What Is An SBA Loan And Do You Qualify?

Wondering if you qualify for a small business administration (SBA) loan as determined by the U.S. Small Business Administration? You may be pleasantly surprised by just how well your company meets the criteria – and how large a sum you may be able to borrow and obtain. After all, SBA loans can reach amounts up to $5.5 million.

Put simply, an SBA loan is a form of small-business loan that’s partially guaranteed by the government (via the Small Business Administration), which eliminates some of the risk for the financial institution issuing the loan. Noting this, an SBA loan is a popular form of loan program among small-business borrowers, as it allows many to acquire access to working capital that they can use to help build and grow their business. Lenders also like loaning sums under the program, as they can expect to receive up to 75% or more of the total amount of the loan back from the federal government if the borrower defaults on payment.

A Small Business Administration (SBA) loan for small businesses provides lending opportunities for enterprising companies in the form of funding that’s partially backed by the government, eliminating some of the risk normally involved for lenders. Because of their federal backing, SBA loans, which are designed to assist small businesses in their operations, typically come with lower interest rates than traditional loans.

Of course, as with any form of loan, potential applicants are also required to meet certain minimum criteria and qualifications, as defined by both private lenders and the federal government. Accordingly, obtaining an SBA loan will require borrowers to maintain minimum credit scores, solid income and debt ratios, and a strong track record and credit history. These requirements help improve the odds of successful loan repayment and are designed to help ensure that funds go to small businesses with a track record of successfully serving both their customers and community as well.

Small businesses seeking an SBA loan will need to complete background paperwork get and accounting information ready before applying, as the approval process (and the process as a whole) can take time.

As they go about the process of starting a small business and operating a thriving firm, it’s not uncommon for business owners to incur significant costs and expenses – costs that may require significant funding to repay. Likewise, both one-time and regular or recurring financial outlays (e.g. payroll expenses or costs associated with purchasing goods and inventory) can also quickly mount, and occasionally put the squeeze on cash flow, necessitating periodic belt-tightening. Small business administration loans are designed to help offset these expenses and provide enterprising entrepreneurs and small business owners with the capital they need to remain solvent, provide timely bill payments, and grow or expand their operations.

Similarly, SBA loans can also serve as a source of emergency funding for firms in need during challenging economic times such as recessions. SBA loans are further designed to offer prospective borrowers with an alternative to taking out a personal loan in their name to help build or expand their business. To this extent, some common purposes that SBA loans can be put towards include, but are not limited to:

• Buying commercial real estate
• Purchasing equipment
• Making payroll
• Using it as working capital
• Buying a franchise
• Restocking inventory
• Refinancing debt

In essence, an SBA loan can be applied toward making payment on both large one-time expenses and routine day-to-day operating costs. Business owners looking to fund ongoing growth, achieve greater liquidity, or obtain financing with which to make sizable purchases or pay off bills may find these financial vehicles a helpful tool for achieving their goals. SBA loans often provide an added source of capital or comfort for businesses going through marked transitions, or as they transition to larger entities from early phases of growth and development.

SBA 7(a) Loans

An SBA 7(a) loan is the most common type of SBA loan, and can be obtained from banks, credit unions, and other lenders. It’s most typically utilized to fund business expansion and the purchase of equipment, or to serve as working capital. The maximum amount that can be obtained via the 7(a) loan program is $5 million.

SBA 504 Loans

Sometimes known as a CDC loan, SBA 504 Loans are offered by Certified Development Companies (CDCs) as well as traditional lenders. The maximum loan amount is $5.5 million. The 504 loan program is commonly used to fund the purchase of long-term and fixed assets, ranging from machinery and equipment to land and facilities.

SBA Microloans

Microloans are typically used by smaller businesses as a source of working capital and lent by community-based nonprofits as a way for these organizations to support local firms. Because these loans are frequently utilized by the smallest of businesses, common uses for funds obtained through them include payments for inventory, equipment, and everyday supplies or expenses.

Several steps are involved in getting an SBA loan. To learn more about the application process, simply read on. 

1. Determine Your Small Business’s Eligibility

You’ll find that a number of requirements must first be met in order to become eligible for an SBA loan. These requirements include:

• Must be a for-profit business.
• Company has to be based and operated within the U.S.
• Meets SBA size and industry standards.
• Owned, supported, and funded by an eligible person.
• SBA-acceptable personal and business credit.
• Borrower has exhausted all other funding options.

2. Gather Documents For Your SBA Loan Application 

A number of documents must also be collected and presented when applying for an SBA loan. Among them, you’ll need to furnish potential lenders with the following items: 

• Business license.
• Business tax returns.
• Personal income tax returns.
• Statements of personal history and finances.
• Lease agreement if applicable.
• Projection of 1 year’s cash flow.

3. Look For SBA Lenders 

As with mortgage lenders, many institutions provide potential access to funds, and no two SBA lenders are created equal. Similarly, the terms and conditions of any offers that you receive may also vary between financial providers. Bearing this in mind, it’s not only important to do your research up-front and carefully review any prospective lender, but also the terms of any proposed loan agreement that they offer.

To this extent, you may wish to ask questions of a potential SBA lender that are similar in nature to the questions that you might ask a mortgage lender. Sample questions that you may wish to ask could be along the lines of the following:

• What are the loan terms, conditions and interest rates include?
• Are there any late fees or prepayment penalties attached?
• Are there limitations on possible expenses to which funds might be applied are?
• Do you offer any special programs or incentives for small businesses of my type?
• Do you provide access to any helpful online tools and apps, analytics programs, or support services?
• What experience do you have working with firms in my area or industry?
• Can you provide 3 – 5 references from satisfied customers?
• Is support and assistance available if we unexpectedly encounter financial hiccups?

Note that SBA loans often come with upsides in the form of low rates, smaller down payments, and flexible overhead. However, you will also be required to put down a personal guarantee for the monies borrowed (which can be repaid using personal assets if left unpaid) if you are an owner who holds more than a 20% ownership stake in the business.

Small Business Association loans provide access to working capital for small businesses looking to fund new or ongoing operations and cover large one-time expenses as well as recurring expenses. Not every business will qualify for an SBA loan, given associated federal lending requirements, and individual lenders’ rules and regulations. But many types of promising small businesses will meet the minimum standards quite readily – and those that fall into this category may be highly grateful for the funding options that this government loan program provides.

Capable of being applied toward myriad types of everyday professional expenses, and larger purchases such as equipment and machinery alike, an SBA loan comes in multiple types and formats. However, whatever form of loan you ultimately elect to accept under the terms of associated agreements, you’ll be able to apply funds borrowed through the program to a worthy cause – enhancing and improving your business. To learn more about additional financial tips and strategies that can help you manage your money, and fuel ongoing business growth, be sure to read more articles here at Rocket HQ^SM.