When it comes to small business loans, you have a lot of options. While having choices can be a good thing, it can also be overwhelming. For many organizations, researching business loans through the Small Business Association (SBA) can be a good place to start. By comparing SBA loans to non-SBA loans and alternative financing solutions, you can see which options are best for your business’s current situation.
What Is an SBA Loan?
The Small Business Association doesn’t provide its own loans; instead, the SBA backs loans through lending partners to make those loans more accessible to small businesses. In other words, you would have to go through your local lender to apply for an SBA-backed loan rather than contacting the SBA directly.
So, what exactly does it mean for a loan to be backed by the SBA? These loans are partially backed by the federal government, meaning that if you fail to make your payments, the government will cover the portion of the loan they guaranteed. This guarantee is for the lender only, not the borrower. The government will not forgive your debt tied to SBA loans.
Because SBA-backed loans are less risky for lenders, potential borrowers can benefit from the following:
Lower Credit Score Requirements: Commercial banks typically require a minimum credit score of at least 660. Although the Small Business Association does not set a minimum credit score for the loans they back, lenders will often accept minimum scores of at least 620.
Favorable Terms: SBA loans can offer lower down payments than commercial loans, and they can also include flexible overhead requirements and no collateral terms.
Competitive Rates: SBA loans typically have rates and fees that are competitive with non-SBA loans. This is because government backing allows lenders to provide financing to more businesses without taking on substantial risk.
Flexible Limits: Borrowers can source financing anywhere from $500 to $5 million to fund their business.
With these measures, the goal of the SBA is to make loans more accessible to small businesses by providing partial government guarantees for lenders.
What Are the Different Types of SBA Loans?
The different types of SBA loans are 7(a) loans, 504 loans, and microloans. Which option is best for your business depends on the amount of money you need to borrow, what you are going to use the funds for, and which eligible requirements you satisfy.
What Is an SBA 7(a) Loan?
The 7(a) Loan program is the SBA’s most common loan. It offers flexibility in terms of usage and maximum limits of up to $5 million.
SBA 7(a) Loan Uses
These loans can be used to meet a wide variety of business needs, including:
Refinancing existing business debt
Establishing a new business, expanding your current business, or purchasing an existing business
Purchasing real estate, including both land and buildings, for your business
Funding building construction or renovation
Purchasing equipment, machinery, furniture, fixtures, supplies, material, or inventory
Long- and short-term working capital to meet staffing needs, emergency repairs, and more
SBA 7(a) Loan Requirements
In order to qualify for this loan program, your business needs to:
Be a for-profit organization
See if you qualify as a small business in your industry based on your number of employees, average annual receipts, or by using the SBA’s Size Standards Tool
Conduct business in the United States
Have a reasonable amount of equity invested
Use personal assets or other resources before applying for financial assistance
Prove the need for a loan
Use the funds from the loan for business purposes only
Have paid off any and all existing debt to the US government
SBA 7(a) Loan Ineligible Businesses
The terms and conditions for this loan specifically prohibit the following businesses:
Real estate investment firms
Firms that make speculative investments, such as commodities trading or collecting and reselling rare coins and stamps
Pyramid sales plans
Government, religious, or non-profit organizations
Businesses engaging in illegal activity
What Is an SBA 504 Loan?
SBA 504 loans can only be used for major fixed assets and offer up to $5 million in funding.
SBA 504 Loan Uses
This loan program provides funding for major fixed assets that fuel business growth opportunities and job creation. These assets include the:
Purchase of land and existing buildings
Construction of new buildings or renovation of existing buildings
Acquisition of machinery and equipment with long-term purposes
Improvement of streets, utilities, parking lots, and landscaping
SBA 504 Loan Use Restrictions
SBA 504 loans cannot be used for the following:
Working capital needs, such as inventory, staffing, or repairs of short-term equipment
Repaying, refinancing, or consolidating existing debt
Making speculative investments, such as in the rental real estate market
SBA 504 Loan Requirements
To qualify for an SBA 504 loan, your business must meet these requirements:
Operate as a for-profit organization
Conduct business in the United States
Have a net worth of less than $15 million
Earn less than $5 million in average net income after federal income taxes
What Is an SBA Microloan?
SBA microloans provide up to $50,000 (with an average loan amount of $13,000) to small businesses and non-profit childcare centers to help them start up or grow their operations.
