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Understanding Different Types of SBA Loans

Do you have a business idea that will help your community? Maybe you want to start a new restaurant or open up an art gallery. Whatever it is, a critical step towards making this dream a reality and helping your community is to get financing for your business. One way to do so in the United States is by applying for an SBA loan with the Small Business Administration (SBA). There are different types of loans from which you can choose and there are various ways to get one! Keep reading for more information on SBA loans, how to get approved, and make your dream come true!

What is an SBA Loan?

An SBA loan is a type of U.S. government-backed business financing that has been around since the 1930s. As one part of President Roosevelt’s New Deal programs during the great depression, these loans can be used to start or grow small businesses in America’s communities. Today the program still offers low-interest loans to those who qualify at banks, credit unions, or other private lenders so they can get their dream started!

These loans offer competitive interest rates for first-time entrepreneurs as well as established company owners looking to fund new ventures or expand existing operations. However, there are financial requirements that must be met before individuals are allowed to participate in the program. The requirements, terms, and conditions all vary based upon the type of loan being applied for. 

The Different Types of SBA Loans

There are several different types of SBA loans, (ranging from $350,000 to $5 million) each suited for a particular type of business and/or goal. There are many important factors to note, from interest rates and turnaround times to SBA guarantees and eligibility requirements. Below, we will outline the key differences you should be aware of before making a decision and applying for any SBA loan type.

Standard 7(a) Loan

The most popular SBA loan, the Standard 7(a) Loan provides short-term and long-term working capital. It is intended for businesses with little to no collateral. In fact, for loans less than $350,000, lenders are not required to take collateral at all. For larger loans, the SBA requires the lender to take collateral up to an amount equal to the total loan size. Trading assets can also be used as a form of collateral if needed.

Other important aspects of the Standard 7(a) loan to note: 

  • Maximum Loan Amount: $5 million
  • Maximum SBA Guarantee: 85% for loans of up to $150,000 and 75% for larger loans
  • Interest Rate: You and your provider have the ability to choose/negotiate an interest rate with an SBA loan; however, it cannot be more than the SBA maximum (varies depending on the size of the loan and payment period).
  • Revolving Lines of Credit: Up to 10 years
  • Turnaround Time: 5-10 business days
  • Forms: Every SBA loan required SBA Form 1919 and SBA Form 1920
  • Credit & Eligibility Decisions: Decided by the SBA, however – qualified lenders may be allowed to make credit decisions without SBA review in certain circumstances.

7(a) Small Loan

The 7(a) small loan is similar to the standard, with one of the only major differences being the maximum possible loan amount. While the standard offers a maximum of $5 million of credit, the small loan has a limit of $350,000. 

With a substantially smaller maximum amount, the small loan is typically better suited for businesses looking for working capital, rather than a full expansion.

SBA Economic Injury Disaster Loans

The SBA Economic Injury Disaster Loans (EIDL) are for qualified businesses that can prove that the disaster has directly caused an “economic injury” and SBA-approved lenders agree to participate, your business may then qualify for the loan. EIDLs can provide essential funding to help businesses recover and aid those who cannot obtain financing from conventional sources. Furthermore, the loan proceeds can be used for general operating expenses, to replace inventory, rent, utilities, fixed expenses, repairs, payroll, and healthcare benefits.

EIDL terms include the following: 

  • Maximum Loan Amount: up to $2 million
  • Interest Rate: Rates (either fixed or variable) are set by SBA-approved lenders based on the risk level of your business
  • Revolving Lines of Credit: Up to 10 years

As EIDLs are intended to help business owners in particular, they still have more flexible qualifications and terms than other SBA loans.

For example:

  • A history of consistent and on-time payments can help with decreasing the credit requirements for obtaining an SBA loan.
  • For loans less than $200,000, there’s no need to put down a personal guarantee or collateral.
  • You can apply for this loan even if you have other types of SBA loans that are active.
  • You might qualify for the option to defer payments.
  • EIDLs offer low, fixed interest rates (3.75% for businesses; 2.75% for nonprofits) and longer repayment terms (up to 30 years) than other SBA loan types. 

SBA Express

If you’re in need of expedited financing for your business, an SBA Express Loan could be an option. However, the speed associated with these loans (turnaround times are usually within 36 hours) comes with a few potential drawbacks. The maximum loan amount is still $350,000, but the SBA will only guarantee 50% of the total. 

Eligibility and Credit decisions are made exclusively by the lender and you will primarily be using your lender’s forms and procedures. As with other SBA loan types, your interest rate can never exceed the SBA maximum.

Export Express

The Export Express program was designed to provide a streamlined method of obtaining loans and lines of credit backed by the Small Business Administration. Application assessments are processed by the SBA within 24 hours, which allows lenders to use their own credit decision process and loan documentation. 

