You’ve probably heard that there are several types of SBA loans available when seeking funding for your small business. While it may take time to find the right loan for your business, in reality, it’s easy to find the right SBA loan. A helpful guide is below.
What Is an SBA Loan?
SBA loans are small business loans backed by the U.S. Small Business Administration (SBA). Though banks typically issue these loans, the SBA guarantees the majority of the money involved in the issuance of SBA loans. This way, if you can’t pay your loan, the SBA steps in to ensure the bank can recoup any unpaid funds. The result is a lower-risk lending process that incentivizes banks to provide these loans to high-qualified borrowers.
The Six Types of SBA Loans
The six most prevalent SBA loan programs are detailed below.
1. SBA 7(a) Loans
SBA 7(a) loans are often regarded as the most borrower-friendly business loan. In fact, SBA 7(a) loans aren’t just better than any other SBA loan – they’re better than non-SBA loans too.
Overview:
Small business owners often choose SBA 7(a) loans to cover working capital, debt refinancing, or commercial real estate purchases. A standard 7(a) loan has low interest rates and long repayment terms, with the ability to choose between fixed and variable interest rates. The latter will keep your costs lower in the long term since SBA 7(a) loans are fully amortizing. That means you only pay interest on your remaining principal, not the total loan amount.
Key rates and figures:
- Interest rates: 9% - 10%
- Origination fee: 0.5% to 3.5%
- Loan packaging fee: $2,000 to $4,000
- SBA guarantee fee: 2% to 3.75%
- Loan amounts:
- $30,000 to $350,000 for working capital and debt refinancing
- $500,000 to $5 million for commercial real estate
- Repayment terms: 10 years, except for commercial real estate loans (25 years)
- Minimum requirements:
- Credit score of at least 680 (at least 675 for commercial real estate loans)
- 10% to 20% down payment (or greater for startups)
- Collateral
- At least two years in business
- U.S.-based, with U.S. citizen ownership
- Owner at least 21 years old
- No outstanding tax liens
- No recent charge-offs or settlements
- No foreclosures or bankruptcies in the last 3 years
- Up to date on government loans
Who it’s best for:
SBA 7(a) loans are the best choice for any business that qualifies based on the above criteria.
How to apply:
The SBA 7(a) loan application process is known to be lengthy, and it requires lots of paperwork. To apply, you need to first gather your accounting and tax paperwork. Some of the paperwork you might need includes personal and business tax returns, personal financial statements, a balance sheet, a profit and loss statement, and collateral documents.
You should also prepare to answer questions about how the COVID-19 pandemic has affected your business. You should discuss the changes you’ve made to accommodate any disruptions and how the pandemic has affected your industry at large. After that, you’re ready to connect with an SBA loan lender like SmartBiz® – one of the few that won’t make you provide a business plan.
2. SBA 504 Loans
The SBA 504 program minimizes your financial burden thanks to the involvement of community development corporations (CDCs). It’s a great choice for buying commercial real estate if your business objectives would clearly benefit your community.
Overview:
If you need funding for a commercial real estate purchase, equipment purchase, or facility modernization, SBA 504 loans can be a great fit. The issuing bank will cover 50% of your loan’s total, and your local CDC will cover 40%. That means you’re left with just a 10% down payment in the short term. Your loan comprises the remaining 90%, which you’ll repay over the long term.
Key rates and figures:
- Interest rates:
- 3.775% to 3.939% for the CDC portion of your loan (as of March 2022)
- 4% to 9.5% for the bank portion of your loan; the bank may change this rate after 5 or 10 years
- CDC fees: 1.5% to 2%
- SBA guarantee fee: 0.5%
- Loan amounts: $125,000 to $5 million, with rare $5.5 million exceptions for energy-efficient or manufacturing projects
- Repayment terms: 10, 20, or 25 years
- Minimum requirements:
- U.S.-based for-profit business
- Tangible net worth under $15 million
- Average post-tax net income under $5 million for the two years prior to your application
- Business size within SBA guidelines
- Qualified management expertise
- Ability to repay the loan on time based on cash flow
- Serviceable business plan
- Non-passive, non-speculative business activities
Who it’s best for:
SBA 504 loans are best for qualifying businesses whose commercial real estate or equipment purchase or modernization plans match their local CDC’s public policy goals.
