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SBA Loans
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What is An SBA Loan?
A Small Business Administration (SBA) Loan is a type of business financing that is backed by the federal government and provided by private lenders and banks. These loans are popular for small business owners because they offer large loan amounts, low interest rates, and long repayment periods, which can last up to 25 years.
However, the application process for SBA Loans is known to be lengthy and document-intensive, which can be a deal-breaker for those needing quick access to funds. Retrieving all the necessary documents alone can take up to half of the application time. But for those who are patient, the effort may be worth it because of the many benefits the loan offers.
Since SBA Loans are long-term loans with guarantees, every dollar must be accounted for, and the purpose of the funds must be documented at every step. This means identifying how the money will be spent can take time.
Loan Amounts
$100,000 – $10,000,000
Rates
Starting at 6.25%
Speed
Less than 30 days
How Do SBA Loans Work?
SBA loans work by partnering the government with lenders to benefit small businesses. The SBA doesn't directly issue loans but guarantees a portion of the loan amount to approved lenders. This reduces the risk for the lender, making them more likely to offer you a loan with favorable terms like lower interest rates and longer repayment periods. However, your business needs to meet size standards and demonstrate a need for the SBA's guarantee to qualify. With a solid business plan, good financials, and a good credit score, you can increase your chances of getting approved by an SBA-approved lender.
How To Get An SBA Loan
To get an SBA loan, you need to find an SBA-accredited lender, either banks, credit unions, or alternative lenders. You will have to provide the necessary financial documentation, such as tax returns, financial statements, business plans, and more.
The lender will then review the application and, if approved, submit it to the SBA for final approval. Once the SBA approves your application, they will guarantee a portion of the loan.
The SBA requires an unconditional personal guarantee if you own 20% of the business. This means your assets are on the line if your business cannot repay the loan.
Your lender handles loan closing and fund disbursements, and you pay them directly, following the repayment term schedule.
Getting an SBA loan doesn't have to be overwhelming. With SMB Compass as your partner, you'll have expert guidance every step of the way. From finding the right lender to navigating the application process and beyond, we're here to support you and your business. If you're not sure where to start, get in touch with us today to begin your journey toward financial success.
How Can You Use an SBA Loan?
One of the downfalls of SBA loan programs is that small businesses will often have to put up collateral to secure their loan. While this might be intimidating for some small business owners or first time SBA loan applicants, there are many different types of collateral available that can help to secure an SBA loan. Many of these types of collateral are things that are already ready and available just from operating a small business.
A wide range of collateral can be used to secure an SBA Loan. While different asset classes are considered, some will hold more value than others. Some of the types of collateral that can be used for SBA loans are machinery and equipment, accounts receivable, inventory, commercial real estate, residential real estate, investment properties, and marketable securities.
Machinery and Equipment
Considered a hard asset, machinery and equipment are favorable assets for SBA lenders. By taking the make, model, year, and the condition of the equipment into consideration, an SBA lender will have the ability to assign a value to the equipment. One of the reasons that machinery and equipment are commonly used by small businesses owners for collateral to secure SBA loans is because these assets are already available and being used by the business. For most SBA loans, the typical advance rates or loan-to-value (LTV) assigned to equipment and machinery is 60% of the forced liquidation value (FLV). This means that an SBA lender will provide availability based on what they would be able to sell the equipment for in the event of a default.
Accounts Receivable (A/R)
A/R, or accounts receivable, is money that is owed to a company after a sale has been made or services have been rendered to their clients. Basically, if a small business provides goods or services to their clients but often wait for the clients to make payments on invoices or for their contracts, the money owed to the small business can be used as collateral to secure an SBA loan. For most SBA lenders, the A/R that a company has to offer is not as favorable as hard assets, like machinery or equipment. The typical loan-to-value (LTV) for A/R is 20% of the outstanding accounts receivable. This can vary based on the credit quality of the applying business’s clients, the payment terms that are offered, and the diversification of their client base. SBA lenders are often willing to carve out or release their security interest in accounts receivable. SBA Lenders will do this to enable a factoring company or an invoice financing lender to provide a revolving line of credit in addition to an SBA Loan.
