SBA loans are the first loans any small-business owner should consider when exploring small-business financing as they are the most consistently low-priced loans in the market. The most common forms of SBA loans are called 7(a) loans, but there are plenty of other types of SBA loans. While they may come with lengthy applications and prolonged funding times, the benefits of SBA loans make long applications entirely worth it.
|SBA 7(a) Loan|
|SBA Express 7(a) Loan|
|Community Advantage SBA Loan|
|SBA CAPLines (line of credit)|
Table of Contents
What is the SBA?
The Small Business Administration (SBA) is the federal arm in charge of small-business financing. While the SBA provides a number of services like advisory and mentor programs for small businesses nationwide, it is most well known for creating highly competitive loans called SBA loans. The SBA's flagship and most common loan is called the SBA 7(a) Small Business Loan. The organization doesn't usually provide financing directly to small businesses but it does work with a large variety of lenders that do.
Why are SBA Loans so Competitive?
The SBA guarantees significant portions of each SBA loan. This means that lenders may be willing to lend to borrowers who don't fully meet their strict criteria and/or lend to borrowers at a reduced rate. Lenders incur reduced risk because they are paid by the SBA in the case of defaults.
So SBA loans may give borrowers the ability to borrow from traditional lenders like banks who they may not normally be able to borrow from, and even if they could initially qualify, they might get an even cheaper loan because of the guarantee.
How Much do SBA Loans Cost?
Interest rates on 7(a) loans are pegged to a prime rate (most commonly the Wall Street Journal Prime Rate) plus an additional markup percentage determined by the SBA, which is based on the loan amount and repayment terms.
For example, if you're looking for a 7(a) loan that's more than $50,000 with a repayment plan less than seven years, your loan would be capped at 7.25%. On the other hand, if you wanted the same loan with a repayment plan over seven years or more, your loan would be capped at 7.75%.
|7(a) Loan Amount||Less Than seven-Year Repayment Term||Seven-Year or More Repayment Term|
|$25,000 or less||Prime Rate + 4.25%
(5.00% + 4.25% = 9.25%)
|Prime Rate + 4.75%
(5.00% + 4.75% = 9.75%)
|$25,000-$50,000||Prime Rate + 3.25%
(5.00% + 3.25% = 8.25%)
|Prime Rate + 3.75%
(5.00% + 3.75% = 8.75%)
|More than $50,000||Prime Rate + 2.25%
(5.00%% + 2.25% = 7.25%)
|Prime Rate + 2.75%
(5.00% + 2.75% = 7.75%)
Additional details on the cost of all SBA loans can be found here.
Choosing the Right SBA Loan
Choosing the right lender is arguably more important than choosing the right SBA loan. Most businesses will find that their needs are met by the SBA 7(a) loan, and a good lender with plenty of SBA experience should be able to point you in the right direction. We suggest you make sure the lender has years of experience with SBA loans and that they clearly state their rates before signing.
SBA loans can be found at almost every corner. Nearly any traditional lender, from large commercial banks to local community banks will likely offer SBA loans. However, only a few online lenders offer SBA loans.
How Can I Get an SBA Loan?
SBA loans, while great in many ways, tend to be difficult to qualify for. With the exception of the Community Advantage (CA) loan, SBA loans usually aren't designed for startups and newer businesses. In fact, the SBA doesn't really list strict requirements. It does list some basic requirements that borrowers need to meet for its SBA 7(a) loans, but the real difficulties come from lenders themselves and their own application requirements.
Generally, borrowers need credit scores above 680, they should be able to put up collateral for their SBA loan, they should be able to demonstrate a minimum level of cash flow, and they should have been profitable for at least a few years. Traditional lenders tend to be difficult to qualify with, and this is why many borrowers instead turn to online lenders.
|Requirements Set by SBA||Common Lender Requirements|
Documents Needed to Qualify
The application process for SBA loans can be long and the funding time can typically take several weeks, with the exception of SBA Express Loans. In order to shorten the application process, we recommend you have the following documents and information ready:
- Personal background and financial statements
- Business financial statements
- Business license or certificate
- Ownership or affiliation information
- Personal and business income tax returns
- Loan application history
- Personal resume(s)
- Business description and history
- Commercial lease agreement
- Required documents will vary by lender.