SBA Business Loans: Things You Should Know

Applying for a small business loan requires research and work.

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There’s a lot to know about the different types of loans, as well as the alternative types of business funding out there. Many businesses opt for loans backed by the Small Business Administration (SBA). 

We’ll talk about what small business loans are, the various types, interest rates, repayment terms and everything you need to know before you sign any paperwork. 

What is a SBA Loan?

Small-business loans are issued by banks or participating lenders and guaranteed by the SBA. The SBA is able to guarantee percentages of these small business loans as follows:

  • Up to 85% of loans for $150,000 or less
  • 75% of loans that are for more than $150,000

Many small business owners opt for SBA loans because their rates and terms are typically more flexible and lower than other financing methods. That being said, not all small and new businesses can qualify for business loans. Before we jump into what it takes to get a business loan, let’s see what types of SBA loans are available.

Types of SBA Loans

The SBA guarantees loans of different amounts and for different purposes. Under each program, different groups process the loans as follows: 

 

  • 7(a) loan program: The primary SBA loan is called the 7(a) loan program. These are federally guaranteed loans for up to $5 millions and the funds are meant for: expansion, equipment purchases and working capital. Banks, unions and specialized lenders process SBA 7(a) loans. 

  • 504 loan program: This program also guarantees loans up to $5 million, but the funds are geared towards buying facilities, land and machinery. Private-sector lenders and non-profits fund loans under this program.

  • Microloans: For working capital, starting a business, inventory and equipment, businesses can apply for microloans for up to $50,000. Community-based nonprofit organizations process these.

  • SBA disaster loans: When natural disasters strike, the SBA backed loans of up to $2 million that provide funds to small business owners suffering from emergencies and natural disasters. The SBA processes these loans. The most recent program that falls into this category is the Paycheck Protection Program for those affected by the coronavirus pandemic.

 

 

What are the Interest Rates?

Interest rates for SBA loans are determined by participating lenders who set their interest rates based on the prime rate plus a markup rate, which is called a spread. It looks like this for the 7(a) loan program based on loan amounts and the repayment terms. 

 

  • $25,000 or less: <7 years repayment = 7.50% / >7 years repayment = 8.0%
  • $25,0001-$50,000: <7 years repayment = 6.50% / >7 years repayment = 7.0% 
  • $50,000+: <7 years repayments = 5.50% / >7 years repayment = 6.0%

How Can I Get an SBA Loan?

Receiving approval for a SBA loan begins with an application process. It can be a lengthy process, taking weeks or months before you see funds or rejection. There are very specific criteria you must meet to be able to apply for a SBA loan in the first place. So, if you fall into any category of ineligibility, it’s not even worth applying. 

If you are eligible to apply, then you should prepare the following paperwork that will be needed for the application:

  • Borrower information form 
  • Statement of personal history 
  • Personal income tax returns (prior 3 years)
  • Business tax returns (prior 3 years) 
  • Business certificate or license 
  • Loan application history 
  • Business lease 
  • Personal finance statement

What Do Lenders Care About?

Although the process and application can be lengthy, SBA loans do offer some of the best interest rates and repayment terms when compared to other business loans, and they are guaranteed if a borrowed defaults. That’s why it is a good place to begin. However, such lenders do care about your cash flow and credit history. They will stringently choose businesses that they believe have high creditworthiness and are unlikely to default on the loans. Lenders will look at what’s known as the 5 C’s, namely:

  • Character
  • Capacity
  • Capital
  • Conditions
  • Collateral 

They’ll also want a strong business plan and down payment. As such, some up-and-coming businesses may have a harder time proving this good history. 

This is just one of the reasons why many small businesses can benefit more quickly from merchant cash advances (MCA) over traditional bank loans. A merchant cash advance provides borrowers with a lump sum of money upfront in what can be less than 24 hours turnaround. As repayment, businesses promise a portion of future credit card sales that will be proportionally paid back. In most cases, it’s much easier to apply for and receive a MCA than a business loan.

Things to Know Before Applying

  • Limit how many you apply for: Be sure to find the program that is suited for your needs before applying to all of them in the hopes you will be approved.

  • Understand the cost: Understand that there is a cost of borrowing money from any provider. The cost is the interest rate and it can be fixed or variable. It also often differs based on repayment terms and the amount you borrow, or principal amount. 

  • Shop around: Look at your options for SBA loans, private loans and also alternative funding options. Uplyft’s Marketplace is designed to help you find the right lender. 

  • Understand repayment terms: Repayment terms dictate the agreement between borrower and lender for how the loan is to be repaid. If a borrower fails to adhere to the repayment terms, there can be costly and serious consequences that could cost you more than your business.

  • Choose between a line of credit or business loan (or MCA): Weight business loans versus taking out a line of credit or MCA before signing any paperwork. Businesses don’t all operate in the same way, nor do they require the same type of funding. That’s why it’s important to write down the pros and cons of your options to best assess your own situation.

The Wrap Up

Although the Small Business Administration doesn’t provide loans per se, they do guarantee loans on behalf of small businesses that borrow from participating lenders. Since they are guaranteeing the borrower, the application process is rigorous and requires that small business owners are in good standing to pay back the loans they borrow. 

However, not all small business owners will be approved for SBA loans, nor do they all qualify. Some good alternatives for small business funding include merchant cash advances or lines of credit. Every form of borrowing money comes with its own terms and costs, so it’s best to assess your current business standing to see what option leads you down the safest and most cost effective route.

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