What is an SBA Loan?

Small businesses are an integral part of the economy but they also help make up the backbone of the communities they serve and the country as a whole. After all, part of the foundation of the  American dream is that anyone who wants to can open their own business. 

Opening your own business can be extremely rewarding, but if anyone told you it would be easy, they were lying. Some challenges can be overcome more easily than others, and some are straight up out of your control. Like, oh say, a pandemic forcing the entire world’s workforce to come to a screeching halt? 

One of the most common hurdles small businesses must overcome is not enough funding. In fact, 33% of small businesses either struggle or fail due to a lack of capital. 

Small businesses have a ton of expenses, like rent, payroll, inventory, and maintenance costs, just to name a few. This doesn’t even account for the cost of growing the business or investing money.

So what do you do as a small business owner to combat a lack of cash? To meet their financing needs, many small businesses take out business loans. For a non-business owner, applying for a loan might sound intimidating or scary, but it is actually a very common business practice. 

Fortune magazine reported that 45% of small business owners applied for loans in 2021. We can save our conversation about inflation for another blog post, but for now, that should give you an idea of how important business loans are for keeping small businesses afloat, especially in this day and age. 

If you decide your business is ready to apply for a loan, keep in mind there are a variety of different business loans available. Before you apply for any of them you’re going to need to do some research to decide what is the best fit for your business. 

Not only are there different types of loans available, but there are also a number of different lenders, like banks and online lenders, to choose from. 

Once you determine what type of loan you want and from which lender, the process of applying begins. However, this process can be lengthy and can sometimes have some bumps in the road. Some businesses do not qualify for loans. One example is startups that need funding to get their business off the ground. Because startups can’t put up collateral or haven’t been around long enough to accrue credit, they often can’t get loans, which stunts their growth.  

This is where the Small Business Administration comes in! 

The SBA helps small businesses get funding by working with lenders to set loan guidelines that lower the risk for the lender. SBA loans are partially guaranteed by the US government and also come with other benefits that make them perhaps the most attractive option when it comes to small business loans, for both borrowers and lenders. 

 

What is an SBA loan?

The SBA has worked wonders when it comes to helping small businesses, especially over the past few years in the midst of the pandemic. 

According to the SBA’s website, “under Administrator Isabella Casillas Guzman, the SBA has undertaken a monumental task – saving the small business economy and preserving the jobs and livelihoods of millions. From Main Street to Broadway, manufacturers to Mom-and-Pops, thousands of civil servants played a critical role in getting small businesses (who employ half of the private workforce, create two-thirds of net new jobs, and generate 40 percent of America’s economic productivity) back on their feet, and the work continues.”

Not only has the SBA provided billions of dollars in relief to small businesses post-pandemic, but has also delivered a record number of traditional loans to small businesses in 2021-2022. 

An SBA loan is similar to other types of business loans, in that it can be used to cover the costs of business, whatever they may be. SBA loans can be used to get a business off the ground, to cover regular business expenses, or to grow a business by purchasing real estate.

An SBA loan is also acquired through a private lender, like a bank, but unlike a “regular” loan SBA loans are either partially or fully guaranteed by the government. In other words, if your business fails or defaults on an SBA loan, the government will repay the lender for a predetermined amount of money.  

 

How do SBA loans work?

The application process for an SBA loan is very similar to the application process for any other type of business loan. First, your business will apply for a loan through either a bank or a credit union. Then, the lender will apply for a loan guarantee with the SBA. If the loan is approved, you will work directly with your Different types of SBA loans

There is not just one kind of SBA loan, there are actually quite a few different kinds of SBA loans with different terlender to repay the loan.

A pro tip is that some lenders already work with the SBA, and the SBA can match you with a lender if you don’t already have one. Another great thing about SBA loans is that because they are not only vetting the borrower but also the lender, it reduces the chances of striking a deal with a predatory lender.

The SBA certainly does amazing work for small businesses, but they also need to protect themselves which is why anyone applying who owns 20% or more of a company must sign a personal guarantee.

A personal guarantee makes it the individual’s responsibility to repay what’s left of their business’s loan if the business defaults. In other words, after signing a personal guarantee, a business owner’s personal property can be at stake if they can’t pay back the business loan in any other way.

We already discussed how important it is for small businesses to have access to funding and how some businesses can’t get traditional loans. Because SBA loans require both a personal guarantee and provide financial backing to lenders, they feel much more secure working with small businesses and are more likely to do so.

 

Different types of SBA loans

There is not just one kind of SBA loan, there are actually quite a few different kinds of SBA loans with different terms. It is important to review them so you can decide which SBA loan is right for your business.