  • Maximum Loan Amount: $500,000
  • Maximum SBA Guarantee: Up to 90% for loans under $350,000, and 75% for loans exceeding that amount.

Export Working Capital

If your business is generating export sales but needs additional working capital, an Export Working Capital loan can provide the assistance you need. However, unlike all previous loan types, there is no SBA maximum interest rate limit. Credit and eligibility decisions are made by the SBA.

  • Maximum Loan Amount: $5 million 
  • Maximum SBA Guarantee: Up to 90%. 

International Trade

Small Business Administration (SBA) International Trade loans provide long-term financing to businesses that are increasing their export sales because of growth in overseas countries, or that have been adversely affected by imports and need funding for modernization.

These loans are used by businesses as fixed assets for construction, building, real estate equipment, and for working capital for export transactions. 

  • Maximum Loan Amount: $5 million
  • Maximum SBA Guarantee: 90%

For more information about these loan types and how they work, visit the SBA site!

SBA 504 Loans

SBA 504 loans are long-term, fixed-rate SBA loans for small businesses seeking financing for major fixed assets such as equipment, machinery, and facilities. However, it is important to note that SBA 504 Loans and their SBA Guarantees must be used to finance fixed assets only.

To qualify for the loan, a business must propose a specific plan on how SBA will be repaid. After receiving the proposed plan, the SBA must determine that it can recover the loan through the borrower’s net worth and cash flow, after recovering its advances and allowed for expenses.

  • Minimum Loan Amount: $150,000 
  • Maximum Loan Amount: $5 million 
  • Maximum Interest Rate: 8%. SBA will not allow interest rates to be increased if SBA involvement is used.
  • Maximum Term: 20 years
  • Application Fee: 2% of the total loan amount or $500 (whichever is greater)
  • Loan Security Requirements: First position lien takes precedence in bankruptcy and foreclosure proceedings

Additional SBA 504 Loan requirements include the following:

  • The business must have less than $15 million in net assets and generate less than $5 million of annual net income over the past two years.
  • Your business cannot engage in the following businesses: legal gambling, pyramid schemes, life insurance companies, lobbying or speculative businesses, apartment buildings, or mobile home parks.
  • You must meet at least one economic development objective (e.g. job creation or retention) in order to qualify for the loan.
  • You are required to occupy 51% or more of a pre-existing structure in order to acquire it for your business. For new structures, the requirement is 60%, and you must work up to 80% occupancy over 10 years.
  • While you can utilize the assets you’re buying with the loan as collateral, every business owner with a 20% stake in the company or more must also put down a personal guarantee.
  • You must put down at least 10% of the cost of a project as your down payment—perhaps more if opening a new business or using the loan for special purposes property. Fortunately, this is about half what banks require as their typical down payment.
  • Every small business owner/shareholder with ownership of at least 20% needs to undergo a criminal background check. Some criminal records can disqualify an application for an SBA loan.

SBA Microloans

SBA microloans are tailored to meet specific, small business needs. Similar to 7(a) loans, Microloans are multi-purpose and can apply towards working capital, equipment, and inventory. However, one exclusion is that the funds cannot contribute to the payment towards existing debts or the purchase of any real estate.

Unlike some other SBA loans, microloans are lent to what is typically a non-profit community organization or other intermediary lender at a discounted rate in lieu of guaranteeing part of the loan. These lenders then supply the money with their own set eligibility requirements and loan terms.

  • Loan Amount: $100-$35,000
  • Repayment Period: Up to 8 years due to the CARES Act extension (previously 6 years). Effective October 1, 2021, the maximum repayment term is scheduled to revise to 7 years; however, repayment terms could vary based on the amount you borrow, use of proceeds, financial needs, and lender.
  • Interest Rates: 6.5% or less 
  • Maximum SBA Guarantee: Up to two-thirds of the loan amount. 

How To Obtain an SBA Loan

SBA loans are typically given to businesses that are able to prove an ability to adequately service the loan and other debt obligations. Lenders themselves will also have certain criteria you will need to meet. For example, many lenders will require at least two years in business, a credit score of 620 or higher, and an annual revenue greater than $100,000. While there are exceptions to these rules, staying close to these guidelines will help facilitate the process. 

As for the SBA themselves, there are several important considerations made.

What kind of management experience do you have? What is your credit history? What does your cash flow look like? During the application process, you will be required to submit a great deal of documentation and financial statements to help the SBA make its decision. These records could take the form of:

  • Personal & Business Tax Returns
  • Profit/Loss Statements
  • Bank & Balance Sheets
  • And other documentation depending upon the type of loan for which you are applying

Eco-Tax, INC: Here for You Throughout the SBA Loan Process

At Eco-Tax, our goal is to help you start and grow your business. Whether that support looks like annual report filing, full business tax preparation, or assistance through your SBA loan application process, we have the skills and experience necessary to help you tackle the obstacles facing your success. 

Contact us today to start the conversation!

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