option when commercial real estate is part of a business purchase, but it can also be used for:
- Short-term and long-term working capital
- Refinance current business debt
- Purchase furniture, fixtures, and supplies
The maximum loan amount for a 7(a) loan is $5 million. Key eligibility factors are based on what the business does to receive its income, its credit history, and where the business operates. Your lender will help you figure out which type of loan is best suited for your needs. The maximum SBA guarantee for 7(a) loans is 85% for loans up to $150,000 and 75% for loans greater than $150,000.
SBA 504 Loans
The SBA 504 Loan Program provides long-term, fixed-rate financing for major fixed assets that promote business growth and job creation.
504 loans are available through Certified Development Companies (CDCs), SBA’s community-based partners who regulate nonprofits and promote economic development within their communities. CDCs are certified and regulated by the SBA.
The maximum loan amount for a 504 loan is $5 million. For certain energy projects, the borrower can receive a 504 loan for up to $5.5 million per project, for up to three projects not to exceed $16.5 million total.
Disaster Assistance Loans
The SBA provides low-interest disaster loans to help small businesses located in declared disaster areas affected by declared disasters including civil unrest and natural disasters such as hurricanes, flooding, and wildfires. The types of loans include:
- Physical damage loans
- Mitigation assistance
- Economic Injury Disaster Loans
- Military reservist loan
For more information, please visit the SBA website on disaster assistance loans.
Does the SBA offer other funding options besides loans?
Above we discuss the financing options from the SBA, letâs quickly touch on what the SBA does not offer so there is no confusion. The SBA does not offer a business credit card or a business line of credit. A business credit card and a small business line of credit can help small business owners operate. Having both a business credit card and a small business line of credit open at the same time is a sound business strategy. Small business owners need to make purchases all the time to operate their business and having both can help you optimize your purchases.
Take a closer look at this strategy by reviewing our article Business Credit Card vs. Line of Credit: Whatâs the Difference?
SBA loan requirements
Each SBA loan has different eligibility requirements that you must meet. Generally speaking, before starting the loan application process to secure a loan through the SBA, make sure you understand your current credit score (you will need good credit so run your credit report), financial statements, cash flow, a sense of the monthly payments you can afford, and business needs because having this information will help speed up the process.
Consider speaking with an SBA loan funder to discuss qualification requirements in more depth. Below is a checklist for SBA loan qualification requirements:
The SBA gives intermediaries authority to issue Microloans. There are certain conditions between the SBA and intermediaries, and between intermediaries and borrowers. Since the intermediary lender has lending and credit requirements, they typically need some type of collateral as well as the personal guarantee of the business owner.
As the business owner, be prepared to discuss (but not limited to) the following with an SBA microloan intermediary :
- personal liabilities
- personal credit score
- type of business you operate
- income tax returns
- bank statements
In addition, to qualify for this type of SBA lending, you must use the loan proceeds to rebuild, re-open, repair, enhance, or improve your small business. Examples include working capital, inventory, supplies, furniture, fixtures, machinery, and equipment. You will not qualify for a Microloan if you plan to use the proceeds to pay existing debts or to purchase real estate.
To be eligible for 7(a) loan assistance, businesses must:
- Operate for profit
- Be considered a small business, as defined by SBA
- Be engaged in, or propose to do business in, the United States or its possessions
- Have reasonable invested equity
- Use alternative financial resources, including personal assets, before seeking financial assistance
- Be able to demonstrate a need for a loan
- Use the funds for a sound business purpose
- Not be delinquent on any existing debt obligations to the U.S. government
Certain businesses may not qualify for a 7(a) loan. For example, businesses are not eligible for a 7(a) loan if they are engaged in illegal activities, loan packaging, speculation, multi-sales distribution, gambling, investment, or lending, or where the owner is on parole.
For more information on the terms, conditions, and eligibility of 7(a) loans visit the SBA website.
In addition, to qualify for a 7(a) loan, you must use the proceeds for long-term and short-term working capital, revolving funds based on the value of existing inventory and receivables, the purchase of equipment, machinery, furniture, fixtures, supplies, or materials, the purchase of real estate, including land and buildings, the construction of a new building or renovation of an existing building, establishing a new business or assisting in the acquisition, operation, or expansion of an existing business. Refinancing existing business debt under certain conditions is allowed.
To be eligible for a 504 loan, your business must:
- Operate as a for-profit business in the United States or its possessions
- Have a tangible net worth of less than $15 million
- Have an average net income of less than $5 million after federal income taxes for the two years preceding your application
Other general eligibility standards include falling within SBA size guidelines, having qualified management expertise, a feasible business plan, good character, and the ability to repay the loan.
Loans cannot be made to businesses engaged in nonprofit, passive, or speculative activities. For additional information on eligibility criteria and loan application requirements, small businesses and lenders are encouraged to contact a Certified Development Company in their area.
In addition, to qualify for a 504 loan, you must use the proceeds towards the purchase or construction of existing owner-occupied buildings or land, new facilities, long-term machinery, and equipment. Or the improvement or modernization of, land, streets, utilities, parking lots, landscaping, or existing facilities. You will not qualify for an SBA 504 loan if you plan to use the proceeds for working capital or inventory, consolidating, repaying, or refinancing debt, or speculation or investment in rental real estate.
General qualification requirements
Your small business will have to meet lender qualifications in addition to the SBA eligibility requirements. When you apply for a small business loan, the lender is trying to understand your ability to repay the loan. As part of the SBA loan qualification process, your SBA-approved lender will likely ask to review these core documents:
- Bank statements
- Credit statements (typically both a personal credit score and business credit score)
- Tax returns
- Financial statements (for example, balance sheet, income statement, and statement of cash flow)
In addition to the core documents, depending on your situation, your lender might also ask to review these documents:
- Business licenses
- Commercial leases
- Articles of incorporation
- Business plan
- Financial forecasts
- Financial statements (profit statements, loss statements, etc)
- Franchise documentation
For a full breakdown of each of these small business loan documents, please review our article titled All the Small Business Loan Documents You Need Explained. Only after the entire SBA loan application process, and qualifying for funding, will you be presented with the repayment terms of your loan.
For entrepreneurs with little or no business history, the emphasis of the application process will be on your personal finances. Be prepared to present a personal financial statement and likely personal collateral to secure the loan.
How to get an SBA loan
Biz2Credit can help merchants find the right SBA lender to review the financing options for their needs, and we have the experience needed to make SBA borrowing easier and more convenient for our customers.
Whether you are after small business loans from the SBA to expand your business or help you operate during tough times, Biz2Credit is a great place to start. Our helpful staff will provide you with exceptional customer service and will work hard to understand the needs of your business, the intended uses for your loan, and the best terms that can be offered. Get in touch today to find out how small business financing can help you.
For even more information, head over to our comprehensive guide on SBA loans.