If you’re a new (or existing) business, SBA small business loans may be something you’ve heard about when chatting with other business owners. In this article, we’ll discuss the top questions new business owners ask about SBA loans and help you determine if an SBA loan is right for your business.
What is the SBA?
The U.S. Small Business Administration (SBA) is an independent agency funded by the federal government. It provides free and low-cost resources to help business owners succeed, including but not limited to loan programs, business counseling, and training.
How do SBA loans work?
Rather than directly provide a loan, the SBA supports small businesses by setting guidelines for loans and reducing lender risk.
For example, a small business owner stills goes through a bank for an SBA loan, but the SBA provides benefits to the lender (like repaying up to 85% of any loss in case of default) to reduce the risk to banks and to encourage them to lend to small business owners.
This process makes it easier for small businesses to get funding, because the loan is backed by the SBA. This also provides a sense of security to the bank.
Which SBA loan is right for me?
The SBA offers many types of business loans. The best loan for you depends on how much you need, how much collateral you have, and whether or not you have a military background. Below are various types of SBA loans and their requirements.
- Microloans
- Used to purchase furniture, fixtures, supplies, materials, equipment, and working capital.
- Max loan amount: $50,000
- Collateral required: Each lender has its own lending and credit requirements, but collateral and the personal guarantee of the business owner is usually required.
- Standard 7(a)
- Used for inventory, supplies, raw materials, and working capital.
- Max loan amount: $5 million
- Collateral required: None if loan under $25,000
- 7(a) Small Loan
- Used for inventory, supplies, raw materials, and working capital.
- Max loan amount: $500,000
- Collateral required: None if loan under $25,000
- 504 Loans
- Used for major fixed assets that promote business growth and job creation.
- Max loan amount: $5 million
- Collateral required: The property acquired is used as collateral.
- SBA Express
- This program features an accelerated turnaround time for SBA review. They will respond to your application within 36 hours.
- Max loan amount: $500,000
- Collateral required: None if loan under $25,000
- Export Express
- Used for export development activity.
- This program provides exporters and lenders a streamlined method to obtain an SBA loan or line of credit. The SBA will respond to applications within 24 hours.
- Max loan amount: $500,000
- Collateral required: Lenders follow collateral policies that the lender has established for its SBA-guaranteed loans.
- Export Working Capital
- Used for many purposes relating to exporting goods, including but not limited to buying inventory, manufacturing costs, and purchasing goods and services.
- These loans are for businesses that can generate export sales and need additional working capital to support their sales.
- Max loan amount: $5 million
- Collateral required: Export-related inventory and receivables generated by export sales financed with Export Working Capital funds. The SBA also requires a personal guarantee of owners with 20% or more ownership.
- International Trade
- These loans provide long-term financing to businesses that are expanding because of growing export sales or that have been negatively affected by imports and need to modernize their operations to better compete. Businesses can use these loans for fixed assets for construction, building, real estate equipment, and working capital for export transactions.
- Max loan amount: $5 million
- Veterans Advantage
- The small business must be at least 51% owned and controlled by a veteran, reservist, national guard member, or spouse of one of these groups.
- May be used for long-term fixed assets and for working capital
- Max loan amount: $5 million
- Collateral required: Lenders follow collateral policies that the lender has established for its SBA-guaranteed loans.
Are SBA loans public record?
Yes, information on loans issued by the SBA is publicly available and subject to release under the Freedom of Information Act.
What’s the difference between PPP and COVID disaster loans?
The biggest difference between the Paycheck Protection Program (PPP) and COVID disaster loans was that the PPP had a forgivable component, whereas the disaster loan wasn’t forgivable. Below we share a few of the major components of each program.
Paycheck Protection Program (PPP) Loans
During the pandemic, PPP loans provided short-term working capital to certain businesses (and nonprofits). The PPP loans were forgiven if the funds were spent on expenses like payroll within a certain period. Unfortunately, PPP loans are no longer available.
COVID Disaster Loans
The COVID-19 Economic Injury Disaster Loan (EIDL) was for up to $2 million that could be used for working capital to help businesses and non-profits during the pandemic. These loans are not forgivable, but the loan term was up to 30 years, and it featured a low-interest rate (3.75% for for-profit businesses and 2.75% for non-profit businesses). Unfortunately, the EIDL loans are no longer accepting new applications, but they are still considering requests for appeal, reconsideration and increases.
How do I get an SBA loan?
If you’re a new business looking at SBA loans or if you want more information, it’s best to reach out to a business consultant through the SBA. They can help you determine the best business loan for you and even help you create a business plan as they are often required as part of your loan application. You can find your local SBA office and speak with a consultant for more help.
