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What is an SBA loan?
Government-backed financing designed for small businesses that have struggled to find funding elsewhere.
The Small Business Administration (SBA) offers a range of loans to small businesses who’ve struggled to qualify for funding from a bank in the past. With so many different options to choose from, knowing the basics of each can help you find the one that best meets your business’s needs.
What is an SBA loan?
SBA loans are small business loans backed by the Small Business Administration (SBA) that banks, credit unions, community development financial institutions and online lenders offer. Because they’re guaranteed by the federal government, lenders are more likely to offer competitive rates and larger loan amounts. However, exact terms, interest rates and SBA guarantee fees will vary based on the type of loan you’re interested in.
To qualify, your business needs to prove it’s struggled to find financing elsewhere — on top of meeting other stringent requirements set by the SBA. And you can expect this to be a slow process. The lengthy application can take months to complete — and includes submitting your personal resume as well as a business plan that covers what your company does and how it stands out from the competition.
What types of SBA loans are available?
There are several SBA loan programs available to small business owners:
- SBA 7(a) loans. These general-use loans can be used for almost any legal purpose — from covering payroll to buying inventory to consolidating debt. And you won’t be required to provide collateral for smaller amounts.
- SBA Express loans. A small-dollar version of the 7(a) loan, these loans have a much faster turnaround and require less paperwork — so you won’t have to commit months to the application process.
- SBA 504 loans. Also known as Certified Development Company (CDC) loans, these are tailored to businesses looking to expand by purchasing real estate or expensive equipment.
- SBA CAPLines. Revolving or fixed lines of credit designed to help businesses finance a real estate or construction project, prep for seasonal sales, fill a contract or access working capital during a sales slump.
- SBA Community Advantage loans. Available to businesses that work in underserved communities, these microloans are accessible even if you have poor credit, low revenue or limited experience in your industry.
- SBA microloans. A small-dollar loan program designed to foot startup costs — especially for women, minority and veteran-owned businesses.
- SBA disaster loans. Financing designed to help both businesses and homeowners recover after a natural disaster. These loans are also open to businesses owned by military members on active or reserve duty.
- SBA Paycheck Protection Loans. This temporary loan program was designed to help small businesses, nonprofits, sole proprietors and independent contractors make payroll and retain employees during the coronavirus outbreak. You can learn more with our guide to the Paycheck Protection Loan program.
How much can I borrow?
You may be able to borrow as little as $500 up to $5 million — it all depends on the type of SBA loan you’re interested in. How much you qualify for will also depend on your personal and business credit scores, annual revenue, collateral you have available and your business’s current debts.
The SBA has a long list of requirements that your business must meet — in addition to what your lender might require. Generally, you and your business must meet the following criteria:
- For-profit business
- Owners have invested equity in business
- Eligible industry
- Based in the US
- Meet SBA size requirements for your industry
- Tried and failed to qualify for financing elsewhere
Read our guide to SBA loan requirements for more details on which businesses can qualify for an SBA loan.
How can I apply for an SBA loan?
You may be able to apply for an SBA loan online or in person — it depends on the lender you go with. There are also online connection services that can help you find a lender you qualify with, and also apply for funding.
While the exact application and forms required will vary by lender, expect to provide a variety of documentation — including information about your business’s finances and each business partner. Before you get started, ask your lender what’s required to ensure you’re not wasting time on the wrong paperwork.
Is a loan connection service a direct lender?
No, an SBA loan connection service isn’t a direct lender. Instead, it’s a third party that works to match you with lenders you might qualify with that have been approved by the SBA. You can also use the SBA Lender Match service to find an approved lender to work with your small business.
Pros and cons of SBA loans
Weigh the benefits and drawbacks of this program before you decide to apply.
- Low rates. These loans come with some of the lowest rates out there, thanks to SBA caps on interest rates and fees.
- Qualify for more financing. SBA loans can top $5 million, depending on the program. And a government guarantee can help businesses qualify for more funding than they would otherwise be eligible for.
- Less collateral required. The SBA guarantee means that your business only needs to back between 15% and 25% of the loan amount.
- Options available to startups. Businesses in the startup phase can qualify for financing through the SBA microloan program.
- Legal protections. Business loans typically face fewer regulations than other types of financing. But the SBA is an exception, with rules protecting your business against unfair lending practices.
- Complicated application. SBA loans generally require more documentation and forms than any other type of business financing.
- Long turnaround. It can take months to receive your funds after you get started — and days or weeks to complete the application without help.
- Low approval rate. Only 58% of SBA loan applicants were approved in 2019, according to the Federal Reserve.
Apply for an SBA loan today
Compare several lenders that offer SBA loans.
How long does it take to get an SBA loan?
The entire process to get an SBA loan can take months from start to finish. The most time-consuming part is filling out the different forms and gathering all of the required documentation.
Once the application is in, you can expect to hear back about a decision in five to 10 business days. However, there are two notable exceptions: The SBA Express loan has a turnaround time of just 36 hours, and the SBA Export Express loan has a turnaround time of just 24 hours.
This doesn’t mean you’ll be funded that quickly, however. After you hear back about approval, it can take a couple more weeks for your loan to be funded.
How do repayments work?
Repayments are generally made monthly, and many SBA loans are amortized — meaning you’ll pay more toward interest than the principal at the beginning of your loan. Depending on the type of financing you opt for, your term may last anywhere from five to 30 years.
What happens if I can’t repay the loan?
After you’ve received a notice regarding your missed payments, a lender may declare your loan is in default if you’re unable to reach a compromise. From here, two things will happen:
- Your lender may repossess any collateral you used to secure your loan.
- Your lender may go after your personal assets, including your property, retirement savings and bank accounts.
If this still isn’t enough to repay your loan, your lender may transfer it to the SBA. At this point, you can submit an offer in compromise (OIC) to try to reach a settlement. But if a settlement isn’t possible, your loan may be transferred again — this time to the US Treasury Department. Your wages could be garnished and your tax refunds withheld until your loan is fully paid off.
Can I pay off an SBA loan early?
It depends on your lender. Because SBA loans aren’t issued by the SBA itself, you’ll need to check your specific loan agreement for potential fees for early repayment.
Many lenders charge a prepayment penalty — either a flat fee or a percentage of the loan amount — if you decide to pay off your loan before the term is up. And if your loan amortizes, you may have paid more toward interest than the principal, leaving you with a high payoff amount.
4 alternatives to an SBA loan
If you don’t have the time to invest in a lengthy SBA loan application or your business doesn’t qualify, you might want to consider one of these alternatives:
- Business loan or line of credit. Banks, credit unions and online lenders also offer their own suite of business loans and lines of credit outside of the SBA. These may have higher rates, but they’re typically easier to qualify for and funded faster than SBA loans.
- Business credit card. A business credit card is ideal for smaller, everyday expenses. As a bonus, you can build your business’s credit history and many offer cash back or travel rewards for every dollar you spend.
- Small business grant. Run a nonprofit that doesn’t qualify for SBA financing? Or own a for-profit company that strives to make a positive impact? You might want to look into small business grants. Offered through government agencies and private corporations, these are funds geared toward specific types of businesses or business owners that you don’t need to pay back.
- Personal loan. You might be able to use a personal loan for business expenses, depending on the lender. While these typically come with less competitive rates than an SBA or business loan, they can be a good option for startups or businesses less than six months old.
Taking out a business loan backed by the SBA can help you qualify for more competitive rates and terms than you might have found elsewhere. But with a lengthy application that can take months to complete, you might want to learn more about how the SBA loan process works before getting started.
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