When you want to apply for an SBA loan, you must do so by going through a bank or credit union. Then, the bank or credit union applies to the SBA for a loan on your behalf. This application process is intended to obtain a loan guarantee, meaning if you end up defaulting on an SBA loan you’re approved for, then the government will pay the lender the guaranteed amount on your behalf.
But before an SBA loan is granted, the SBA will require an unconditional personal guarantee from everyone who holds at least 20% of the company's total ownership. By agreeing to this personal guarantee, you must accept the responsibility of putting your own assets on the line as a backup for payments if your business cannot afford to or simply does not pay them as promised.
With SBA personal guarantees, risks for lenders are much lower, making them far more likely to work with businesses that those lenders would have otherwise not accepted as eligible for a loan. Now, after you are approved for an SBA loan, the lender will need to close the loan and disburse the money to you. From there, you will repay the loan by paying money to your lender directly.
Government-related loan options for small businesses
The SBA offers a range of loan programs, each of which is designed to cater to different and unique business needs. Let's take a closer look at what each loan program means.
This category of SBA loans provides guarantees for a portion of the total loan amount. It ensures favorable terms, such as capped interest rates and limited fees. These 7(a) loans offer flexibility to businesses that need funding for a wide array of purposes.
If you require long-term and fixed-rate financing, 504 loans might be for you. They can be used to acquire and renovate real estate, purchase equipment and machinery, or invest in other assets. If you are eligible, the 504 loan program can provide you with stability and predictability for your business's financial planning.
For smaller funding requirements, the microloan program offers loans up to $50,000. This program aims to support the establishment and expansion of a business by providing accessible financing options.
SBA Express loans
If you need expedited funding, SBA Express loans can provide you with a quick solution. These loans offer amounts up to $500,000 per loan. They can be utilized for working capital, business expansion and the purchase of real estate or equipment.
Factors that affect loan terms
Loan durations vary based on the purpose of the funds. Working capital or equipment loans typically last for 10 years, while real estate loans usually extend to upward of 25 years. Use the SBA's Lender Match tool to find lenders suitable to your needs.
SBA loans also offer competitive interest rates. They are subject to occasional adjustments by the Federal Reserve as well. However, despite this, SBA loans maintain high standards, flexible terms and favorable rates.
That's why they are so attractive to small businesses. Leverage these benefits to access financial support and promote success for years to come.
Eligibility requirements for lenders and loan programs
Lenders and loan programs set specific eligibility criteria based on the nature, ownership structure and location of a business. That said, despite the similarities, requirements still vary among lenders. Meeting SBA standards is a common criterion as well.
You'll have to consider your repayment abilities, financial stability and projected cash flow, as all three of these factors will be assessed. Clearly describe how the loan will support your business operations. Focus on growth, equipment purchases and market expansion.
Also, lenders will usually provide a comprehensive list of eligibility requirements for your chosen loan program. Review and understand these requirements as you work through the application process. Plus, familiarity with the criteria and open communication with the lender should increase your chances of securing the financing you need from the lender you prefer.
How to get an SBA loan
To qualify for an SBA loan, your business must be a for-profit entity that legally operates in the United States. Ensure proper registration and compliance with regulations at all times.
Also, remember that creditworthiness is crucial. You must demonstrate financial stability and responsible credit history. The SBA also offers specialized programs to facilitate export financing for U.S.-based businesses.
Conventional banks often view export loans as risky, so contact a local SBA international trade finance specialist or the Office of International Trade for guidance. Meeting eligibility requirements, utilizing SBA export loan programs and seeking expert assistance can help you secure financing for your business-related ventures.
How to obtain an SBA-backed loan in three steps
Explore SBA loan options on its website's loans page. Use Lender Match to find local lenders in your area. Work with trusted local lenders that are experienced with SBA loans. Doing so will ensure a smooth application process. SBA loans primarily provide direct loans for disaster recovery.
Similarly, approved lenders offer various funding options for both starting and growing your business. As mentioned, you can utilize the SBA's Lender Match tool to collaborate with an SBA-approved lender. That way, you can find the best loan opportunities to support your entrepreneurial journey from the very beginning.
Benefits of SBA-guaranteed loans
SBA-guaranteed loans offer competitive terms, counseling options and educational resources. They provide advantages like lower down payments, flexible overhead requirements and potential collateral-free funding.
Extended repayment periods can also help you manage cash flow. Application processes and timelines vary, which requires you to pay attention to detail and keep your documentation as updated as possible at all times.
So keep an eye on updated fee structures and changes as they happen. For instance, as of September 2023, there are no upfront guaranteed fees or annual service fees for SBA 7(a) loans of $500,000 or less. Also, there aren't any upfront fees for SBA Express loans for veteran-owned businesses.
All in all, with competitive terms, support, unique benefits and evolving fee structures, SBA loans are an attractive option when you need to finance business-related growth.
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