WHAT IS AN SBA LOAN?
The Small Business Administration (SBA) offers government-backed loans to help businesses start or expand. The SBA offers three different types of loans: 7(a), 504 loans, and microloans. These types of loans tend to be one of the most popular because they offer low interest rates and long repayment terms.
A misconception about these loans is that the SBA lends directly to small businesses. That is not the case. The SBA guarantees these loans, meaning that if you can't pay back the loan, the SBA will pay a certain portion of your loan back to the bank. This guarantee lowers the risk for banks and lenders and actually encourages them to offer these loans.
Each of the loans that the SBA offers, has its own requirements and purpose for which the loan is going to be used. Below you will find in more detail what each type of loan does.
WHAT IS AN SBA 7(A) LOAN PROGRAM?
It provides financial assistance for small businesses with unique needs. It can be used for working capital both short-and long-term, refinance current business debt, and purchase inventory, but the best option is for real estate as a part of a business purchase.
This loan has an interest rate that can either be fixed or variable. It also depends greatly on your credit score and the length of your repayment period. It has a repayment term between 10 - 25 years.
HOW TO QUALIFY FOR AN SBA 7(A) LOAN?
To qualify for this loan, the business must meet the following:
Operate for profit
Have other financial resources available including personal assets
No delinquencies on existing debt to the U.S. government
Use the funds for a business purpose
The funds of the loan can be used for the following:
Working capital both short-and long term
Purchase of equipment (ex: machinery, furniture, supplies)
Purchase of real estate (ex: land and buildings)
Establishing a new business or expanding an existing business
WHAT IS SBA 504 LOAN PROGRAM?
It provides financing for major fixed assets that support business expansion and growth. It is a long-term and fixed-rate loan.
The interest rate is set to be higher than the current market rate for 5-year and 10-year U.S Treasury issues. It amounts to approximately 3%, but it can be financed with a loan. It also has a maturity repayment available for 10 years and 20 years.
HOW TO QUALIFY FOR A 504 LOAN PROGRAM?
To qualify for this loan, the business must meet the following:
Operate for profit
Have less than $15 million in tangible net worth
Average net income of less than $5 million after taxes prior to your application
The funds of the loan can be used for the following:
Purchase or construction of: existing land or building, new facilities, machinery, and equipment
Improvements of: land, parking lots, existing facilities, and landscaping
WHAT IS AN SBA MICROLOAN?
It provides finance for start-ups and expansion for small businesses and some not-for-profit childcare centers. The SBA has intermediary lenders like nonprofit community-based organizations that are able to administer this type of loan to eligible borrowers.
HOW TO QUALIFY FOR AN SBA MICROLOAN?
To qualify for this loan, each intermediary lender has its own set of requirements and lending criteria. These loans generally require some type of personal guarantee and collateral from the business owner.
The funds of the loan can be used for the following:
Reparation, re-building, or improvements for the business
Working capital
Inventory, supplies, and fixtures
Equipment and machinery
As we have looked over the three main types of loans that the SBA offers and how each of them can be used for business purposes. We will now go over some of the most commonly used documents that you will need when applying for one of the SBA loans above.
Required Documentation:
Below you will find a list of required documents that are most commonly used for the type of loan programs that have been mentioned above.
Documentation:
Government issued driver’s license
Business tax returns
Personal tax returns
Balance sheet
Profit & loss statement
Collateral (depends on the loan size)
Business debt schedule
As we have seen, each SBA loan has its own unique set of requirements and use of funds, but it all depends on what your business is in need of.
If you are a business owner and would like to know more about SBA loans and see what the best option for your business is click here or follow us on social media for more content.