What is a Small Business Administration (SBA) Loan?

If you’re thinking about owning and running your own business, you may have already started thinking about funding. Unfortunately, money doesn’t grow on trees, and even the most nimble of businesses need at least a little funding.

In this article, we’re going to focus on one particular means of small business funding that you’ve probably already heard of, the Small Business Administration Loan, which we’ll refer to in the remainder of the article as an SBA loan.

We’re going to explain just what exactly is an SBA loan, the different types of SBA loan, who is eligible to receive it, what exactly are the requirements to apply for it, and whether it is actually a good deal.

And without further ado, let’s get straight to it.

What Exactly Is A Small Business Administration (SBA) Loan?

The term SBA loan is used to describe any small business loan that is obtained through the U.S. S.B.A., where SBA stands for Small Business Administration. The small business administration is a government agency that was set up in 1953 to support entrepreneurs and their businesses.

Basically, the SBA guarantees business loans issued by a long list of approved lenders.

Although SBA loans are generally thought to be difficult to qualify for, they tend to have a significantly lower interest rate than many other types of business loans, and the borrower can take advantage of having up to 25 years to repay it.

Different Types Of SBA Loan

There are 6 main types of SBA loans, and they are as follows:

  • SBA 7(a) Loans - these are intended to boost business working capital by up to $5 million
  • SBA CDC/504 Loans - these are for purchasing of fixed assets
  • SBA Disaster Loans - these were traditionally given when a business has been affected by natural disasters, but they have since also been given to business affected by the Coronavirus pandemic
  • SBA Microloans - this is a micro version of the SBA 7(a) loan, for loans of up to $50,000 towards working capital
  • SBA Export Loans - intended to boost export activity
  • SBA CAPLines - a line of credit that can be used again

How SBA Loans Work

The SBA is not the lender of the loan, and you will have to approach an approved lender if you want to apply for an SBA loan.

What the SBA does is to promise to cover some of the lender’s losses if a borrower defaults on their loan. The portion of loan covered depends on the type of loan, but can be between 50% and 85% of the lender’s losses.

This greatly reduces the risk for lenders, and makes giving the loan a more attractive proposition for them. And perhaps because of this, lenders can offer quite generous terms, such as longer repayment periods and lower interest rates, relative to more conventional commercial loans.

Who Are SBA Loans For?

The good news is that SBA loans are not solely focused on one particular group of the population, or on one specific industry. SBA loans are available across the board for anyone who has a small business in any industry.

There are some businesses that are not eligible for SBA loans. These include loans for illegal activities or where the owner is on parole. SBA loans also cannot be used for lending, gambling, or multi-sales distribution.

Exactly Are The Requirements To Apply For It?

In this section, we’re going to focus on the two most popular types of SBA loan, the SBA 7(a), and the SBA 504. For information on other SBA loans, please browse or search elsewhere on our website.

Requirements for the SBA 7(a) Loan

  • Fewer than 500 employees
  • Tangible net worth under $15 million
  • Less than $7.5 million revenue over last 3 years
  • Net income under $5 million

Requirements for the SBA 504 Loan

  • Tangible net worth under $15 million
  • Net income under $5 million for last 2 years

It’s worth noting at this point that although the SBA does not set a minimum credit score for their loans, the lenders usually do, and you will typically need a credit score of approximately 620 to 640 to get an SBA loan.

Is It Actually A Good Deal?

Again, in this section, we’re going to focus on the two most popular types of SBA loan, the SBA 7(a), and the SBA 504. For information on other SBA loans, please browse or search elsewhere on our website.

Repayment of the SBA 7(a) Loan

It’s the SBA’s mission to support small businesses, and this means that they allow plenty of flexibility in the repayment of the loans that they guarantee, since the SBA recognizes that commercial loans can at times be tricky for the borrower to repay.

And the interest rates are very reasonable, too. They would hardly be doing their job to support small businesses if they were asking for extortionate interest rates.

You can choose from a fixed rate loan where the interest rate remains constant, or alternatively a variable rate loan, where the interest rate changes with the base interest rate.

Unfortunately, it's beyond the scope of this article to go into specifics here, since loan repayment terms can vary from lender to lender.

Repayment of the SBA 504 Loan

Repayment of an SBA 504 loan is a different kettle of fish, however. There are three maturity terms available, namely the 10-year, 20-year, and 25-year.

The interest rate is set at an increment slightly above the current market rate, but the total interest required to pay is just 3% of the total debt.

Wrap Up

We would argue that the SBA loan, whichever type you get, is an excellent deal, with very favorable terms and conditions. It is, and should be, THE go-to small business loan to go for in most circumstances. But more often than not, you will also need a good credit score of at least 620 to be approved by one of the available lenders.

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