Many of the small businesses seeking funding are drawn to the long terms and low rates of SBA loans. Here is a look at what sets these loans apart from conventional commercial loans and how small businesses can obtain one.
What Is an SBA Loan?
An SBA loan is a type of business loan that is guaranteed, in part, by the Small Business Administration (SBA), a federal government agency that helps small businesses in the U.S. This eliminates some of the risk for lenders, which allows them to provide more favorable terms.
The SBA does not offer these loans to businesses directly. Instead, the SBA works with lenders to offer these loans by regulating the amount of money that businesses can borrow and guaranteeing certain interest rates. This support can make it easier for businesses to access the capital they need to grow.
Types of SBA Loans
There are several types of SBA loans available that are designed to meet various business needs.
The most common type of SBA loan is a 7(a) loan. These flexible loans are available for up to $5 million and carry an interest rate that depends on the amount of money being borrowed. They are suitable for business expansions, working capital and other purposes, and generally carry terms of up to 10 years; those for fixed assets typically carry terms of up to 25 years.
A subset of this type of loan is the 7(a) Small Loan, which is offered for funding of $350,000 or less.
SBA Express Loans
For businesses that need funding of up to $350,000, an SBA Express Loan can offer interest rates that will be based on the amount borrowed. This money can be used as a term loan or a revolving line of credit.
SBA Veterans’ Advantage Loan
Small businesses that are owned by veterans and certain family members may qualify for an SBA Veterans’ Advantage Loan, which is similar to an SBA 7(a) or Express loan but has different terms.
Another popular type of SBA loan is the 504 Loan, which is for the purchase of fixed assets, such as property, and can be obtained for up to $5.5 million. It typically has a fixed interest rate, and is funded through Certified Development Companies backed by the SBA covering 40% of the total costs, the lender providing 50% and the borrower paying the remaining 10%. The collateral for the loan is the property being purchased with the borrowed funds.
Obtaining an SBA Loan
The most common way to obtain an SBA loan is applying through a local bank. Many community banks have a designated representative focused on these types of loans to help businesses navigate the application process.
Before applying, a business must ensure it meets the SBA’s eligibility criteria. For example, for a 7(a) loan, the business must be a for-profit company operating in the U.S. with reasonable equity to invest. Moreover, business owners need to use other financial resources such as personal savings and assets before resorting to SBA funding. There may also be minimum yearly profit and credit score requirements.
One of the most daunting aspects of obtaining an SBA loan is gathering the extensive financial documentation required for the approval process. It is imperative to provide the SBA and the bank with as much detail as possible about the finances and performance of the business. Profit and loss statements, tax returns, debt lists, property leases and deeds, business licenses, business plan and history, and certificates and licenses are among the documents that are typically required.
The SBA may also assess the personal financial information of the business owner and other major stakeholders as borrowers are often asked to sign a personal guarantee for an SBA loan. These may include personal financial statements, resumes for business principals, records of previous personal loans, and information about all subsidiaries and partners.
A well-written business plan can increase the chances of the business being approved for an SBA loan, whether it is an established business or a startup. This demonstrates to potential lenders that the business leaders have a clear idea of where the business is going as well as their ability to repay the loan.
The review and approval process for an SBA loan can be lengthy. The specific time period depends on the type of loan the business is seeking, but could take up to 120 days. Businesses should keep in mind that while the SBA may offer an approval relatively quickly, the lender often needs more time to make a decision because they must review extensive documentation.
Learn More About SBA Loans from Woodsboro Bank
Woodsboro Bank is focused on helping their clients thrive and prosper, supporting small businesses and the community as a whole. If your business is considering an SBA loan, the commercial lending team at Woodsboro Bank can explain the options and provide personalized guidance. Contact us today to learn more about which loan is right for you and how to apply.