SBA Microloan Uses
Microloans can be used to start, improve, rebuild, or re-open small businesses. Microloans are often used to supply working capital to cover costs such as:
SBA Microloan Restrictions
SBA microloans cannot be used for the following:
Purchasing real estate
Paying or consolidating existing debt
SBA Microloan Requirements
These loans do not have specific requirements set by the Small Business Association. However, each lender may set their own requirements for:
Minimum credit score
How To Get an SBA Loan
The first step to getting an SBA loan is to determine which loan your business can use and qualify for. Once you know which loan you wish to apply for (using the above information), the next step is to find a lender. With the SBA Lender Match tool, you can enter your zip code to start finding lending institutions near you. Here’s how it works:
Prepare Your Documents: Small business loans are competitive, and this is also true for SBA-backed loans. Use the following checklist to ensure you have the essentials covered:
Intended use of funds
Describe Your Needs: Spend as little as five minutes answering questions about your business.
Get Matched in Two Days: After submitting your form, you will receive contact information for interested lenders. You can either reach out to them or wait for them to reach out to you.
Talk to Lenders: Discuss rates, terms, fees, and other important information with multiple lenders to find the right match for your small business.
Apply for a Loan: When you’ve found the right lender for your SBA-back small business loan, it’s time to apply. Keep in mind that the SBA Lender Match tool is designed to connect you with potential lenders; it does not guarantee that your application will be approved.
Wait for a Decision: The approval process often takes several weeks, and you may have to wait between 30 and 90 days to secure funding after applying for an SBA loan.
How Do You Qualify for an SBA Loan?
When qualifying for a small business loan, there are general SBA loan requirements (covered above) along with lender-specific criteria (credit score and time in business).
What Are the SBA Loan Requirements for Credit Score?
The SBA does not set requirements for applicants’ credit scores. However, lending institutions will generally consider a score of 620 or higher as acceptable for SBA-backed loans and a score of 660 or higher as acceptable for non-SBA loans
What Are the SBA Requirements for New Business?
Similar to credit score requirements, the SBA does not have a set time that businesses need to operate for to qualify for a loan; however, individual lenders typically do. In most cases, your business will need to have existed for at least two years before you can apply for an SBA-backed loan. The exception is SBA microloans, which are designed to help new businesses get started by providing working capital.
Do SBA Loans Have To Be Paid Back?
SBA loans work like loans in the traditional sense; you borrow money from a lending institution and then pay it back over time with interest. When determining how much your SBA monthly payment will be, you need to take your principal and interest into account. SBA loan interest rates can be fixed, meaning they stay consistent for the life of the loan, or variable, meaning that your lender can change your interest rate. Visit the SBA website to see the current interest rates for 7(a) loans, 504 loans, and microloans.
Do You Have To Pay Back an SBA Grant?
If you receive an SBA grant, you do not have to pay it back, unlike loans. SBA grants have stricter requirements than loans and are only available for certain business goals or community initiatives. Some available SBA grants include:
The Research and Development grant, which supports businesses that pursue scientific research that have a high potential for commercialization.
The State Trade Expansion Program (STEP), which helps local governments train businesses to export their goods and services.
The 7(j) Management and Technical Assistance Program, which trains small businesses in the skills they need to compete for government contracts.
How Do I Know If an SBA Loan Is Right for My Business?
SBA loans can help make financing more accessible for small businesses. But are they always the right solution? Not necessarily. Here are a few of the most common reasons why considering alternative lenders may be the right option for your business:
You don’t qualify for an SBA loan. SBA loans can come with lengthy requirements, from needing to be in business for at least two years to having a maximum annual revenue. Borrowing through Backd is straightforward. To qualify, you need:
To have at least one year in business
An annual revenue of at least $100,000
To own a business bank account
Time is of the essence. When challenges or opportunities arise, you need to react quickly. It can take several weeks to get approved for an SBA loan. Backd offers a 24 hour turnaround time when processing applications, so you can hit the ground running.
You need flexibility. SBA loans dictate what you can and can’t spend your borrowed money on. Sometimes, your needs change. You may start with a 504 loan and then need to quickly hire new staff, but the terms of that loan prevent you from doing so. When borrowing through Backd, you can take out between $10,000 and $2 million for whatever your business needs.