• Types of business loans
  • How to Find and Qualify for a small business loan

What Are the Different Types of Small Business Association Loans?

The Small Business Association is a government agency that provides a few different types of loans. The loans are available for nearly any business purpose, whether you need the funds for working capital, debt refinances, or real estate renovations. Loan amounts range from $5K to $5MM and interest rates begin at 7.75%. Funding can be issued in as little as two weeks or the process could take months. It’s safe to say that no lender will be able to issue an SBA loan in a matter of days.

A wide range of businesses can qualify for an SBA loan. The SBA does not actually lend money directly to your business. The SBA guarantees a certain percentage of loans issued by a traditional bank, incentivizing the banks to lend to small businesses. Since the Small Business Administration is backing the loan, it's far less risky for the bank. Since less risk is involved in your loan, your business is considered for lower rate financing. The government guarantee makes the bank more inclined to lend you money.

In general, it’s easier to qualify for an SBA loan than a traditional bank loan. The bank will want to review your financial statements and credit. You can expect a review of the following documents: - Personal tax return- Business tax return - Business plan- Bank statements - Profit & Loss statement- Business debt schedule - Possible collateral

There are 13 different loan programs offered by the SBA. Most likely, one of the following programs will meet your needs. However, if you’re a veteran, seeking a credit line, repairing physical damage to your business, or are active duty, there are specific loan programs for these situations among others.

The CDC/504 Loan Program

A CDC is a Certified Development Company program, also known as the 504 Loan Program. The 504 loan provides you with necessary funding for the purchase of a fixed asset such as real estate, including machinery and buildings. An advantage of this loan program is that you're receiving funds at below-market-rate. CDCs are regulated by the SBA and work with banks to provide business loans. Here’s how the 504 Loan is structured; 40% of project costs are backed from the SBA, 50% from a participating lender, and 10% of project costs are paid by you.

In some situations, the borrower provides up to 20% of the project costs. Note that the 504 Loan is not really for working capital and this is only made possible under the Jobs Act. The loan is intended for use in connection with the purchase of; a building, land, land improvements, renovations, street improvements, landscaping, construction, refinancing a facility’s debt, or the purchase of long term equipment. The 504 Loan program funding begins at $125,000 and extends to $20 million.

Standard 7(a) Loan Program

Most businesses seeking an SBA loan, in general, are seeking a 7(a) Loan. The 7(a) Loan is the most popular SBA program. This loan can be used for general business finance needs, working capital, renovations, or refinancing. You can access a loan up to $5 million with repayment terms up to ten years. Commercial real estate loans can provide the borrower with 25 years to repay.

If the loan is used as working capital, the repayment terms change to five to seven years. For equipment and business acquisition, loan repayment terms are 10 years. The SBA doesn’t lend funds but acts as a guarantor to reduce risk to the lender. The funds from this loan can come from an online, community, or large bank. The standard 7A Loan program can be used for a wide variety of purposes so it's important to state what it cannot be used for. You cannot use this loan to buy out your business partner, pay delinquent taxes, or outstanding debt. The Standard 7(a) Loan requires a 10% down payment as the 504 Loan does.

The Microloan Program

Microloans are available to business owners seeking between $500 and $50,000 in capital. The repayment terms of this loan are up to six years. Profit and nonprofit businesses alike are eligible for this loan. The average size of microloans issued to business owners is $13,000. Microloan funds can be used for furniture, equipment, working capital, and inventory. Microloans cannot be used to pay for real estate or existing debt.

The maximum repayment term for a microloan is six years. The interest rate of this loan is often between 8%-13%. Consider applying for a microloan if you need less than $50k, have good credit, and a strong business plan. The intermediary that you choose to work with will have their own specific criteria that you'll need to meet to be eligible for an SBA microloan. The SBA does not review your application for creditworthiness, they only provide the intermediary with a basic set of parameters.

How to get an SBA Loan and usual requirements to qualify

The most important factor that determines your qualification is your business credit score. A good personal FICO score of 650 is acceptable. If your credit is less than stellar, you’ll need to at least demonstrate that you have a profitable business.

To qualify, you must have been in business for a sufficient amount of time, your business is operated and located in the US, and it meets the criteria of a small business as defined by the SBA. You’ll need strong business revenue to confirm that you have the ability to repay the loan. Your current debt obligations will also be assessed and your Debt Service Coverage Ratio or DSCR needs to be at 1.15.

The Pros & Cons

Since there are so many different types of SBA Loans to analyze, let's take a closer look at the Standard 7(a) Loan specifically. The greatest benefit of the SBA 7A loan is that you're likely to get approved because there's less risk involved for the lender. Plus, the interest rate is usually affordable.

There is a maximum interest rate stipulated by the SBA because they want business owners to be able to repay. Another benefit of SBA Loans is the low down payment. A 10% down payment is more attractive than the 20% required by many lenders. The loan terms are largely decided upon by the lender you choose to go to. You could view this negatively since the lender can use their own discretion and charge you the full interest rate or request a higher down payment. Another con is that lenders usually charge greater fees forStandard 7(a) Loans than private loans.