Inventory
Although inventory is a tangible asset that might hold value to an operating business, inventory is not always as valuable to an SBA Lender. The type of inventory, the ease of liquidation, and the location of the inventory will all play major roles in determining the advance rate or LTV that an SBA Lender will provide when using inventory to secure an SBA loan. For example, a company that manufactures their own jewelry might receive a 30% LTV from a lender while a steel manufacturer that holds raw steel as inventory might receive a 65% LTV. From a lender’s perspective, the faster and easier they could sell the inventory, the higher the liquidation value they will assign.
Commercial Real Estate
Commercial real estate, or CRE, is a hard asset for small businesses and a great form of collateral for an SBA Loan. Real estate is not as liquid as equipment, A/R, or inventory, but can provide a stable asset for an SBA lender to lend against. Like machinery or equipment, small business owners often utilize real estate to secure SBA-backed loans because the real estate is tied in with the function of the business. Additionally, unlike asset-based lending, loans that have commercial real estate pledged as collateral have a higher likelihood of being approved. Traditional commercial real estate lenders and banks will normally only provide the first lien mortgage on commercial real estate, however, this is not the case with SBA lenders. The financing can be secured by a second lien on commercial real estate. For example, if a property’s appraised value is $1,000,000 and they have a bank real estate loan for $500,000, an SBA lender can still use the real estate as collateral. An SBA lender will use the remaining $500,000 of equity as collateral for an SBA Loan. Depending on the lender, residential and personal real estate may also be applied as collateral to help secure an SBA loan. However, for traditional loans, many commercial lenders will only allow commercial assets to be used as collateral for a commercial loan and do not accept the residential property. With SBA lenders, residential real estate can be used as collateral to secure the SBA loan. In fact, under SBA guidelines, SBA lenders are required to take any available collateral to secure an SBA loan – another part of the incentive for lenders to offer SBA loans to small business owners. The ability for the SBA to use personal residences as collateral helps make the loans more obtainable for more small business owners. Most homeowners have a bank mortgage in place, but similar to the commercial real estate example above, if there is available equity then the residential real estate can be used as collateral.
Investment Properties
Another type of collateral that can be used to secure an SBA loan for a small business is an investment property. Business owners that invest in various types of investment properties have the ability to pledge those properties as collateral for an SBA Loan, if their lender will accept them. Whether the investment property is a shopping center, office building, apartment building, or single-family home, it might be eligible to be used as collateral.
Marketable Securities
One final type of collateral that small business owners can use to secure SBA loans are marketable securities. Marketable securities are liquid assets that can quickly be turned to cash. A few examples of marketable securities are publicly traded stocks, private or public bonds, and certificates of deposits (CDs). Like commercial real estate, marketable securities are typically used as ‘boot’ or extra collateral to help a borrower gain additional liquidity. Advance rates for securities tend to range from 50% to 95%, which is dependent on the type of security.
What Are the Different Types of SBA Loans?
SBA 7(a) Loan Program
The SBA 7(a) Loan Program is the most commonly used program by small businesses. Eligible businesses can receive up to $5 million in funding when approved, and the repayment periods can be as long as 25 years. The SBA 7(a) is as popular as it is because it can be used for various reasons and offers more flexibility than other SBA Programs. With the funding, businesses can: Acquire businesses Purchase and improve commercial real estate Renovate their stores and offices Buy expensive equipment Restock inventory Refinance debt Interest rates for SBA 7(a) Loans are among the most competitive in the market. The SBA controls the interest rate the lenders can charge to protect the borrowers. Small business owners can sign up for SBA-backed loans through local banks, credit unions, or other alternative lenders.
SBA 504 Loan
The SBA 504 Loan program is unique from other SBA-guaranteed loans in a way that it involves another party, which is the Certified Development Company (CDC). The SBA CDC/504 loan focuses on strengthening a community’s economy through job creation and overall business growth. With the CDC/504 loan, eligible businesses can get up to $5 million ($5.5 million for manufacturing businesses) in funding. This program is utilized by small business owners looking to invest in fixed assets, including office expansion, new equipment purchase, land development, or ground-up construction projects.
