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Updated: March 27th, 2020
If you’ve ever researched small business financing, you’ve likely heard of SBA loans. But, how much do you really know?
In this guide, we cover:
Contrary to popular belief, the Small Business Administration (SBA) doesn’t usually lend money directly to small businesses. Instead, the SBA partners with participating SBA-approved banks, credit unions, community development organizations, nonprofits, and other lenders to provide long term, low-cost, government-backed loans ranging from $500 to $5.5 million to small businesses.
The SBA provides a guarantee on a portion of the SBA loan (up to 85% of the total loan amount), which reduces risks for lenders (as the SBA will cover most of the loss if the borrower defaults). This, in turn, makes capital more accessible for small businesses.
Typically, the terms, interest rates, and fees associated with SBA loans are favorable to small business owners and entrepreneurs, making them a strong choice for those who qualify … if they have the time to fill out the paperwork and wait as long as six months to get funded.
There are multiple types of SBA loans available to small business owners.
SBA 7(a) loans are the most popular type of SBA loan. These loans are federally guaranteed term loans that can range up to $5 million. Business owners often use SBA 7(a) loans to finance working capital needs, buy an existing business, refinance debt, or purchase new equipment. When most people talk about an SBA loan, they’re usually referring to this type, because the use of capital is flexible and can be applied to just about any business purpose.
SBA 7(a) Loan overview
SBA 7(a) Loan rates and terms
The rate for an SBA 7(a) loan depends on a variety of factors, including your credit score and the repayment terms. SBA 7(a) loan rates can also be fixed or variable. While the lender is the one evaluating your application and determining an interest rate, the SBA does set a maximum rate that the lender is not allowed to exceed.
Your SBA loan rate is contingent upon the current U.S. Prime Rate, which is a market rate that changes based on how the U.S. economy is doing. Simply put, if the economy is doing well, you should expect to pay more in interest than when the economy is struggling. SBA 7(a) loan rates currently range between 7.5% to 10%. You could receive a lower rate than this if you have great credit and your business financials are strong, however, the lender can’t charge more than 10%*.
The lender and the SBA will base your repayment terms on the amount of money borrowed, the use case of the capital, and the life of the assets you’re financing. Depending on these factors, you could receive a payment term of up to 25 years.
The SBA Express Loan program is a part of the SBA 7(a) loan umbrella. As the name suggests, the Express program is used by businesses who are in need of a quicker turnaround for approval — within 36 hours to be exact. It’s important to note that while the SBA Express Loan program does provide faster turnaround times from the SBA, borrowers will still need to go through the underwriting process with individual lenders, which can take a few weeks. And while the SBA Express Loan program does offer a faster application and approval process, these loans have shorter repayment terms and higher interest rates, and you can only borrow up to $350,000. They are also only able to be guaranteed up to 50% by the federal government.
SBA Express Loan overview
Community Advantage loans range from $50,000 to $250,000. The loans are guaranteed up to 85% for a $250,000 loan, with interest rates typically falling between 7% and 10%. Similar to SBA Express loans, there is a faster turnaround time on the application process than with the standard SBA 7(a) loan program.
SBA Community Advantage Loan overview
The SBA CAPLines program offers four different lines of credit that are designed to help small business owners with their short term working capital needs. The maximum amount offered by SBA CAPLines is $5 million.
SBA CAPlines are a good option for small businesses that pay upfront for goods or services before receiving payment themselves. It’s worth noting that while SBA CAPLines are available as a standalone product, they’re usually offered in conjunction with a traditional SBA 7(a) loan or CDC/SBA 504 loan. For these loans, the SBA usually guarantees between 75% to 85% of the loan amount. Once approved for an SBA CAPLine, you have a set amount of time to pay back the credit line.
SBA CAPLines overview
The SBA CAPLines umbrella includes four different loan programs. Each has its own qualification standards in addition to the standard SBA eligibility criteria. The four programs are:
SBA CAPLines rates and fees
Interest rates for SBA CAPLines mirror those of the SBA 7(a) program. It’s important to remember that with a line of credit, though, you only pay interest on the money you borrow — you are not advanced funds upfront like with a term loan.
The ongoing servicing fee for an SBA CAPLine will be higher than that of an SBA 7(a). This is due to the fact that SBA CAPLines are extended based on short-term assets like invoices and contracts, which requires the lender to frequently review those documents. For the majority of CAPLines, the servicing fee is capped at 2%.
The CDC/504 loan program is complex, but its rates and terms are some of the best available to small business owners. Many small business owners use this type of loan to finance major fixed asset purchases, such as equipment and commercial real estate.
In most cases, 504 Loans are structured with the SBA providing 40% of the total project costs, a participating lender covering up to 50% of the total project costs, and the borrower contributing 10% of the project costs. There are certain circumstances, however, where a borrower may be required to contribute up to 20% of the total cost.
CDC/504 SBA Loan rates
CDC/504 SBA loans are actually funded by two separate lenders: a bank or traditional lender and a Certified Development Corporation (CDC). The two lenders will have different rates, terms, fees, and limits. Combined, these rates will make up your total SBA/CDC 504 loan rates. Generally, your interest rate will fall somewhere between 4%-6%, with repayment terms as long as 25 years.
Examining the CDC portion of the SBA 504 Loan:
The CDC can cover up to 40% of the loan, and the SBA sets limits on the rates and fees given by the CDC. The interest rates on the CDC loan are based on the current rate for 5-year and 10-year U.S. Treasury bonds. In addition to those rates, however, you must add a spread for investor returns, as well as fees that the CDC and SBA charge. The loan has 10 or 20 year terms, and the rates typically look like this:
Examining the bank/nonbank lender portion of the SBA 504 Loan
The SBA does not set limits on the rates and terms for the lender, which leaves the specifics of the loan up for negotiation. In general, interest rates should be below 10 percent.