7(a) loans

7(a) loans are part of the SBA’s most popular loan program. This type of loan is the best SBA loan for purchasing real estate but can also be used for short or long-term working capital, refinancing existing debt, or making other purchases for your business like equipment or supplies.

The maximum amount of money for a 7(a) loan is $5 million. In order to be eligible you must fit with a list of requirements provided by the SBA, including being able to prove what you will use the money for. The SBA also considers what your business does to make money, checks credit score information, and the physical location of your business.

You will also have to fill out paperwork and provide multiple documents in order to 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.

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.

504 loans

504 loans are long-term, fixed-rate loans for large assets like real estate, facilities, or equipment. The purpose of 504 loans is to help businesses expand and create more jobs in the process. 

Some examples of things 504 loans can be used for are, building a new building, buying long-term equipment or tools, and construction on an existing building or land. A 504 loan cannot be used for working capital or buying inventory, refinancing existing debt, or paying rent on land you do not own.  

504 loans are also usually for up to $5 million but can sometimes be $5.5 million, depending on the project. If you are applying for multiple projects, you cannot receive more than $16.5 million in total. 

Unlike 7(a) loans, which are available through private lenders, 504 loans can be acquired through Certified Development Companies (CDC). CDCs act as the SBA’s community partners who work to promote economic growth and also help regulate nonprofits in their areas.

In order to be eligible for a 504 loan, your business 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. Of course, you will also have to provide a business plan and prove that your business will be able to repay the loan. Nonprofit companies do not qualify for 504 loans.   

You can only apply for a 504 loan through CDCs. You can find a CDC in your area through the SBA website. The application process also requires many documents and will likely take some time to complete. 

The repayment terms for 504 loans are long-term and can be done over a 10 or 20-year period, with approximately a 3% interest rate.

Microloans

Microloans, as the name suggests, are smaller loans for up to $50,000. The average microloan provided by the SBA is $13,000. Microloans are used to help small businesses and some non-profit childcare centers grow. 

Microloans can be used for virtually anything that can help improve or expand your business such as working capital, purchasing inventory, repairing equipment, and so on. Microloans cannot be used for refinancing existing debt or purchasing real estate, however. 

Unlike the other two types of SBA loans, microloans are provided by nonprofit community-based organizations chosen by the SBA. These nonprofits act as lenders when it comes to microloans. 

Each lender has its own set of requirements, sometimes including collateral or personal guarantees from the borrowers. To apply for a microloan, you will need to find an SBA intermediary in your area, which can be done on the SBA website.

The repayment terms and interest rates of the microloan will depend on the lender’s requirements.

Paycheck Protection loans (PPP)

The PPP program was available during the Covid pandemic and closed in January 2021.

Covid-19 struck, and Revenued stepped up.

When it became clear that federal funding would become the most pressing need for small businesses because of the Covid-19 pandemic, we teamed up with a leading fintech bank to underwrite and process Paycheck Protection Program (PPP) loan applications.

Throughout 2020 and 2021, we were able to provide a total of $4 B in PPP approvals helping more than 113,000 US businesses.

 

Pros and cons of SBA loans

Now that we’ve discussed the three main types of SBA loans, you may be asking yourself, “what are the pros and cons of SBA loans?”   

 

Pros of SBA loans

Competitive terms

Because of federal regulation, the interest rates and fees connected to SBA loans are generally lower than regular loans. You will also generally have a longer time to repay the loan, so you won’t have to put a large chunk of your revenue back into repaying the loan each month. 

SBA loans also offer larger sums of money than would normally be available to a small business, giving you the opportunity to do things like purchase real estate or expensive machinery. 

SBA loans often have lower down payments, and flexible requirements, like not always requiring collateral, meaning more small businesses can get access to the funds they need.

Education and guidance

In addition to the financial pros, some SBA loans have the added benefit of support from nonprofits and community leaders that can help give you business advice and teach you how to be the best small business owner you can be.   

 

Cons of SBA loans

Hard to get

Because SBA loans have such desirable terms, it isn’t very easy to get one. For one thing, you  can expect a lot of competition. Many small businesses apply for SBA loans which means in order to be selected you will have to fit the SBA’s criteria, which includes good credit among other things. 

The process can also be a lengthy one, even if you are approved. So be prepared to put in the time and if you need funding now, you might want to consider other options. 

The truth is that every type of business loan has pros and cons and all things considered, SBA loans are a pretty great option. The application process might require more effort, but the pros definitely seem to outweigh the cons.