SBA loans are considered one of the most attractive types of small business loans for both borrowers and lenders. The main purpose of SBA loans is to help small businesses get the funding they need by lowering the risk for the lender.
Without capital, businesses can’t function. This is why small business loans are so often necessary to stay afloat. In 2020, 43% of small business owners applied for loans with banks. That said, getting roped into unfair terms can feel like signing a deal with the devil.
Because SBA loans are partially guaranteed by the government, they encourage lenders to offer larger sums of money to businesses that otherwise may not qualify. SBA loans also offer lower interest rates and longer repayment terms than other types of business loans.
The SBA provided $44.8 billion in funding to small businesses in 2021, which may sound like more than enough to go around. But with the combination of strict eligibility requirements, a lengthy application process, and high demand during the coronavirus pandemic, getting your hands on that cash can be difficult for small businesses.
How to Get Started with SBA Loans
Before we get into more detail about the individual types of SBA loans and their requirements, there are a few things you should know before getting started. If you’ve applied for any type of business loan in the past, you should know that applying for an SBA loan is likely a similar process.
To begin, you’ll need to find a lender that offers SBA loans. This can be done through the SBA’s website directly. With their search tool, you’ll be able to look for a bank or credit union in your area or one that offers an online application process. Once you’ve narrowed your search for a lender, you’ll be able to figure out what type of SBA loan is right for you and begin the application process.
It’s important to note that SBA loans require anyone applying with 20% or more ownership of a company to sign a personal guarantee, no matter the type of loan. This means the business owner(s) take on personal responsibility of repaying the loan if their business fails.
Although a bit frightening to do, these personal guarantees allow the SBA to work with small businesses that may not otherwise be eligible for a business loan under other circumstances. Personal guarantees can be a common requirement for all types of business financing
The bottom line is, If signing a personal guarantee is a dealbreaker for you then SBA loans are not going to be an option for you“
Different Types of SBA Loans and their Requirements
There are a number of different SBA loans, each with unique terms and use cases. How easy it is to get an SBA loan will depend on which type of loan you want to apply for and whether or not you meet the qualifications.
504 loans are long-term, fixed-rate loans reserved for large business purchases. The main purpose of 504 loans is to help businesses grow. 504 loans typically give out financings of up to $5-$5.5 million. Repayment terms for 504 loans are long 10 or 20-year periods, with around a 3% interest rate.
504 loans are acquired through Certified Development Companies (CDC) and not private lenders like banks. The application process can be quite lengthy and requires a long list of documents.
In order to be eligible for a 504 loan, businesses must have a net worth of less than $15 million and a net income of less than $5 million (after taxes) over the past two years. If these requirements are met, a business plan will be required to show the SBA that your business is on track for long term success. Nonprofit companies do not qualify for 504 loans.
To sum it up, 504 loans are a great option for businesses that are looking to expand through the purchase of real estate, equipment, or facilities and create more jobs in the process.
7(a) loans are the most popular type of SBA loan and can be for up to $5 million. The requirements for eligibility include credit score information, the physical location of your business, and providing a plan for how you will spend the money. The SBA also takes what it is your business does into consideration.
You will also have to fill out a long application and include many documents and official business information as you apply for a 7(a) loan. Your lender will help you complete the application process and determine whether or not a 7(a) loan is right for you before getting started.
7(a) loans are fixed-rate loans, meaning you will pay the same amount every month to the lender, plus interest until the loan has been repaid.
In short, 7(a) loans are a great option for any small business looking for funding for purchasing real estate, long-term working capital, refinancing existing debt, or making any other major business purchases.
Microloans are the smallest type of SBA loans and are for up to $50,000, but are usually for around $13,000. Microloans cannot be acquired through private lenders but through nonprofit community-based organizations chosen by the SBA.
These nonprofit lenders each have requirements of their own. They can sometimes require the borrowers to put up collateral or sign personal guarantees. The lenders also determine the details of repayment terms and interest rates.
The bottom line is that microloans are used to help small businesses grow and can be used for working capital, inventory, equipment repairs, and anything to help expand your business. Microloans cannot be used for refinancing existing debt or purchasing real estate.
Answering the question, “Is it hard to get an SBA loan?” is largely dependent on whether or not your business meets the requirements for an SBA loan. In 2020, it was reported that 65% of applicants received SBA loans, but if you are eligible it is certainly worth it to apply.