If your small business has been turned down for a loan by a bank it may qualify for a loan backed by the Small Business Administration.
The federal agency, which is set up to help small businesses create jobs, partners with lenders to share the financial risk of making loans to small businesses that don’t quite qualify for a regular bank loan.
The SBA doesn’t lend money directly to a business. Instead, it guarantees part of the loan to encourage lenders to make loans to businesses they wouldn’t otherwise consider.
The goal is to help existing businesses grow until they can qualify for regular loans on their own, if needed, and to protect the jobs they create along the way. Some smaller SBA loans require SBA-supplied business training to sharpen owners’ skills and boost the odds their businesses will survive.
An SBA loan might be right for your small business if you need money to grow but don’t have stellar credit and a long track record of making profits. As long as your credit is okay and your business has a clear path to profitability, you have a shot at getting an SBA loan.
If the loan will be used to buy assets that can be used as collateral for the loan, including equipment, fixtures, or commercial real estate, an SBA loan might be a good choice for your small business.
It’s important to know that even though an SBA loan comes with a partial government-backed guarantee, for which you and/or the lender will pay a fee, if you do default on your loan the SBA doesn’t automatically swoop in to cover it. As the borrower, you will have had to put up collateral to get the loan. That may be your house. And that’s what the lender has to go after first, before it can tap the SBA guarantee.
How is an SBA loan different from a regular bank loan?
Along with being easier to qualify for, an SBA loan typically has more flexible terms than a regular bank loan. So you will have longer to pay it back, which means your monthly loan payments will be lower. And the down payment will likely be lower. That’s good for cash flow, although you will be paying interest over a longer period of time.
For example, one of the two main SBA loan programs is the 7a, its general purpose business loan. If you borrow money for working capital, you’ll have five to seven years to pay it back under the 7a program and a downpayment of about 10%. If you use the money to buy or start a business, the term will be longer, up to 10 years. And if you borrow to purchase, build or renovate commercial real estate, you could have as long as 25 years to repay the loan.
Interest rates are largely controlled by the SBA and for a 7a loan can be fixed or variable, depending on what the lender offers. The maximum fixed for a seven-year loan over $50,000 is 7.61% currently, according to one lending source. The max variable rate is 6.25% for the same type of loan
How much can I borrow with an SBA loan?
The amount of money you can borrow depends on the purpose of the loan. The maximum for a 7a loan is $5 million, although the average loan in this program is about $370,000.
The SBA’s other main loan program is the 504. It can be used to buy, build or convert big commercial real-estate projects such as an office building or a warehouse, or to buy long-term machinery or equipment. The SBA will back a 504 loan for up to $5 million. The interest rate is fixed. And you can have up to 20 years to pay it back, if its for real estate.
The SBA works with nonprofit community development corporations, or CDCs, to coordinate 504 loans because it expects a business borrower to create or retain one job for every $65,000 of the loan the government guarantees.
The 504 is part of a two-loan package. The SBA guarantee will apply to 40% of the cost of the project, up to $5 million. The CDC will work with your small business to get a traditional bank loan to cover 50% of the project price. And you as the borrower have to make at least a 10% down payment.
Who can apply for an SBA-backed loan?
Your small business has to fall into certain size and revenue ranges to qualify for an SBA loan. And it can’t have access to other resources to cover the purpose of the loan, such as the owner’s personal assets or the ability to get a regular bank loan.
Small business status under the SBA is measured differently depending on the industry in which your business operates. Some industries face a max on employee count. Others are measured by average revenue. For instance, if you are in the business of solar electric power generation, you are considered a small business if you have no more than 250 employees. If your business is a distillery, you can have as many as 1,000 employees and still qualify for a small-business loan from the SBA. An art gallery or architectural firm can’t have more than $7.5 million in average annual revenue, for example, but an industrial laundry has a revenue cap of $38.5 million before it is no longer eligible.
Here is a table to look up your small business.
To be eligible for a 504 loan, your small business has to have a net worth of less than $15 million and average net income of less than $5 million, after taxes, over the previous two years.
Where can my small business apply for an SBA loan?
Your small business can apply for a loan from a lender that has been approved by the SBA to offer loans backed by its guarantees. Both banks and non-bank lenders, such as the community development corporations, offer SBA loans.
Just fyi, Wells Fargo makes the most SBA loans by a long shot. And it lends more in total than any other SBA lender, according to SBA data: Wells Fargo made 6,587 loans for a total of $1.4 billion in SBA’s latest fiscal year. The average loan was for $207,000.
If you think an SBA-backed loan could help your small business, you can connect with local SBA-approved lenders via Linc, an online questionnaire. It’s not a full application, but it is a good start if you think an SBA loan is the right tool to help you start or grow your small business .