SBA Disaster Loan
SBA Disaster Loans are part of the SBA Disaster Relief programs, designed to help small businesses that have experienced damage or hardship due to a natural calamity or disaster. It is worth noting that the SBA Disaster Loan is the only SBA loan program wherein the SBA lends money directly to the business owners. SBA Disaster Loans are classified into five different loan types: Home and Personal Property Loans, Business Physical Loans, Economic Injury Disaster Loans, Military Reservists Economic Injury Loans, and Express Bridge Loan Pilot Program. Each loan is intended to address a specific business purpose. The SBA also offered COVID-19 relief as part of their disaster loans to help businesses that were heavily impacted by the pandemic. However, the applications for the assistance have ended in 2021. In general, SBA Disaster Loans can be used for leasehold improvements, repair damage to real estate, or replacing machinery. Businesses can qualify for as much as $2 million in funding when approved. In order to qualify for an SBA Disaster Loan, the business must have experienced damage during a natural disaster and must be located in a declared disaster area.
Commercial Real Estate
Commercial real estate, or CRE, is a hard asset for small businesses and a great form of collateral for an SBA Loan. Real estate is not as liquid as equipment, A/R, or inventory, but can provide a stable asset for an SBA lender to lend against. Like machinery or equipment, small business owners often utilize real estate to secure SBA-backed loans because the real estate is tied in with the function of the business. Additionally, unlike asset-based lending, loans that have commercial real estate pledged as collateral have a higher likelihood of being approved. Traditional commercial real estate lenders and banks will normally only provide the first lien mortgage on commercial real estate, however, this is not the case with SBA lenders. The financing can be secured by a second lien on commercial real estate. For example, if a property’s appraised value is $1,000,000 and they have a bank real estate loan for $500,000, an SBA lender can still use the real estate as collateral. An SBA lender will use the remaining $500,000 of equity as collateral for an SBA Loan. Depending on the lender, residential and personal real estate may also be applied as collateral to help secure an SBA loan. However, for traditional loans, many commercial lenders will only allow commercial assets to be used as collateral for a commercial loan and do not accept the residential property. With SBA lenders, residential real estate can be used as collateral to secure the SBA loan. In fact, under SBA guidelines, SBA lenders are required to take any available collateral to secure an SBA loan – another part of the incentive for lenders to offer SBA loans to small business owners. The ability for the SBA to use personal residences as collateral helps make the loans more obtainable for more small business owners. Most homeowners have a bank mortgage in place, but similar to the commercial real estate example above, if there is available equity then the residential real estate can be used as collateral.
SBA Express Loan
The SBA Express Loan is a subset of the SBA 7(a). The difference between the two programs is that Express Loans have an expedited application process. While 7(a) loan take a few weeks to months to get a decision, Express Loans have an average turnaround time of 36 hours. SBA Express Loans also come with lower loan amounts, considering the loan application process is expedited. Loan amounts can go as much as $350,000, and the repayment length can go as long as 25 years, depending on where the loan was used. A major benefit of SBA Express loans is that collateral is not a requirement and business owners can use the money for virtually any business purpose. To get approved by the SBA, an applicant must have strong personal credit and cash flow.
SBA Microloan Program
The SBA Microloan Program offers funding to SMEs seeking less than $50,000. SBA Microloans can be used for machinery and equipment, furniture or fixtures, working capital, and inventory or supplies. If you want to start your business, you can also use the SBA Microloan for additional working capital. Through the SBA Microloan program, businesses can borrow from $500 to $50,000 with interest rates ranging from 8% to 13%.
SBA Loans Summarized
|
SBA 7(a) Loan Amounts
|
SBA 7(a) Loan Amounts
|
SBA 7(a) Loan Rates
|
|---|---|---|
|
$100,000 to $5,000,000
|
7 to 25 years
|
Prime + 1% to 2.75%
|
|
SBA 504 Loan Amounts
|
SBA 504 Loan Terms
|
SBA 504 Loan Rates
|
|---|---|---|
|
$500,000 to $20,000,000
|
10 to 30 years
|
4.92% to 5.22%
|
|
SBA Disaster Loan Amounts
|
SBA Disaster Loan Terms
|
SBA Disaster Loan Rates
|
|---|---|---|
|
Up to $2,000,000
|
Up to 30 years
|
4% to 8%
|
|
SBA Express Loan Amounts
|
SBA Express Loan Terms
|
SBA Express Loan Rates
|
|---|---|---|
|
Up to $350,000
|
7 to 35 years
|
Prime + 4.5% to 6.5%
|
|
SBA Microloan Amounts
|
SBA Microloan Terms
|
SBA Microloan Rates
|
|---|---|---|
|
$500 to $50,000
|
Up to 6 years
|
8% to 13%
|
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What Are the Benefits of SBA Loans?