How to apply:
The process of applying for an SBA 504 loan mostly resembles that of SBA 7(a) loans. However, you’ll need additional paperwork pertaining to your real estate or equipment.
3. SBA CAPLines
The SBA offers loans specific to short-term and cyclical working capital needs. These CAPLines loans pertain to four classes of borrowers. Some of them are inherently business lines of credit, whereas others can be revolving or installment loans.
Overview:
The SBA CAPlines program comprises the below four types of loans.
- Contract loans. Any contractor or subcontractor who has profitably completed similar contracts can apply for funding on a project. The loan proceeds can cover the cost of the contract, subcontract, or any related purchase orders.
- Builders lines. Any construction contractor or homebuilder with at least one supervisory employee on-site during construction can qualify for this loan. The loan can cover direct construction costs or renovation costs greater than the fair market value or one-third of the property purchase price.
- Seasonal lines of credit. Any business with a definite, provable pattern of seasonal activity qualifies for this SBA line of credit. Loan proceeds can cover seasonal increases in inventory or accounts receivable.
- Working capital lines of credit. Any business that generates accounts receivable or keeps inventory qualifies for this credit line. Proceeds can go toward short-term operational and working capital needs.
Key rates and figures:
- Interest rates: 2.25% to 4.75% plus current prime rate
- Origination fee: 0.5% to 3.5%
- Loan packaging fee: $2,000 to $4,000
- SBA guarantee fee: At most 3.75%
- Ongoing service fee: Up to 2%, with rare exceptions for working capital lines
- Loan amounts: Up to $5 million
- Repayment terms: Five years for contract loans; 10 years for all other loans
- Minimum requirements: Same as SBA 7(a) loans plus the criteria explained above
Who it’s best for:
SBA CAPLines loans are best for contractors, subcontractors, seasonal businesses, construction contractors, or homebuilders. They’re also ideal for businesses that keep inventory or generate accounts receivable. Among these businesses, those that need short-term, cyclical capital are the best prospective borrowers.
How to apply:
The application process is approximately the same as with an SBA 7(a) loan. In fact, SBA CAPLines loans often come attached to SBA 7(a) or 504 loans. However, businesses in exceptionally good standing may qualify for standalone SBA CAPLines.
4. SBA Export Loans
According to the SBA, 70 percent of U.S. exporting companies comprise teams of under 20 people. SBA’s three export loans can help these small businesses – and slightly larger small exporters – expand or develop their operations. They can also help you start a new export business of your own.
Overview:
The SBA Export Loans program comprises the below three loans.
- Export Express Program. Through SBA express loans, small exporters can learn within 36 hours whether they’ll receive up to $500,000 in funding. Proceeds can go toward any activity that develops the business’s exporting capabilities. This loan is available as a line of credit or an installment loan.
- Export Working Capital Program (EWCP). The EWCP program lends exporters up to $5 million as a credit enhancement. This enhancement can open exporters to traditional loan opportunities they might otherwise struggle to access. It can also give exporters more leverage to negotiate export payment terms.
- International Trade Loan Program. Exporters whom import competition has negatively impacted can apply for SBA international trade loans. So too can exporters looking to develop new markets or expand existing ones. Recipients can use their proceeds to acquire, construct, renovate, modernize, improve, or expand assets and operations. Debt refinancing is also allowed.
