Starting and running a business can be difficult, especially when it comes to financing. You may have limited access to capital or lack the necessary credit score for traditional loans. More and more businesses are looking for ways to access affordable financing and SBA loans provide an attractive option.
Are you wondering if an SBA loan is right for your business? Our guide will take you through everything you need to know using the 5W1H approach: what, who, why, when, where, and how.
What is an SBA Loan?
An SBA Loan is a loan that is guaranteed by the U.S. Small Business Administration (SBA). Contrary to popular belief, the SBA does not actually lend directly. Rather, the SBA establishes guidelines for participating lenders and guarantees a portion of the loan, up to 85%, which lessens the risk for the lender, and increases the likelihood of approval. The SBA also offers various incentives such as lower interest rates and longer repayment periods.
The SBA has a number of different loan programs available, each with its own set of requirements. The most popular and widely available SBA loan programs are the 7(a) Loan Program, the Express Loan Program, and the 504 Loan Program.
The SBA 7(a) Loan is the most popular SBA loan program mainly because of its flexibility and wide range of acceptable uses. For loans $25,000 and up, collateral will likely be required, and for loans $350,000 and up, the maximum available collateral will likely be required (personal assets can be used to supplement business collateral). While the standard 7(a) loan, which goes all the way up to $5 million, has relatively stringent credit requirements and sometimes takes up to 60 days to fund, the 7(a) small loan, which only goes up to $350,000, can be fast-tracked by the lender with somewhat relaxed requirements.
If you need quick cash, an SBA Express Loan might fit the bill. In many ways, they mirror the standard SBA 7(a) loan with regards to acceptable use of funds and funding requirements. The main difference between them is that while SBA Express loans usually have less favorable interest rates than 7(a) loans, their applications usually receive credit decisions within 36 hours and often fund after only 30 days, which is a considerably faster funding speed than 7(a) loans.
The SBA 504 Loan is used to acquire fixed assets or improve existing assets (certain soft costs can be included as well) and has many benefits like 90% financing, no balloon payments, long amortizations (10 to 20 years), and low fixed interest rates (5%-6%). The SBA bank only provides 50% of the funding while an SBA-approved certified development company provides 40%, which means the borrower must have the ability to provide a 10% down payment. This program requires a 20% personal guarantee, a business tangible net worth of $15 million-plus as well as $5 million or less in average net income over the 2 years before the application. Much of the underwriting focuses on the project costs, and since the approval process involves two lenders, the bank and the CDC, instead of just one, funding usually takes longer than the SBA 7(a) and Express programs.
Who is an SBA Loan For?
With an SBA Loan, businesses can access much-needed capital that can help them grow and succeed in today’s competitive market. With the right loan program and a strong application, businesses can secure financing with favorable terms and reasonable rates of interest. Ultimately, an SBA Loan can be the key to unlocking success for businesses of any size.
Why Do I Need an SBA Loan?
7(a) loans are the most commonly used SBA loan program, offering businesses access to capital up to $5 million dollars for a variety of purposes. These loans can be used for:
- Refinancing debt
- Buying land
- Financing construction expenses
- Purchasing equipment, furniture, materials, or supplies
- Expanding or acquiring an existing business
Express loans are designed to help small businesses access the capital they need quickly and easily. These loans can be used for:
- Working capital (5 to 10-year term)
- Line of credit (7-year term)
- Commercial real estate (25-year term)
504 loans are typically used by small businesses that need long-term financing. These loans are best for:
- Purchasing long-term equipment
- Refinancing debt from facility renovation, equipment refurbishing, and/or business expansion
- Acquiring an existing building
- Buying land or financing land developments like landscaping, creating new parking lots, and grading
- New facility construction or existing facility renovation
When Do I Apply for an SBA Loan?
Generally, it is recommended to apply for an SBA loan as soon as possible when a business has identified a need or opportunity that could be supported by the loan. This allows for more time to adequately prepare the application and gives the borrower more time to shop around for the best loan terms from lenders. Additionally, many SBA loan applications require a business plan and financial information that can take time to compile. By applying early, businesses have more time to create an effective application and greater peace of mind that their loan will be approved.
In most cases, the SBA loan process takes around 30 to 45 days from the time of application to loan disbursement. However, it is important to note that this process can take longer depending on the complexity of the loan and the business’s individual circumstances. Additionally, businesses should be mindful of any deadlines associated with their loan applications and ensure their paperwork is complete in advance of these deadlines.
How Do I Get an SBA Loan?
No matter which loan program is best suited for a business’s needs, the application process is fairly straightforward. Applicants are required to provide business and personal financial information, including tax returns and bank statements. The SBA also considers certain factors such as the creditworthiness of the applicant and their ability to repay the loan. Once approved, borrowers will need to meet ongoing requirements such as making payments on time and submitting regular financial statements.
Although SBA loans are typically easier to obtain than other financing options, they also come with a variety of fees and costs that must be taken into account. It is important to carefully review all terms and conditions before signing any agreement and ensure that the SBA loan is the right choice for your business.
Where Do I get an SBA Loan?
Small Business Administration loans are acquired through alternative lenders and online financial institutions, rather than traditional banks. SBA loans offer better terms than traditional bank loans including lower interest rates, longer repayment schedules, and higher borrowing limits. They are also usually easier to obtain as they have fewer requirements needed for approval.
We know you have options when it comes to selecting an alternative lender for your SBA loan. We hope you’ll consider CapFront for your working capital needs. Our focus is on complete transparency with our clients, and our dedicated relationship managers are bonafide experts in business funding.
Apply with CapFront and you can get the capital you need quickly, without hassle.