Unlike traditional loan options, SBA loans are designed specifically for small firms. That said, it offers benefits that traditional loans or non-SBA-backed loans don't provide.
The SBA directly targets small business owners for the SBA loan programs, providing flexibility and options that are helpful for smaller companies. For example, an SBA loan can be used for various expenses. The SBA goes so far as to say that funds from SBA loans can be used for "most" business purposes – which includes SBA startup loans, loans for expansion, equipment purchasing, working capital, inventory, SBA business loans, or SBA real estate loans.
One of the biggest benefits of SBA loans is that the loans are secured through the SBA guanratee. This greatly incentivizes lenders to offer SBA loans to small business owners. SBA agencies guarantee a majority of the loan amount for the lender, which reduces their risk and allows them to continue supporting small business owners. This leads to a higher likelihood of finding a lender that can successfully approve your SBA application.
What Type of Collateral Can You Use for SBA Loans?
One of the downfalls of SBA loan programs is that small businesses will often have to put up collateral to secure their loan. While this might be intimidating for some small business owners or first time SBA loan applicants, there are many different types of collateral available that can help to secure an SBA loan. Many of these types of collateral are things that are already ready and available just from operating a small business.
A wide range of collateral can be used to secure an SBA Loan. While different asset classes are considered, some will hold more value than others. Some of the types of collateral that can be used for SBA loans are machinery and equipment, accounts receivable, inventory, commercial real estate, residential real estate, investment properties, and marketable securities.
Accounts Receivable (A/R)
A/R, or accounts receivable, is money that is owed to a company after a sale has been made or services have been rendered to their clients. Basically, if a small business provides goods or services to their clients but often wait for the clients to make payments on invoices or for their contracts, the money owed to the small business can be used as collateral to secure an SBA loan. For most SBA lenders, the A/R that a company has to offer is not as favorable as hard assets, like machinery or equipment. The typical loan-to-value (LTV) for A/R is 20% of the outstanding accounts receivable. This can vary based on the credit quality of the applying business’s clients, the payment terms that are offered, and the diversification of their client base. SBA lenders are often willing to carve out or release their security interest in accounts receivable. SBA Lenders will do this to enable a factoring company or an invoice financing lender to provide a revolving line of credit in addition to an SBA Loan.
Inventory
Although inventory is a tangible asset that might hold value to an operating business, inventory is not always as valuable to an SBA Lender. The type of inventory, the ease of liquidation, and the location of the inventory will all play major roles in determining the advance rate or LTV that an SBA Lender will provide when using inventory to secure an SBA loan. For example, a company that manufactures their own jewelry might receive a 30% LTV from a lender while a steel manufacturer that holds raw steel as inventory might receive a 65% LTV. From a lender’s perspective, the faster and easier they could sell the inventory, the higher the liquidation value they will assign.
Commercial Real Estate
Commercial real estate, or CRE, is a hard asset for small businesses and a great form of collateral for an SBA Loan. Real estate is not as liquid as equipment, A/R, or inventory, but can provide a stable asset for an SBA lender to lend against. Like machinery or equipment, small business owners often utilize real estate to secure SBA-backed loans because the real estate is tied in with the function of the business. Additionally, unlike asset-based lending, loans that have commercial real estate pledged as collateral have a higher likelihood of being approved. Traditional commercial real estate lenders and banks will normally only provide the first lien mortgage on commercial real estate, however, this is not the case with SBA lenders. The financing can be secured by a second lien on commercial real estate. For example, if a property’s appraised value is $1,000,000 and they have a bank real estate loan for $500,000, an SBA lender can still use the real estate as collateral. An SBA lender will use the remaining $500,000 of equity as collateral for an SBA Loan. Depending on the lender, residential and personal real estate may also be applied as collateral to help secure an SBA loan. However, for traditional loans, many commercial lenders will only allow commercial assets to be used as collateral for a commercial loan and do not accept the residential property. With SBA lenders, residential real estate can be used as collateral to secure the SBA loan. In fact, under SBA guidelines, SBA lenders are required to take any available collateral to secure an SBA loan – another part of the incentive for lenders to offer SBA loans to small business owners. The ability for the SBA to use personal residences as collateral helps make the loans more obtainable for more small business owners. Most homeowners have a bank mortgage in place, but similar to the commercial real estate example above, if there is available equity then the residential real estate can be used as collateral.