Your maximum loan size (between the two lenders) cannot exceed $14 million. That being said, this is the limit on an individual project — it’s possible for borrowers to take out multiple SBA loans at the same time for different projects, which raises the maximum amount one can borrow to $20 million.
CDC/504 SBA Loan fees
In the case of CDC/504 SBA Loans, both the CDC and the SBA are able to charge fees. Below are the primary fees you should be aware of. In addition to the fees listed below, you should also expect additional closing costs and fees from the CDC and the bank.
CDC/504 SBA Loan purposes
The SBA Microloan program provides smaller loans than other types of SBA financing, with the maximum loan amount being $50,000. The SBA Microloan program is typically used by small businesses, startups, and not-for-profit childcare centers to grow their operations.
The way the Microloan program works is the SBA lends money to non-profit intermediary lenders, who in turn lend the money out to small businesses.
SBA Microloan Program overview
SBA Microloan program rates and terms
Unlike other types of SBA loans, the interest rate for microloans is determined by the partner institution, or intermediary, who looks at the borrower’s credit score as well as their relevant business financials. On average, the interest rates for SBA Microloans range from 8% to 13%. You’re able to borrow up to $50,000, however, in 2017 the average loan size was roughly $14,000. The maximum loan term for an SBA Microloan is six years.
SBA Microloan purposes
The SBA offers disaster loans to those affected by a declared disaster, such as a hurricane, drought, or tornado. The disaster loan program is the only SBA program that lends directly to borrowers, instead of going through an intermediary. Each type of disaster loan can be used differently, and you’re able to apply for multiple disaster loans at the same time if needed.
SBA Disaster Loan overview
There are four types of disaster loans available:
SBA Disaster Loan rates and terms
SBA Disaster Loan rates and terms differ based on the type of disaster loan. All of the SBA Disaster loans offer rates as low as 4 percent, and you can borrow up to $2 million. The highest interest rate you can be charged is 8 percent, and this is only if you are able to get credit from another source.
The typical SBA Disaster Loan rates are:
The typical SBA Disaster Loan terms are:
*as of October 2018
To qualify for an SBA loan, businesses must have a legitimate business purpose, be able to repay what was borrowed, and for the most part, meet size standards.
What is a size standard? According to the Small Business Administration, a size standard “represents the largest size that a business (including its subsidiaries and affiliates) may be to remain classified as a small business for SBA and federal contracting programs.”
Size standards are predominantly based on number of employees (all individuals employed on a full-time, part-time, or other basis) or annual receipts (all revenue, or “total income” plus “costs of goods sold.” For the most part (although it does vary by industry), if you have fewer than 500 employees and less than $7.5 million in average annual revenue, you are considered a small business by the SBA. Your net worth must also be under $15 million.
However, lenders and loan programs each have their own unique eligibility requirements which you should be mindful of. For example, an SBA 504 loan is specifically designed for the purchase or renovation of capital assets (land, buildings, equipment). You won’t be approved if you apply for an SBA 504 loan with the intention of giving your working capital a boost.
Before you begin the application process, it’s important to get all your ducks in a row. To improve your chances of getting approved, you’ll want to make sure your credit scores are in tip-top shape.
Before you start speaking with lenders, the SBA suggests having the following items prepared:
Lenders may also require the following documents or information:
As part of your loan application, you will also likely need to complete some additional SBA forms. For example:
This list is not one-size-fits-all, as requirements vary across loan programs and lenders. And if you’re a new business or purchasing an existing business, there is additional legwork (such as a description of assumptions related to financial documents) or supporting documents (such as purchase agreements) that are required.
Luckily, there are some application checklists that can help you be better prepared:
SBA loans can be an attractive product for businesses. But they also come with strict requirements and a cumbersome application process.
Funding Circle offers the best parts of an SBA loan, but makes it faster and more flexible. Our SBA loan alternative was designed for small businesses who don’t want to go through the hassle of applying for an SBA loan or don’t have time to wait.
We’ve created a faster and easier option — apply online in 6 minutes and get a decision in as little as 24 hours after document submission. We offer:
How does an SBA loan differ from a Funding Circle term loan?
The SBA’s 7(a) loans allow you to borrow up to $5 million. We allow you to borrow $50,000 – $500,000. 7(a) loans are also partially guaranteed by the Small Business Administration qualifying them for low interest rates (between 5% and 9% in 2016). Your specific rate will be determined by the length of the loan (in years) and the strength of your credit profile. One major difference is that it can take as long as six months to get funds from an SBA loan. We can get you funding in as few as 10 days.
How long does it take to apply for alternative SBA financing through Funding Circle?
Funding Circle’s application process is quick, easy, and transparent. You can apply for a loan in just 6 minutes, and get the money in your bank account in as few as 10 days — much faster than the typical 60 to 90 days it takes to get funding with an SBA loan.
Why should I borrow from Funding Circle as opposed to a bank or other lender?
While the underwriting process at traditional banks can be clunky and opaque, Funding Circle delivers a best-in-class experience to our customers. You’ll work with a dedicated loan specialist who will guide you through the entire application process and remain focused on meeting your unique financing needs. And we will never leave you waiting — you’ll have a decision from us in as little as 24 hours after document submission. We also deliver competitive rates, with no prepayment penalty.
What will my rate be?
Interest rates from Funding Circle are competitive, and will be based off the length of the loan (in years) and the strength of your credit profile.