A guide to SBA loans (and what you need to qualify)
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
- Maximum loan amount: Up to $5 million
- Repayment terms:
- Up to 7 years for working capital/daily operations
- Up to 10 years for new equipment
- Up to 25 years for commercial real estate
- Interest rates: Ranging from 7.5% – 10%
- Average minimum credit score requirement: Typically 680 or above
- Other requirements:
- 10% to 20% down payment
- Collateral may be required
- Loan purposes:
- Equipment purchases
- Working capital
- Meeting your seasonal business needs
- Refinancing debt
- Setting up a new branch or buying an existing business
- Construction or contract work
- Buying commercial real estate
- Funding startup costs
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
- Loan amount: $5,000 – $350,000
- Interest rates: 4.5% to 6.5% + prime rate
- Time in business requirement: Generally two years or more
- Loan terms:
- Up to 7 years for a line of credit
- Up to 25 years for real estate
- 5 to 10 years for other purposes
- Average minimum credit score requirement: Typically 680 and above
- Approval time: Within 36 hours
- Time to funding: Generally 45 to 90 days
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
- Maximum loan amount: Up to $250,000
- Interest rate: Prime rate + 6% (typically 7% – 10%)
- Repayment terms: Up to 7 to 10 years
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
- Maximum credit limit: Up to $5 million
- Repayment terms:
- Up to 5 years for Builders CAPLines
- Up to 10 years for seasonal, working capital, and contract CAPLines
- Interest rates: Range from 5.75% – 8.25%
- Guarantee fee: Range from 2% – 3.5% of the guaranteed amount
- Average minimum credit score requirement: Typically 660 and above
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:
- Contract loans: Used to finance contracts, purchase orders, or sub-contracts. In addition to material and labor costs, these funds can also be used to cover overheard and other administrative expenses that are necessary in order to complete the contract.
- Seasonal lines of credit: Used for short term financing needs based on changes in seasonable operations. The funds can only be used to finance the increase of accounts receivable, inventory, and sometimes labor costs. (You are not able to use the loan proceeds to maintain business activity during slow periods of the year.)
- Builders lines: Used by small general contractors or builders to cover labor, building materials and supplies, rental equipment, building permits and inspections, utility connections, landscaping, and septic tank construction. If the cost of the land does not exceed 20 percent of the project cost, it may be eligible for coverage.
- Working capital lines of credit: Used strictly for short term working capital and operating needs. They cannot be used for floor planning or for paying certain delinquent taxes or trust funds. In addition to meeting the standard requirements necessary to qualify for the 7(a) loan, your business must also have assets in the form of inventory or accounts receivable.
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
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 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:
- Current 10-year CDC loans: ~5.04% (fixed rate)
- Current 20-year CDC loans: ~5.25% (fixed rate)
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.
- Annual SBA service fee: Currently 0.368%
- CDC servicing fee: 0.625%
- Central servicing agent fee: No more than 0.1% per year
CDC/504 SBA Loan purposes
- Buying existing commercial or industrial real estate
- Purchase of lot and land improvements, including utilities, parking lots, street improvements, and landscaping
- Construction or renovation of existing buildings
- Purchase of long-lasting equipment or machinery
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
- Maximum loan amount: Up to $50,000
- Rate: 8% to 13%
- Term: Maximum of 6 years
- Average minimum credit score requirement: Typically 640 and above
- Fees: Origination fee (up to 2%)
- Repayment cycle: Monthly
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
- Purchase of equipment
- Working capital
- Purchase of inventory and supplies
- Start-up capital (for new businesses)
- Purchase furniture and fixtures.
SBA Disaster Loan
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.
- Loan amount: Up to $2 million
- Repayment terms: Up to 30 years
- Interest rates: Ranging from 4% – 8%
- Average minimum credit score requirement: Generally 660 and above
There are four types of disaster loans available:
- Business Physical Disaster Loans: These let business owners replace or repair material assets that may have been damaged by a disaster. Examples include (but are not limited to) property, machinery, inventory, or equipment. These loans are meant to offset losses not fully covered by your insurance. Businesses of any size and most private nonprofits are eligible to apply for these loans.
- Economic Injury Disaster Loans (EIDL): You can think of EIDLs as working capital loans. This type of financing is used to help business owners fund areas of their businesses they are no longer able to operate because of a disaster. Only small businesses, small agricultural co-ops, and private nonprofit organizations are eligible.
- Home and Personal Property Disaster Loans: Homeowners can borrow directly from the SBA to repair or replace the value of their primary home and property. This is not solely for people who own businesses. You only need to be affected by a declared disaster to be eligible.
- Military Reservist Economic Injury Disaster Loans (MREIDL): MREIDLs provide capital to small businesses to meet expenses that they would not have incurred if a staff member hadn’t been called to active military duty.
