SBA stands for Small Business Administration, and the SBA 504 loan is a program designed for the provision of financing to small businesses for purchase of fixed asset requirements such as buildings, real estate and machinery at lower-than-market rates. It exists for the development of small businesses and offers a wide range of different loans for specific capital needs of a business in the growing stage.
About SBA Loans
The maximum amount of loan that can be provided through the SBA is about $5.5 million. It is, however, not actually the SBA that is giving the loan. Rather, it is a network of financial institutions approved by the SBA such as traditional banks which lend to small businesses on better terms as SBA partially guarantees the loans.
This means in case a business is unable to pay back the entire amount of the loan to the lender, since there is an SBA guarantee for the loan, it would cover the portion it has guaranteed. This partial guarantee provided by SBA can be about 85% of the total loan amount, without which most commercial banks and other financial institutions would probably not lend to small businesses or startups as they are considered quite risky.
Small businesses which are unable to get loans secured by the SBA end up getting high rates and unfavorable terms of the loan, if they end up getting a loan at all.
The process of acquiring a loan through the SBA is not too simple as it is a government entity. There is a lot of documentation required.
In order to meet the eligibility criteria set up by the SBA, a business should be able to meet the definition of a “small business” and must be planning on making use of its property to run its operations within a year of ownership.
If the building is supposed to be constructed, the borrower must make use of at least 60% at once and must have plans to occupy 80% of the property. The borrower can also form a real estate company that can lease about 100% of the operating business that can then sub-lease the surplus space (not more than 49%).
Moreover, in order to be qualified for this, the borrower must be a US citizen or permanent resident and should have majority of the ownership of the holding and operating company. A business may finally be eligible for subprime SBA loan.
The three main features or SBA guidelines for eligibility are:
- The business’s net income on average cannot be more than $5 million after taxes for the past two years.
- The anticipated project size should not be more than the personal, unencumbered and non-retirement liquid assets of the principals or guarantors.
- The business should not have a tangible net worth greater than $15 million.
- The business should have been in operation for at least two years.
- The credit score of the business owner should be at least 640+.
- The business should be making at least $100,000 in revenue on an annual basis.
Terms of the SBA Loans
The SBA terms vary from business to business. They depend on the qualifications of the business and lender that the business chooses to work with.
The SBA loan can be anything in size, from $500 to even $5.5 million, and may even offer an APR as low as 6.5%. Moreover, the repayment terms can be anywhere from 5 years to 25 years, though 10 years is the average length of repayment for a standard SBA loan.
As mentioned earlier, the process does require some time and the quickest that a business can fund itself through an SBA loan is at least three weeks. Thus, if your business is in dire need of quick cash, an SBA loan may not be the best option.
Different Types of SBA Loans
There are different types of SBA loans available to suit different types of businesses and their unique needs, from basic working capital requirement ones to export assistance and express loans. Depending on the need of the business, it can apply for the loan that is best suited for it.
1. Loans for Exporters
Most of the exporters based in the USA find it quite hard to get a loan for their day-to-day running or operation of the business. There are, however, SBA programs which make it easy for businesses to get export loans by contacting the SBA International Trade Finance Specialist. These loans help exporters engage in international transactions, enter foreign markets and expand their businesses. The rates are generally between 8-10% on average. There are different export loans under this broad category as well, including:
- SBA Export Express Loan
- International Trade Loan
- SBA Export Working Capital Loan
The terms, rates and minimum and maximum amount of loans vary according to the type of export loan the business acquires. You may qualify for an export loan for a rate as low as 6%, and the term can be as long as 25 years. In fact, these export loans have the largest range when it comes to the costs and terms of any loan from SBA.
- Interest rates: 4-8%
- Loan amount: Not more than $5 million
- Repayment: Up to 25 years
2. SBA Microloan Program
This is yet another type of loan offered through SBA. It provides lending to the nonprofit lender acting as an intermediary and, in turn, it lends this amount to the for-profit small business and nonprofit child care centers. The SBA, however, does not take guarantee of any part of this loan. Most of these microloans have terms going up to 6 years, and the amount has to be under $50,000. This type of loan is good for:
- Home-based businesses
- Self-employed people
- Those with small capital requirements
Micro lenders also provide technical assistance and training needed for the success and growth of a business. These non-profit intermediaries can borrow about $750,000 maximum in the first year and then around $1.25 million in the subsequent years, but they cannot borrow more than $5 million altogether at one time.
- Interest rates: 8-13%
- Loan amount: Not more than $50,000
- Repayment: Up to 6 years
3. SBA Disaster Loans
These SBA loans are used for recovery from an economic or a physical disaster. A business may apply for different types of disaster loans at one time as each of these loans can be used for a different purpose. These types of loans are for those companies that have been negatively impacted by a disaster, provided that they have evidence to proof its negative impact on their business.
- Interest rates: 4-8%
- Loan amounts: Up to $2 million
- Repayment: Up to 30 years
The rates and terms of a disaster loan may vary based on the type of disaster. There are three types of disaster loans offered by the SBA, and their rates vary as follows:
- Military Reservist Economic Injury Loans: 4%
- Economic Injury Disaster Loan Rates: Less than 4%
- Business Physical Disaster Loan Rates: 4 – 8%
The loan requirements for this type of loan are slightly different since the business applying for such a loan may not be in a good shape while doing so. While the SBA has relaxed its requirements a bit, it still needs the following:
- No specific credit score but acceptable credit history
- Applicants must show ability to repay the loan
4. SBA 7a Loans
These are the most popular ones and generally used for a business to meet its working capital or cash flow requirements or for buying real estate, refinancing debt, etc. These loans are of two types:
- SBA Express Loan, which is an expedited loan processing option that provides a response to a loan application within 36 hours.
- SBA Advantage Loan, which is for helping businesses in underserved markets with low access to financing as they might not be able to meet the eligibility criteria.
Uses of these loans
- Working capital
- Refinancing debt
- Equipment purchases
- Buying a business or franchise
- Leasehold improvements
- Buying commercial real estate
- Rates: 7-9.5%
- Repayment: Can be 7, 10, or 25 years
5. CDC/SBA 504 Loans
This loan is a combination of a nonprofit CDC loan as well as a loan from a conventional bank, which creates a low interest rate but a long-term loan that can be for up to $20 million. It is generally used for purchasing heavy equipment or owner-occupied commercial real estate.
- Rates: 4.67-4.95%
- Repayment: 10-20 years
6. SBA CAPLines Program
This is a line of credit for businesses, which can be used over and over again when they find cashflow crunches or for meeting their shortfalls in their working capital requirements. There are 5 types of these loans for a business. They can be revolving as well as fixed. There are around five different types of CAPLines loans:
- Seasonal Line of Credit
- Contract Line of Credit
- Builders’ Line of Credit
- Standard Asset-Based Line of Credit
- Small Asset-Based Line of Credit
- Rates: 5.75%-10%
- Repayment: Up to 5 years
The SBA offers small businesses a way to get forward in order to expand their business, take on new opportunities and meet seasonal shortfalls in cash. It provides businesses long repayment terms as well as high loan amounts.
However, it may not be the best choice for all types of businesses or for every situation. Some businesses may not even meet the terms and conditions of the SBA, while others may require a loan quickly which may not be possible with the SBA. If it is the former case, a business may keep trying and eventually might end up fixing its credit score or having the required years in business count so that it can get the financing it needs.
When it comes to the SBA, it is no doubt the undisputed champion of lending to the small business sector in the USA and the best option for small businesses to acquire financing. It does not let small business struggle just because of a lack of finance.