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Guide to SBA Lenders and Financing Options

Starting or growing a small business takes capital. For many entrepreneurs, securing business financing can be a major hurdle on the journey to success. That’s where the Small Business Administration (SBA) comes in. The SBA works with lenders to provide loans to small businesses that might not qualify for traditional bank financing.

In this guide, we’ll cover the basics of SBA loans, the different loan programs available, how to apply, and the pros and cons of using SBA financing. Whether you’re looking to purchase real estate, equipment, or just need working capital, SBA loans can be a great option for small business owners with limited resources.

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Overview of SBA Lending

The SBA doesn’t directly lend money to business owners. Instead, it sets guidelines for loans and guarantees a portion of the amount borrowed in order to mitigate the risk for banks and other commercial lenders. This allows entrepreneurs who would likely not qualify for loans otherwise to secure financing.

There are a few key things to understand about SBA loans:

  • Lower Interest Rates – SBA-guaranteed loans can come with lower interest rates (generally between 6-10%) and longer repayment terms. This makes the borrowing costs manageable for small business owners.
  • Funding Uses – SBA loans can be used for purchasing real estate, equipment, inventory, and working capital among other uses. You cannot use an SBA loan to refinance existing debt.
  • Collateral Requirements – The SBA requires lenders to secure collateral prior to issuing loans over $25,000. Collateral can include real estate, equipment, inventory, accounts receivable and in some cases a personal guarantee.
  • Credit Requirements – Although credit requirements are lower than conventional business loans, you still need a minimum credit score between 620-650 to qualify for most SBA loan programs. Some financing options like the SBA Express program have higher requirements around 690+.
  • Origination Fees – There are upfront guarantee fees charged by the SBA ranging from 2-3.75% of the loan amount. These fees are typically rolled into the loan. There may also be lender fees.
  • Prepayment Penalties – Most SBA loans let you pay off the balance early with no prepayment penalty. However, loans with maturities over 15 years do charge a fee if paying off within the first 3 years.

Types of SBA Loan Programs

There are several loan programs offered by SBA lenders to meet different business needs. The most popular options include:

SBA 7(a) Loan

The SBA 7(a) loan is the SBA’s primary business loan program. It can be used for nearly any business purpose including working capital, equipment, and commercial real estate purchases.

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  • Loan Amount – Up to $5 million
  • Interest Rates – Generally between 6-10%
  • Terms – 5-10 years for working capital, up to 25 years for real estate
  • Guarantee – 50-90% of the loan amount

This loan is delivered by banks and credit unions that partner with the SBA. Nearly 70% of all SBA loans approved are part of this program. If you need a sizable loan for your business, the 7(a) program is a top choice.

CDC/504 Loan

The CDC/504 loan program provides long-term, fixed-rate financing for major fixed assets like real estate and heavy equipment. The loan is delivered through non-profit lending organizations called Certified Development Companies.

  • Loan Amount – Up to $5 million
  • Interest Rates – Below market rates (2022 = 4.65%)
  • Terms – 10-20 years
  • Guarantee – 40% of the loan amount

A 504 loan requires at least 10% down from the borrower. The remaining 90% comes from a bank loan (50%) and the CDC loan (40%). The long repayment term and low interest rate makes this loan ideal for owner-occupied commercial property purchases.

SBA Express Loan

The SBA Express loan offers a streamlined and expedited loan process for amounts up to $500,000. These loans have a turnaround time of 36 hours or less.

  • Loan Amount – Up to $500,000
  • Interest Rates – 6.5-10%
  • Terms – Working capital up to 7 years; equipment up to 10 years
  • Guarantee – 50%

This is a great option if you need fast financing or have an urgent need. The downside is that maximum loan size is small compared to other SBA products.

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SBA Community Advantage Loan

The SBA Community Advantage pilot program allows community-based lenders like CDFIs to provide financing up to $250,000 for underserved markets.

  • Loan Amount – Up to $250,000
  • Interest Rates – Prime + 6%
  • Terms – Up to 10 years for working capital; up to 20 years for real estate
  • Guarantee – 85% for loans under $150,000; 75% for loans over $150,000

This newer SBA offering helps expand access to capital for women-owned, minority-owned and veteran-owned businesses. It offers near-term funding for startups and existing businesses.