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:
- Business Physical Disaster loan rates: 4 – 8%
- Economic Injury Disaster loan rates: 4%
- Military Reservist Economic Injury Disaster loan rates: 4%
The typical SBA Disaster Loan terms are:
- Loan amount: Up to $2 million
- Repayment term: Up to 30 years
- Repayment cycle: Monthly
*as of October 2018
- Competitive terms. SBA loans offer some of the best deals around with low interest rates, long terms, and manageable monthly payments. Assuming your personal credit score is high (above 700) and your application is impeccable, the APRs offered are hard to beat.
- Accessible for startups and newer businesses. It can be nearly impossible as a young operation to get a small business loan. While it is certainly easier to qualify as an established business, startups and newer ventures may be able to get funding through a variety of the SBA loan programs. Just look at Under Armour and Chipotle.
- Lots of paperwork. SBA loan applications are not for the faint of heart. You’ll be required to create, collect, compile, and submit a serious amount of documents, forms, statements, and other information related to both you and your business (more on that below).
- Long process. As a business owner, when you need cash, you likely need it fast. But when it comes to applying for an SBA loan, you’re looking at a timeline of at least 60 to 90 days (not including how long it takes to prepare your paperwork). And you may not even qualify in the end.
- Personal liability. Anyone who owns at least 20% of your business must sign a personal guarantee. This means your personal assets are up for grabs if your business defaults on payments.
- Down payment. If you’re applying for an SBA 7(a) loan or 504 loan, a down payment of 10% to 20% is required. That’s a lot of cash to put down upfront if you’re borrowing hundreds of thousands of dollars.
- Average minimum credit score requirement. While there is no “official” minimum credit score for SBA loan eligibility, it is very difficult to qualify with a personal credit score that is lower than 620 (and that’s assuming the rest of your application is superb). In fact, most lenders are looking for credit scores upwards of 700.
- Fees. The SBA may offer some of the lowest interest rates around, but they also can come loaded with fees. With an SBA 7(a) loan amount over $150,000, for example, you’ll be charged an SBA guarantee fee of at least 3%. SBA 504 loans all come with origination fees equal to about 3% to 3.5% of your loan. Some loan providers may also charge you packaging fees, broker fees, service fees, or closing costs.
- Variable rates. Some SBA loans come with variable rates, which means when the Federal Reserve hikes interest rates, your monthly payments go up as well.
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.
- According to the SBA, you must also meet the following eligibility requirements:
- Be a for-profit business. Your business must be officially registered and operate legally. Depending on the loan program, certain types of businesses may be ineligible for SBA assistance.
- Do business in the United States. Your business must be physically located and operating in the U.S. (or its territories).
- Have invested equity. You must have invested your own time or money into your business venture prior to seeking funding.
- Exhaust financing options. Your business must be out of options (in other words, you simply cannot get funds from any other financial lenders).
- Clean financial history. That means no bankruptcies, defaults, or debt obligations to the U.S. government.
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:
- Executive summary
- Business plan
- Amount and use of funds
- Credit history
- Financial projections
- Industry experience
Lenders may also require the following documents or information:
- Personal information. Your “character” as an individual and business owner plays a substantial role in the evaluation of your application. Anyone who owns 20% or more of the business in consideration must individually submit any documents required, which may include:
- Personal history statement for each business owner (SBA Form 912)
- Personal financial statement for each business owner (SBA Form 413)
- Resume of each business owner
- Personal tax returns from each business owner for the previous 2 to 3 years
- Personal bank statements from each of the business owners for the previous year
- Driver’s license for each business owner
- Business tax returns for the previous 2-3 years
- Financial statements
- Cash flow statement
- Income statements and balance sheets or federal income tax returns for the previous 2-3 years
- Current income statements and balance sheets
- Business debt schedule
- Business bank statements for the previous year
- Legal documents
- Business licenses and registrations
- Insurance information
- Loan application history
- Ownership and affiliations
As part of your loan application, you will also likely need to complete some additional SBA forms. For example:
- If you’re getting a 504 loan, you will need to fill out an SBA Form 2450. You also will need to provide:
- An environment impact statement
- Evidence of meeting economic development goals (creating new jobs or supporting public policy goals such as energy conservation)
- Evidence that existing buildings are at least 51% owner occupied
- If you’re applying for a 7(a) loan, you will need to fill out a SBA Form 1919. This is used to collect general information about you as an applicant as well as your business.
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 10 minutes and get a decision in as little as 24 hours after document submission. We offer:
- Access to funding in as few as 10 days
- Fixed monthly payments
- Transparent rates and a simple, one-time origination fee
- Best-in-class service with dedicated loan specialists
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). Our rates start at 4.99%, and 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 10 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 start at just 4.99% and will be based off the length of the loan (in years) and the strength of your credit profile.