Investment Properties
Another type of collateral that can be used to secure an SBA loan for a small business is an investment property. Business owners that invest in various types of investment properties have the ability to pledge those properties as collateral for an SBA Loan, if their lender will accept them. Whether the investment property is a shopping center, office building, apartment building, or single-family home, it might be eligible to be used as collateral.
Marketable Securities
One final type of collateral that small business owners can use to secure SBA loans are marketable securities. Marketable securities are liquid assets that can quickly be turned to cash. A few examples of marketable securities are publicly traded stocks, private or public bonds, and certificates of deposits (CDs). Like commercial real estate, marketable securities are typically used as ‘boot’ or extra collateral to help a borrower gain additional liquidity. Advance rates for securities tend to range from 50% to 95%, which is dependent on the type of security.
What Types of Documents Do You Need to Get an SBA Loan?
The below forms are necessary to process an SBA Loan Application, but additional documentation will be required. – SBA form 1919 and 1920
Downloadable SBA Forms (SBA form 1919 and sba form 1920)
SBA 7(a) Loan Application Documents – SBA 504 Loan Application Documents – SBA Disaster Loan
Application Documents – SBA Express Loan Application Documents – SBA Microloan Loan
Application Documents – SBA form 1919 and 1920
- SBA Form 1919 and SBA Form 1920
- Profit and Loss Statements (prior 3 years)
- Current Balance Sheet
- Current A/R Aging Report
- Current A/P Aging Report
- Business Debt Schedule
- Environmental Questionnaire
- Complete Business Plan
- 2 Years of Business Projections
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How to Apply for SBA Loans
Small business owners often ask how to apply or how to qualify for an SBA business loan. Because these are longer-term loans, there is a deeper background and credit check compared to other small business loans.
When looking into how to get an SBA loan, business owners need to gather documentation and evidence that their small business will be alive and healthy for over 10 years. They may also have to pledge collateral to secure the loan.
As for the document requirements, business owners will also need to provide the following:
Personal identification
Business certificate or license
Proof that they are the owner of the small business
Business financials
Tax returns for the last two years for the small business and the business owner's personal taxes
History of past loan decisions or applications
If a small business can provide all of this information and can demonstrate strong health, has a good borrowing history, shows good credit, presents a profitable business plan, and shows that they are making money and will be able to pay off the loan, then they should be ready for application.
Frequently Asked Questions
Common Questions. Straight Answers.
The application process for an SBA Loan varies depending on the type of SBA loan the business is applying for and how organized the business's finances are. Working directly with a lender that specializes in SBA Loan lending will help expedite a long and document-intensive process.
SBA loans are still available for small businesses that meet specific qualifications. Different SBA loan programs are available, each with its eligibility requirements and purposes. The SBA does not provide loans directly but collaborates with lenders to guarantee a portion. This can help small businesses get financing more easily.
Here are a few tips to get your SBA loan approved. First, ensure your business meets size requirements and operates legally in the US. You'll also need to demonstrate that traditional lenders wouldn't finance your venture without the SBA's guarantee.
A solid application is crucial. This includes a well-crafted business plan outlining your goals, strategies, and financial projections. Support your plan with financial documents and maintain an excellent personal credit score, typically above 640.
Since the SBA doesn't directly lend money, you'll need to find an SBA-approved lender familiar with your industry or loan type. Offering collateral can strengthen your application. Additionally, take advantage of free counseling provided by the SBA to refine your application and enhance your business prospects.
Yes, SBA loans are just like traditional business loans in that they require repayment with interest. There was a temporary SBA loan forgiveness program during the COVID-19 pandemic, but that program has expired. So, if you take out an SBA loan, you'll be responsible for making the scheduled payments to fulfill the loan terms. Defaulting on an SBA loan can lead to negative consequences like asset seizure by the lender or the SBA itself.
No. SBA loans aren't guaranteed approvals. To qualify, your business size and legal status must meet SBA standards. You'll also need to show traditional lenders wouldn't fund you without their help. Even with a strong business plan, financials, and good credit score, the final decision rests with the SBA-approved lender who assesses your business's risk and repayment potential. However, careful preparation and meeting eligibility requirements can significantly increase your chances of securing an SBA loan.