SBA Loans: A Complete Guide for Small Business Owners

Where can you go when private funding sources deny you a business loan? For the owner, the answer is usually the United States Small Business Administration (SBA). The federal government has a vested interest in encouraging the growth of small businesses. As a result, some have less stringent capital and collateral requirements than commercial loans, making the SBA an excellent source of funding for startups. Also, many SBA loans are for amounts less than most banks are willing to lend.

Shutterstock

Of course, that doesn't mean the SBA is giving money. In fact, the SBA does not provide direct loans; instead, it provides an SBA-backed loan to entrepreneurs, promising the bank to repay a certain percentage of your loan if you are unable to do so.

Banks participate in the SBA program as a Regular, Certified, or SBA Preferred Lender. The SBA can help you prepare your small business loan case, which you then submit to the banks. If the bank approves you, it submits your loan file to the SBA. Applications submitted by regular lenders are reviewed by the SBA within an average of two weeks, applications from SBA certified lenders are reviewed in three days, and approval by an SBA preferred lender is even faster.

The most basic SBA eligibility criteria for SBA loans is the ability to repay the loan from cash flow, but SBA loans also consider personal credit history, industry experience or other evidence of management capacity, guarantees and equity contributions from the owner. If you own 20% or more of the equity in the business, the SBA requires you to personally guarantee the loan. After all, you cannot ask the government to support you if you are not ready to support yourself. The SBA offers a wide variety of loan programs for businesses at various stages of development. Here's a preview:

7(a) Guarantee Loan Program

The main and most flexible SBA loan program is the 7(a) loan program.

The SBA does not lend money itself, but provides maximum loan guarantees of up to $5 million or 75% of the total loan amount, whichever is lower. For loans under $150,000, the maximum guarantee is 85% of the total loan amount. SBA policy prohibits lenders from charging many of the usual fees associated with commercial loans. However, you can expect to pay a one-time guarantee fee, which the agency charges the lender and allows the lender to pass on to you.

An SBA 7a loan can be used for many business purposes, including real estate, expansion, equipment, working capital, and inventory. The money can be repaid over 25 years for real estate and equipment and 10 years for working capital. Interest rates vary depending on the type of loan you apply for.

SBAExpress Program

A general 7(a) loan may best suit your business needs, but the 7(a) program also offers several specialty loans. One of them, the SBAExpress program, promises fast processing for amounts under $350,000. SBAExpress can provide you with an answer quickly because SBAExpress approved lenders can use their own documentation and procedures to attach an SBA guarantee to an approved loan without having to wait for SBA approval. The SBA guarantees up to 50% of an SBA Express loan.

CAP lines

For businesses that need a short-term or cyclical working capital loan, the SBA offers a set of revolving and non-revolving lines of credit called CAP...