The Small Business Administration, or SBA, is a US government department that extends support to small businesses.
A trade finance company or a participating lender like credit unions, or banks, issue an SBA loan.
They are also partially insured by the SBA.
The SBA loan program was designed to provide aid to small businesses.
This loan typically offers more lenient terms compared to traditional loans, such as extended repayment durations and a smaller down payment.
How Does an SBA Loan Work?
Businesses must submit an application via a trade finance company, credit union or bank to be eligible for an SBA loan.
The lender then asks the SBA for a loan guarantee, which ensures that even if small enterprises are unable to repay the loan, the government will still pay the lender the guaranteed sum.
To receive the SBA loan, every individual owning at least 20% of the business must provide an unconditional personal guarantee.
This puts their personal assets at risk in case the business is unable to make payments.
These assurances lower the lender's risk and make collaboration with small enterprises simpler.
They repay the loan directly to the lender, typically on a monthly basis, after it has been approved. The lender handles loan settlement and payment disbursement.
How to Apply for SBA Loans?
Here’s a breakdown of the SBA loan process:
Ensuring Business Eligibility:
Businesses must be at least two years old, have stable yearly revenue, and a credit score of at least 690 to qualify
Businesses can apply for the loan using the SBA's Lender Match service or through a trade finance company or a bank with a history of handling SBA loans.
Gathering Required Documents:
The applicant must produce necessary paperwork, such as a one-year cash flow projection, personal and business tax records, business license and personal financial statements.
Depending on the lender, the approval time period for SBA loans varies. The entire process of acceptance and funding through a bank may range from 30 days to a few months.
However, if quick cash is required, businesses can apply for SBA Express Loans, which promises a 36-hour response time.
The SBA will guarantee up to 50% of this loan up to a maximum financing amount of $500,000.
What is the Maximum Amount Provided by SBA Loans?
The SBA's most well-known program, the 7(a) Loan Program, offers financial support to small businesses with particular needs.
This program can be used to refinance existing business debt, purchase furniture, fixtures and supplies, as well as purchase real estate.
Most 7(a) loans have a $5 million maximum loan amount; however, the maximum loan amount for SBA Express Loans is $500,000. The maximum liability of the SBA is $3.75 million ($4.5 million for loans for international trade).
The maximum amount guaranteed to the lender under an SBA-guaranteed loan of $5 million is $3.75 million, or 75% of the loan amount. The guarantee percentage varies depending on the loan amount and program type. SBA 504 loans are the next most commonly used loans by small businesses.
What Credit Score is Required for the SBA Loan?
Depending on the loan type, a minimum credit score may be needed to qualify for an SBA loan.
SBA 7(a) loans typically require a minimum credit score of 640, but SBA Microloans often require a credit score between 620 and 640.
If a borrower's credit score exceeds 680, they might have a better chance of getting approved.
What are the Disadvantages of SBA Loans?
Despite the benefits, SBA loans also come with a few drawbacks:
1. Difficult to Qualify
Even though the government's guarantee reduces lender risk, businesses must still satisfy strict eligibility conditions to be authorized for an SBA loan.
To qualify, small enterprises need to be in business for two or more years with a strong credit history and financials.
2. Slow to Disburse Funds
Depending on the SBA loan type and the lender, businesses may have to wait one to three months to get the required money.
Applying for SBA loans requires a lengthy application process and extensive supporting documentation.
Consider a speedier small business loan alternative if businesses need cash immediately.
3. Personal Guarantee Mandatory
Individuals who own 20% or more of the business are required to provide an unrestricted personal guarantee for SBA loans to be approved.
It's also possible to get a limited or unrestricted personal guarantee from other business owners.
Businesses might be required to provide actual collateral or down payment in order to secure their SBA loan along with signing a personal guarantee.
Who Qualifies as SBA?
Most non-manufacturing enterprises with an average annual income under $7.5 million and manufacturing businesses with less than 500 employees fall under the small business category. Note that this regulation includes several industry-specific exceptions.
What is the Eligibility for SBA Loans?
Businesses must meet several criteria to be eligible for 7(a) loan assistance, including:
Operating for profit
Fitting the SBA's definition of a small business
Operating or planning to operate in the US or its territories,
Having a reasonable amount of invested equity,
Using personal assets and other financial resources before applying for financial aid,
Demonstrating the loan's necessity, and
Using the loan amount for lawful business purposes.
Disqualifications for SBA Loans
Businesses must be careful while applying for SBA loans, or they can be disqualified on the grounds of participating in illicit activities, loan packing, speculation, multi-sale distribution, gambling, investment, lending, or if the owner is on parole.
Other types of businesses that are not eligible are:
Real estate investment companies that keep the property instead of letting qualifying small business use it for investments
Companies that, while not part of their usual operations, engage in speculative activities that profit from price volatility, such as wildcatting for oil or trading in commodities futures
Dealers in stamps and rare coins
Businesses whose primary product is cash
Businesses involved in gambling-related activities, including those with gambling as their primary business (Note that businesses with limited legal gambling or lottery income can qualify.)
Churches and organizations that advance religious goals, charitable, religious or other non-profit or eleemosynary institutions, government-owned businesses and cooperatives for consumers and marketers
How Long Does the SBA Loan Approval Take?
The time it takes to approve and fund the SBA loan varies depending on the loan type and lender businesses choose, but it usually takes between 30 and 90 days.
Are SBA Loans Paid Monthly?
Typically, SBA loans are repaid on a monthly basis.
What is the Easiest Way of Getting SBA Loans?
As the process necessitates fulfilling specific eligibility requirements and submitting a complete application, there is no one "easy" approach to obtaining an SBA loan.
However, using the SBA's Lender Match service and working with a lender who has knowledge of SBA loans will speed up the procedure and possibly boost the chances of approval.
For a faster turnaround time, businesses can apply for the SBA Express loan; however, the maximum loan amount and SBA guarantee are smaller than other SBA loan programs.