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Almost every small business owner wants to know what an SBA loan is, and how to qualify for one. As one of the lowest-cost products out there, SBA loans are the holy grail when it comes to growing your business affordably.
But aren’t they impossible to get approved for?
At BitX Funding, we’ve helped thousands of small business owners successfully secure loans with our SBA loan services. With all that experience—and data—under our belt, we’re confident we can give you the information you need to apply for an SBA loan.
By understanding how the product works and what exactly the eligibility requirements are, you’ll know if an SBA loan is the right product for your business.
The “SBA” in SBA loans stands for the Small Business Administration.
The SBA does not make direct loans to small businesses. Rather, the SBA sets the guidelines for loans, which are then made by its partners (lenders, community development organizations, and micro-lending institutions). The SBA guarantees that these loans will be repaid, thus eliminating some of the risks to the lending partners.
So, when a business applies for an SBA loan, it is applying for a commercial loan, structured according to SBA requirements with an SBA guaranty. SBA-guaranteed loans may not be made to a small business if the borrower has access to other financings at reasonable terms. SBA loan guaranty requirements and practices can change as the government alters its fiscal policy and priorities to meet current economic conditions. Therefore, you can’t rely on past policy when seeking assistance in today’s market.
The SBA can guarantee as much as 85 percent of the loan proceeds, so while the lending institution will have some risk, it should also be willing to take on more risk than with traditional loans. SBA loans can be as large as $5 million. Most SBA loan services are through banks. You can ask your bank whether it makes SBA-guaranteed loans, or you can go to the SBA website for a list of participating lenders. Besides, the SBA has a microloan guarantee program for loans up to $50,000. These loans are provided through nonprofit community-based organizations. You can find a list of participants on the SBA website.
It’s tougher than ever to qualify for a small business loan from a bank. Sole proprietorships that don’t bring in much money, export businesses, and startups can have an even more difficult time getting SBA loan services, even through online lenders.
Since Small Business Administration loans are backed by taxpayer dollars, the application can be a doozy. What you need is a breakdown of how to apply for an SBA loan for your business.
Applying for an SBA loan takes longer than most other loans — and it requires a lot more paperwork, too. There’s the application to fill out, forms to complete and documents to get together. And wading through the government-issue jargon to figure out who is required to fill out what can be more time-consuming than the forms themselves. Here’s what you need to do if your business is getting ready to apply for an SBA loan.
Before you even begin your application, make sure your business is eligible. The SBA might be open to businesses that don’t typically qualify for loans, but it still has strict eligibility requirements. The SBA’s most general requirements include:
Good or excellent credit for all major owners 650 > FICO
For-profit, US-based business in an eligible industry (vice and loan packaging typically can’t qualify)
At least two years old
Proof the business has tried and failed to get funding from other lenders
No delinquencies or defaults on government loans
Meets the SBA’s definition of a small business
Owners have invested a reasonable amount of equity in the business
Your lender or program might also have additional eligibility requirements. Your business could qualify for an SBA startup loan through the 7(a) program if it doesn’t meet the age or credit score requirements.
Some SBA lenders also require collateral in the form of the business or business owners’ assets. The collateral typically backs the portion of the loan that the SBA doesn’t cover — typically between 15% and 50% — with your personal assets.
Just because most businesses go for the SBA 7(a) program doesn’t necessarily mean it’s right for you. Choose a program that works best for your business. Here are some of the most common SBA loan services.
SBA 7(a). The 7(a) program covers several different types of SBA loans. But the standard 7(a) loan is a term loan of up to $5 million that any qualified business owners can get for nearly any legitimate purpose.
SBA CAPlines. Falling under the umbrella of the 7(a) loan program, the CAPline is the SBA’s standard use line of credit of up to $5 million.
SBA 504. These term loans are generally for buying fixed assets like equipment or real estate to help a business expand, which acts as collateral. This program requires a down payment of around 10% to 20% and instead of applying through a lender, your business applies through a Certified Development Company (CDC).
Disaster assistance. This program was made to help businesses get back on their feet after suffering physical damage from a disaster like a hurricane. They come with extra-low rates in amounts up to $2 million.
SBA Export programs. The SBA offers three programs designed for small export businesses to get financing — which typically has trouble getting a business loan. These include the SBA Export Express program, Export Working Capital program and the International Trade loan program.
