SBA Loans: Everything Entrepreneurs Need to Know

Entrepreneurship is not just exciting, but it is also playing a vital role in the growth of the overall world economy. 

During and after the pandemic small businesses have contributed tremendously towards keeping people’s financial conditions stable and afloat, and to help the economy bounce forward.

 

Constant Need of Funds by Small Businesses

All small business owners and founders understand the importance of funds. At every stage and every turn of your business progress, you will need some capital to help you succeed in the long run. 

Historically, most new ventures or startups begin their journey with the personal savings of their founders or small personal loans. 

You as an entrepreneur are eager to transform your dream into a reality. Investing everything you have, along with borrowing money from informal channels like family and friends.

Later on this may involve other types of funding to grow, expand or sustain business continuity in a crisis.

How can SBA Help?

Borrowing from financial institutions, banks, and other types of formal creditors, allows you to pay your salaries, meet high production demands, renovate your facilities, and even expand your operations to new places. 

There are many emerging opportunities and challenges that might require an injection of capital to gear up the momentum and let you take full advantage of them to grow your business. 

This is where small business financing can play a significant role. 

It is suitable for first-time entrepreneurs who want to lift their startups off the ground as well as established small business ventures that are looking for small loans at good interest rates. As well as pretty sizable and mature businesses that are still classified as ‘small businesses’.

If you are wondering where entrepreneurs can get these small business loans, what they are all about, and how to get them, then keep on reading. 

In this article we will take a closer look at everything entrepreneurs need to know about SBA loans.

What is the Small Business Administration or ‘SBA’?

The United States Small Business Administration is a Federal Agency that works to provide funds to small business ventures. 

Established in 1953, the agency is focused on providing specialized small business services like loan support, consultation, exporting, and contracting expertise to entrepreneurs and business founders. 

They work in collaboration with other supporting agencies like SCORE, the Small Business Development Center, Women’s Business Centers, and Veterans Business Outreach Centers. 

Together, they aim to assist and empower new and small companies to achieve their business goals. 

The money for the agency is channeled through the Congressional appropriations of the taxpayer’s money. Being a national and social initiative funded by citizens’ taxes, every individual has the right to benefit from it. 

One of their most popular and effective service categories is SBA loans. 

What are SBA Loans?

SBA Loans are funds lent to small companies and startup ventures with considerably less stringent and burdening conditions through the backing of the SBA in the United States. They can boost your company’s growth or help your new company launch in the market. 

They are much more attractive and easier to manage than regular business loans because of their low-interest rates, less down payment requirements, and very favorable terms for the borrower. 

These loans are principally provided by a local bank or online bank to the individuals and corporations, but they are guaranteed, designed, and supervised by the SBA. 

If you fall short of the banks’ typical qualifying criteria, you still have a chance to get a favorable loan through SBA loans. 

In this regard, keep in mind that in fundraising, storytelling is everything. In this regard for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

Different Types of SBA Loans

Below you will find some of the different types of SBA loans available.

As an entrepreneur and small business owner, you should be knowledgeable about all of them. 

SBA 7(a) Loan 

SBA 7(a) loans are suitable for all types of business funding including construction, purchase of equipment and assets, expansion, renovation, new development, working credit, or any other reason. 

You can even use them for refinancing your existing debts. They are SBA guaranteed loans and can be availed up to a maximum limit of $5 Million. The maximum repayment tenure is 10 years which can also be extended in special cases to 25 years. 

SBA Express Loans

Like the name suggests, these are quick turnaround loans. You can get them approved in less time. However, they are small loans with a maximum limit of $500,000. 

Based on your requirements you can opt for a line of credit or a term loan under this category. You can use the funds for a wide range of business needs like the 7(a) Loans.  

The maximum repayment term is 10 years. 

SBA CDC 504 Loans

These loans are offered through a collaborative effort by a CDC (Certified Development Company) and a private lender. CDC is a non-profit organization that is dedicated to helping small businesses. 

In the SBA CDC 504 loan, the CDC provides 40% of the loan requirement which is guaranteed by SBA. The rest of 50% is provided by the lender and almost 20 % by the entrepreneur. 

These loans are only offered to small companies and startups for the acquisition of fixed assets needed for modernizing and expanding their operations. They are based on fixed interest rates and are long-term loans. 

With no maximum limit to this project-based loan, the SBA can only cover up to $5M. The repayment tenure ranges between 10 – 25 years. 

SBA Microloans

These are micro or small loans provided as an initiative by non-profit organizations for specified communities. 

The small loan amounts can be utilized for various business needs like a working capital requirement, machine procurement, and other movable asset purchases. 

They can also be used for debt repayment and refinancing. 

The maximum loan limit of the SBA Microloan is $50,000. They are short-termed and the maximum repayment tenure is up to 6 years. 

