3 Main Types of SBA Loans for Small Businesses

Last Updated Jun 30, 2020 | Published on Feb 18, 2019 | SBA Loan

If you own a small business in Minneapolis, you’ve probably heard about the Small Business Administration Minneapolis (SBA). The SBA partners with banks, credit unions, and other financial institutions to offer low-cost, government-backed loans to small business owners, who can then use these funds to pay for daily business expenses, new equipment, inventory, and more.

It’s a common misconception that the Small Business Administration is a lender. While they do provide the cheapest financing solution for small businesses, the SBA itself doesn’t lend money. What they do is, they guarantee 75% to 85% of your loan, which decreases their level of risk. What this amounts to is, in the unfortunate event someone cannot repay their loan, the lender is guaranteed that they will recoup all of the money owed to them.

By lowering the lender’s risk, small business owners are able to secure much-needed business funding. Your business gets financed, while lenders profit from interest payments. If you default on a loan, the lender loses little to none.

The General Requirements

The general qualification for any type of SBA loans include the following:

  • Your small business is located in the United States and you must demonstrate why you need a loan.
  • Your company should operate in an eligible industry.
  • The business should be owned by an American citizen.

Top 3 SBA Loans

There are several types of SBA loans. However, there are three major kinds of SBA loans that attract a majority of small business owners:

1. Microloan Program

As the name suggests, microloan offers smaller loan amounts to small businesses. The average SBA microloan is usually around $13,000 but can go as high as $50,000. The interest rates vary between 8% to 13% and the loan amortizes over a period of up to six years.

There are no restrictions as to how you can use a microloan, as long as it benefits your business. You can use it as working capital or to purchase inventory and equipment, however, you cannot use it to buy real estate or refinance debt.

How to Qualify for Microloans

The qualifications for SBA microloans vary from lender to lender. Unlike other types of SBA loans, the Small Business Administration gives lenders the freedom to set eligibility requirements for microloans.

The most common requirements include the following:

  • A minimum credit score of 640
  • A personal guarantee
  • Some lenders may require collateral

2. CDC/504 Loan Program

The CDC/504 loan program is one of SBA’s cheapest and largest lending programs. However, you can only use borrowed funds to purchase equipment or real estate – or other large fixed assets.

With this type of SBA loan, you can borrow money up to $5 million, which can be repaid within 10 to 20 years. Interest rates average between 5% to 6% and come with an upfront 3% fee. Lenders also require 10% of your purchase as collateral to secure the loan.

While applying for the CDC/504 can be complicated, it’s a great choice for small businesses looking to purchase big and expensive equipment, real estate, or carry out renovations.

How to Qualify for CDC/504 Loans

Be sure to meet the following requirements to qualify for a CDC/504 loan:

  • A minimum credit score of 680
  • A down payment of at least 10%

You also need to demonstrate that you were unable to obtain a loan elsewhere, you don’t engage in investment rental real estate, as well as your ability to meet the following requirements:

  • Your tangible business net worth is less than $15 million
  • 51% of the building must be owner-occupied
  • Demonstrate the ability to repay the loan on time

3. 7(a) Loan Program

Last but definitely not the least, is SBA’s most popular loan – the 7(a). Most business owners opt for the 7(a) loan because of its flexibility. You can use the funds for operational expenses, inventory, equipment purchases, seasonal financing, and even debt refinancing or real estate.

This type of loan offers up to $5 million and can last from seven to 25 years depending on your use. Bank-level interest rates are also available and range from 6% to 13%.

How to Qualify for 7(a) Loans

Startup companies and established companies can apply for SBA 7(a) loans. To qualify for a 7(a) loan, you need to meet the following requirements:

  • A minimum credit score of 680
  • No recent tax liens, foreclosures, or bankruptcies
  • 10% minimum down payment for loans used to buy commercial property, equipment, or another business
  • Collateral is not required but lenders are less likely to approve your loan if you don’t have enough collateral. You don’t need collateral if the loan is less than $25,000

For startup companies, you need to meet the following additional requirements aside from the ones listed above:

  • You need to show lenders that you have industry experience along with a comprehensive business plan.
  • You may be asked for larger down payments of at least 20% or 30% of the total projection costs.
  • Lastly, you need to have excellent credit – at least 700.

The Small Business Administration Minneapolis

The Small Business Administration Minneapolis offers all these and more for your small business. If you want to know more about SBA loans, you can check out the Small Business Administration’s website or better yet, talk to a small business financial expert.

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