Once you’ve found the right lender or referral service, it’s time to start gathering the documents you need for the application. While it depends on the lender and type of SBA loan service you’re applying to, most business owners will need to provide the following information at a minimum:
If any business owner owns 20% or more in another business, they will likely need to provide details on that business as well, especially financial statements. If you intend to buy another business with your loan, you’ll also need to provide financials on that business, including tax returns, and the purchase agreement.
How to Choose the Right SBA Loan Program
The SBA’s loan programs are designed specifically for small business owners who don’t have access to another reasonably termed financing. There are four main types of loan programs:
7(a) loan program: This is the SBA’s primary program to help startups and existing small businesses obtain financing. 7(a) loans are the most basic and most commonly used type of loan, as well as the most flexible. The money can be used for a variety of general business purposes, including working capital, machinery, and equipment, furniture, and fixtures, purchasing or renovating land and buildings, leasehold improvements and debt refinancing. Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed assets. Borrowers can apply through a participating lender institution.
CDC/504 loan program: This SBA loan service provides businesses with long-term, fixed-rate financing for major assets, such as land and buildings. The loans are typically structured with the SBA providing 40 percent of the total project costs, a participating lender covering up to 50 percent and the borrower putting up the remaining 10 percent. Funds from a 504 loan can be used to purchase existing buildings, land or machinery, and to construct or renovate facilities. These loans cannot be used for working capital or inventory. Under the 504 program, a business qualifies if it has a tangible net worth of less than $15 million and an average net income of $5 million or less after federal income taxes for the two years before application. The maximum amount of a 504 loan is $5 million.
Microloan program: This program offers very small loans to startups, or newly established or growing small businesses. The loans can be used for working capital or the purchase of inventory, supplies, furniture, fixtures, machinery or equipment. The SBA makes funds available to specially designated intermediary lenders, which are nonprofit organizations with experience in lending and technical assistance. Those intermediaries then make loans of up to $50,000, with the average loan being about $13,000. The loan cannot be used to pay existing debts or to purchase real estate.
Disaster loans: The SBA offers this option to businesses that have been affected by a declared disaster. These low-interest loans can be used to repair or replace damaged real estate, personal property, machinery, equipment, inventory, and business assets.
Further details on each type of loan program can be found on the SBA’s website.
What’s the bottom line for your business’s bottom line? How much will an SBA loan cost?
Well, the cost and repayment of your SBA loan depend on the program you choose. Here are the fees, interest rates, and repayment terms usually associated with each of SBA’s most popular loan program 7(a)
7(a) SBA Loan Program
The St Louis District Office frequently answers questions for our lenders related to fees on SBA loans, so we wanted to go over a few points. SBA collects loan guaranty fees so entrepreneurs (not the United States taxpayers) bear much of the cost of funding SBA’s financial assistance programs. Guaranty fees are due within 90 days of the date of loan approval and may be financed with the proceeds of the SBA-guaranteed loan.
Entrepreneurs often need capital to start or grow their small business and realize that there is a cost of capital. Small business owners often find the fees associated with obtaining SBA loan services more attractive than the cost of other capital options. For example, for a $150,000 loan, the SBA guaranty fee is $2,550 or 2% of the guaranteed portion (85%). For a $5,000,000 loan (75% SBA guaranty of $3,750,000), the loan fee is $138,125 calculated as 3.5% of the first $1 million guaranteed ($35,000) plus 3.75% of the remaining guaranteed amount. We urge lenders to refer to SBA Standard Operating Procedure (SOP) 50-10-5(E)Download Adobe Reader to read this link content to determine the exact guarantee fee that will be due on a specific SBA-guaranteed loan.
Maximum of 2.75% + Prime Rate (typically between 5 – 10%).
Up to 10 years for working capital loans and equipment loans, and 25 years for commercial real estate loans.
If you’re feeling unsure about which SBA loan program makes sense, BitX Funding can walk you through your options and help you decide which program is right for you—and whether you’ll qualify for our SBA loan services.
And if you’re not there yet, we’ll work with you to graduate your business up to an SBA loan—one of the longest-term and most affordable business loan options out there.
BitX Funding is your online marketplace for small business loans. From SBA, start-up lines of credit, short-term loans, mid-term loans, invoice financing to merchant cash advances and lines of credit, BitX Funding is where lenders compete for your business. Our top-rated lenders focus on real-life business data and cash flow, which means you can qualify for a loan even if your credit score isn’t perfect. What differentiates us from the competition is that with a brief questionnaire our highly trained loan consultant will listen to your needs and match you with the appropriate funding. You can go at it alone and spend hours online trying to find funding for your business or you can have a one-stop experience with BitX Funding and our direct connection with the lenders.