SBA Disaster Loans

This is a disaster assistance program initiated to qualify companies for financial help. 

It is applicable for all federally declared disaster situations and enables businesses to recover from adverse conditions using these loans. 

These types of SBA loans can be utilized for repairing or replacing assets damaged during a disaster. This may include inventories, machinery, and even real estate owned by the business. All types and sizes of companies can apply for this loan. 

The upper loan limit is up to $2M and the maximum repayment tenure is 7-30 years. 

SBA International Trade Loans

This type of SBA loan is offered to small business entities in the United States that are ready to launch their international trade activities or are already involved in some kind of exports. 

The main prerequisite for a business to get this loan is to ensure that the funds will be utilized for financing any project, expansion or production that will lead to growth in export. 

Businesses that are getting financially hurt or burdened due to imports in an industry, can also apply for these loans. They can employ these funds to improve their market position.

The SBA International Trade Loans have a maximum limit of $5M. They can be repaid in a time period of 10 to 25 years depending on where you are going to use the funds. 

SBA Export Working Capital Loans

These SBA loans are for those company founders or entrepreneurs who are looking for funding for their short-term financial needs, especially working capital. 

Targeted for companies that want to enter the export markets, they offer a revolving line of credit for their operations. 

As an entrepreneur or company owner, you can use these funds for making purchases like export inventory, trade stocks, and supplies for production. You can also use the export working capital loan for debt refinancing.

The maximum amount is $5M which can be repaid in short tenures of 1-3 years. 

SBA Export Express Loans

These loans are essentially like the other SBA export loans, but they are much quicker when it comes to processing and approvals. 

When applying for an express export loan, you don’t need to submit as many documents compared to other SBA loans. Also, the SBA will provide you a response to your application in less than 36 hours. 

However, the funding disbursement will be further ahead of this time. 

The maximum loan limit for this type of SBA loan is $500,000 and the repayment tenure varies between 7 to 10 years. 

The Community Advantage Loan

This is a fairly newly launched program by SBA. It offers funding through lenders that are on a mission to serve the community. These lenders are mostly non-profitable organizations working for economic development. 

These loans are suitable for entrepreneurs and businesses that are working in the underserved markets of the country. 

The maximum limit for this type of SBA loan is $250,000 and the repayment time can vary from 10 years to 25 years depending on the project you are funding. 

In the video below I cover in detail how to apply for an SBA loan.

Eligibility for SBA Loans

Qualifying for an SBA loan might sound very difficult but in reality, it is a simple process. You only need to meet some basic requirements. Here is a list of entities that are eligible for SBA Loans. Note that specific requirements change over time and by loan program. 

Owner of a Small Business

To qualify for an SBA loan you must own a small-sized business according to the SBA rules. Variable from one industry to another, you must conform to the SBA requirements to qualify your company as a small business.

Run a Non- Profitable Organization or a Profitable Lawful Business

Companies working for charitable and social causes on a non-profitable arrangement can opt for this loan type. Some vice companies are barred from qualifying for these loans. These include categories such as ones related to gambling. 

Have Good Credit History

For qualifying for SBA loans you and your small business should have a good score on your credit report. Different types of SBA loans have different requirements of a minimum credit score on your report. 

Defaulters on any type of previous loan will find it hard to get an approval. 

Have Repayment Ability

The small business and its owner must exhibit a financial cash-flow projection that will enable them to repay the loan in an orderly manner. 

You as an entrepreneur must have good financial statements to support your claim. 

Have Equity Share in Business

Your business and you will be more suitable for an SBA loan if you have already invested your own equity in the small business. This is a demonstration of your personal involvement and stake in the project. 

Foreigners Are Also Eligible

Citizens other than those in the US can also apply for SBA loans. However, your business entity must be lawfully documented along with your status in the country. 

Have No Criminal Records

Entrepreneurs and business owners with a criminal or unlawful track record will face some challenges to get qualified. However, past criminal or illegal wrongdoings will not completely eliminate you from approval. 

You will have to provide detailed information and additional documents to prove that you have now shunned those unlawful activities and are now on a path to correction. 

Final Thoughts

The Small Business Administration (SBA) is not just a funding agency but it supports entrepreneurial and small business ventures in several aspects. 

Apart from providing several well-designed SBA loans, they offer education, training, public contract assistance, and export initiatives for emerging companies. 

They also act as a leading supporter for raising their voice and bringing transformation in policy matters of the small business sector. 

SBA continuously promotes and encourages programs that help entrepreneurs to launch new business entities and work with them to make these entities successful. 

When entrepreneurs exhaust their lending options and need money to jump start their business efforts, the SBA can provide a wide range of loans. 

Flexible, low cost and guaranteed by SBA, approval rates may be higher than other private sector loans and credit lines. 

You may find interesting as well our free library of business templates. There you will find every single template you will need when building and scaling your business completely for free. See it here.