SBA Microloan Program

The SBA Microloan program provides loans up to $50,000 to help small businesses get started. The average loan size is around $14,000.

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  • Loan Amount – Up to $50,000
  • Interest Rate – 7.5-10%
  • Terms – Up to 6 years

The loans are delivered through non-profit microloan intermediaries focused on economic development in underserved markets. If you just need a small injection of capital to get your business going, this could be an option.

Disaster Assistance Loans

When disasters strike, the SBA offers low-interest Economic Injury Disaster Loans (EIDL) to help businesses recover from temporary loss of revenue. These loans became an integral part of the COVID-19 relief efforts for small business owners.

  • Loan Amount – Up to $2 million
  • Interest Rates – 2.75% for small businesses
  • Terms – Up to 30 years

Finding an SBA Lender

The first step to getting an SBA loan is finding a lender that delivers these loan programs. There are over 5,000 lenders across the country that have been approved to work with the SBA. This includes large banks, community banks, credit unions, and alternative lenders.

When researching lenders, look for these important criteria:

  • SBA Preferred Lenders – The SBA designates seasoned lenders as “preferred” which means they have delegated authority to approve loans faster. This results in a smoother process.
  • Community Focus – Many small, community development banks and lenders have relationships with business owners in their geography. This can help secure financing.
  • Industry Expertise – Some lenders specialize in certain industries like healthcare, hospitality, or construction. Find one with experience in your vertical.
  • Customer Reviews – Online reviews can provide insights into lenders that offer great service and are easy to work with.

The SBA Lender Match tool lets you filter by loan type, geography and lender name to find options. You can also talk to your existing bank to see if they offer SBA loans. Casting a wide net and exploring multiple lenders will help find the best fit.

SBA Loan Requirements

While the SBA aims to help small business owners who don’t qualify for conventional loans, there are still eligibility requirements you must meet:

  • Personal Credit Score – A minimum score between 620-650 is required for most loan programs. Some lenders may approve scores around 600 with strong revenue and collateral.
  • Business Revenue – There are no minimum revenue requirements per se, but the business must generate adequate cash flow to service the debt. Most lenders look for at least 1 year of operating history.
  • Collateral – All loans over $25,000 require some form of collateral including business assets, commercial real estate or personal assets.
  • Equity Investment – The SBA requires owners to contribute a certain amount of their own money, typically 10-30% of the loan amount. This reduces risk for the lenders.
  • Affiliation Rules – If you have multiple businesses, the SBA combines revenue and employees from affiliated companies to determine size status for loans.
  • Use of Proceeds – You must clearly state what the loan will be used for and provide supporting documents during underwriting.

Meeting these requirements upfront will help streamline the application process and improve your chances of getting approved.

How to Apply for an SBA Loan

Now that you understand the different SBA loans available and the eligibility criteria, let’s walk through the steps of how to apply:

  1. Determine the Amount You Need – Think through your financing needs, what you will use the capital for, and the amount required to accomplish your goals.
  2. Find a Lender – Research SBA lenders in your area and compare interest rates, terms, fees, and customer service. Meet with a few to find the best fit.
  3. Submit Your Application – Once you select a lender, complete their application forms and submit all required documents. This includes personal/business financial statements and tax returns.
  4. Underwriting & Approval – The lender will review your application and analyze your finances to make a credit decision. This takes 2-4 weeks on average.
  5. Closing & Funding – If approved, you’ll finalize loan documents and the lender will disburse funds within 5-10 days of closing. Then you can put the financing to work in your business!

Final Thoughts

Navigating business financing for a small company isn’t easy. But SBA lending programs bridge the gap by guaranteeing loans issued by commercial lending partners. This helps entrepreneurs get much-needed capital even if they don’t meet conventional qualification standards.SBA loans feature attractive interest rates, long repayment terms, and funding for nearly any legitimate business purpose. While the application process involves considerable paperwork, it provides small business owners with financing opportunities they likely wouldn’t have otherwise.There are a few great Reddit threads discussing the pros and cons of SBA loans for small businesses:

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