July 26, 2022 | Last Updated on: September 26, 2024
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The U.S. Small Business Administration (SBA) has a wide range of guaranteed loan programs that small business owners can leverage to help grow their businesses. Each of the SBA small business loan options has rules around qualification, the amount of money you can borrow, interest rates, repayment terms, and more. In this article, we will provide several quick checklists to help you understand the key aspects of what you need to know about SBA loans in 2024.
The SBA is a federal agency that provides loan guarantee programs and other services to support and encourage the growth and development of small businesses across the United States. For entrepreneurs that might have trouble securing a loan through traditional financial institutions (i.e., banks, credit unions) whether in need of long-term loans or short-term loans – due to them being in a higher risk category, the SBA guarantees a portion of the loan.
For example, the SBA can help with a loan if a new business has trouble qualifying for a loan from a traditional bank due to a lack of credit history.
There are many benefits to SBA-guaranteed loans. The SBA offers competitive terms for guaranteed loans as their loans generally have rates and fees that are comparable to non-guaranteed loans. Prior to starting the process, make sure you understand the pros and cons of variable interest rates.
The SBA offers counseling, education, and support for small business owners that can help you start and run your 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.
;Here is a quick checklist to understand the SBA loan process:
The only way to receive an SBA loan is through a lender. The SBA only makes direct loans in the case of businesses recovering from a declared disaster. For more information on what qualifies as a declared disaster, please visit the SBA directly.
Make sure you actually need a loan as opposed to a line of credit. A loan is a cash infusion where you receive a lump sum of the agreed-upon dollar amount. A business line of credit is similar to a credit card; the lender will establish a credit limit for the maximum amount of money they will lend you and you can tap as much as you need up to your limit. Like a credit card, you pay interest only on the amount you borrow.
For more information on the differences between a loan and a line of credit, review our article Information About Small Business Loans Every Small Business Owner Must Know.
;From $500 to $5.5 million to fund a business, the SBA has several loan programs designed specifically for small businesses including microloans, 7(a) loans, and CDC/504 loan program. Here is a quick checklist of the types of loans offered by the SBA:
The 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.
The SBA 7 loan program is the SBA’s 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:
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 CDC/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.
SBA loans can be used for a wide range of business applications. Below we provide a quick checklist on what each of the different types of SBA loans can be used for:
Microloans can be used for a variety of purposes that help small businesses expand. Use them when you need less than $50,000 to rebuild, re-open, repair, enhance, or improve your small business. Examples include:
However, proceeds from an SBA microloan cannot be used to pay existing debts or to purchase real estate.
Basic uses for the 7(a) loan include:
A 504 loan can be used for a range of assets that promote business growth and job creation. These include the purchase or construction of:
Or the improvement or modernization of:
A 504 loan cannot be used for:
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.
After you familiarize yourself with the qualification checklist provided in this article, consider speaking with an SBA loan funder to discuss qualification requirements in more depth. Below is a quick 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:
To be eligible for 7(a) loan assistance, businesses must:
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.
To be eligible for a 504 loan, your business must:
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.
Working through Biz2Credit can help keep you safe from predatory lenders. There are many warning signs to look for. For example, some lenders could impose unfair and abusive terms on borrowers through deception and coercion. Or, they might offer you a loan with interest rates that are significantly higher than competitors’ rates, or fees that are more than five percent of the loan value.
Ask the lender to disclose the annual percentage rate and full payment schedule of your loan. Other warning signs of a predatory lender are if they ask you to lie on paperwork or leave signature boxes blank. Don’t get pressured into taking a loan. Survey competing offers and consider speaking with a financial planner, accountant, or attorney before signing for your next loan.
Biz2Credit can help merchants find the right SBA funder 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 an SBA loan 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.
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