Key rates and figures:
- Interest rates (as of March 2022):
- Export Express: 8% to 10%
- EWCP: 6% to 10%
- International Trade: 7.5% to 10%
- Export Express: 8% to 10%
- Loan amounts:
- Export Express: Up to $500,000
- EWCP: Up to $5 million
- International Trade: Up to $5 million
- Repayment terms:
- Export Express: Up to seven years if line of credit; 10 to 25 years for installment loan
- EWCP: Typically one year but can go up to three years
- International Trade: 10 to 25 years
- Minimum requirements:
-
- Credit score of at least 680
- Export-related current or in-development services
- For Export Express, at least one year in business
Who it’s best for:
SBA Export Loans are best for any small business that currently exports goods or plans to do so soon. They’re also great for entrepreneurs who plan to launch, or have just launched, a business that involves exporting goods.
How to apply:
The SBA recommends applying through banks that participate in the Export Loans program.
5. SBA Microloans
Sometimes, your very small business doesn’t need millions of dollars to get everything in order. And if you only need around $10,000, taking out a huge loan can seem risky. SBA microloans are the solution – in fact, they’re so small the SBA doesn’t guarantee them.
Overview:
Think of SBA microloans as a tiny version of SBA 7(a) loans. They come with most of the same advantages – reasonable interest rates and repayment terms, many allowable uses – but on a smaller scale. You can use their proceeds toward working capital, fixtures or furniture, inventory or supplies, and equipment or machinery.
Key rates and figures:
- Interest rates: 6% to 9% (as of March 2022)
- Loan amounts: Up to $50,000, though typically closer to $13,000
- Repayment terms: At most six years
- Minimum requirements:
- Credit score of 620 to 640 or greater
- Collateral or personal guarantee
Who it’s best for:
The SBA microloan program is best for very small businesses that need tiny amounts of cash for working capital, inventory, equipment, supplies, or furniture.
How to apply:
You can apply for SBA microloans through an SBA-approved intermediary. Although SmartBiz does not offer microloans, SBA 7(a) loans that start at $30,000 are available.
6. SBA Disaster Loans
No small business owner can plan for everything – for example, you can’t predict that a tornado will head your way next week. However, such disasters can leave your business reeling. Recovery can be easier if you obtain SBA disaster loans, which the SBA issues directly rather than through banks.
Overview:
You can use SBA disaster loans to cover property damage and asset repair or replacement after a disaster. They can also cover operating expenses you could’ve afforded without a disaster. However, your proceeds must go to costs not covered under your insurance plan or via the Federal Emergency Management Agency (FEMA). A special class of disaster loans, the military reservist loan, can cover operating expenses lost to employees who are on active military leave.
Notably, SBA disaster loans can also cover economic disasters. The COVID-19 pandemic is a great example. In fact, it resulted in a popular but temporary (and now-ended) new class of loans known as the Paycheck Protection Program (PPP). Some PPP loans are forgivable, and some business owners are still repaying them. The pandemic also resulted in a COVID EIDL program that closed on January 1, 2022.
Key rates and figures:
- Interest rates as of March 2022:
- 2.75% to 3.75% for Economic Injury Disaster Loans (for covering property damage expenses)
- 4% for military reservist loans
- 4% to 8% for other loans
- Loan amounts: Up to $2 million
- Repayment terms: Up to 30 years
- Minimum requirements:
- Credit score of at least 575 for loans up to $500,000; credit score of 625 otherwise
- Business located in declared SBA disaster zone
- Physical or economic damage after a disaster
- For military reservist loans, essential employee called to active military duty
- Collateral of at least $25,000 (at least $50,000 for reservist loans)
Who it’s best for:
SBA disaster loans are designed for small business owners whose property and assets are damaged or destroyed after a physical or economic disaster. They’re also designed for employers who temporarily or permanently lose an essential employee to active military duty.
How to apply:
Check to see whether the SBA has declared your location a disaster site. Then, apply for a disaster loan and regularly log into your account for updates.
Apply for SBA loans with SmartBiz
Among the six above types of SBA loans, SBA 7(a) loans are the most versatile. Anyone in any industry can apply for them and use them for many purposes, though the process is easier with a dedicated partner. SmartBiz can be that partner – you’ll have an actual person to contact along the way whenever questions arise. Check whether you pre-qualify*, then take your final steps toward the funding you need and deserve.
