What Is an SBA Loan?

Small businesses play an important role in driving economic growth and innovation. However, securing adequate funding for starting or expanding a business can be a significant challenge. 

This is where Small Business Administration (SBA) guaranteed loans come into play. SBA guaranteed loans can provide small businesses with the necessary capital to start, grow, or sustain their operations, offering accessible funding options  when traditional bank financing may not be possible. 

Want to learn more? Read on to delve into the world of SBA loans, understanding what they are, how they work, and why they are a popular choice for entrepreneurs seeking financial assistance.

Understanding SBA Loans

The Small Business Administration (SBA) is a U.S. government agency that supports and promotes small businesses. While the SBA doesn’t directly provide loans, it guarantees a portion of the loans offered by participating lenders, which helps reduce the risk for lenders and allows them to provide capital to small businesses that may not meet traditional loan requirements.

SBA guaranteed loans are designed to help small business owners access funding for various purposes, such as starting a new business, expanding an existing one, purchasing equipment, or refinancing existing debt. 

What are the types of SBA Loans?

The Small Business Administration offers several loan programs tailored to meet the diverse needs of small businesses. Let’s take a look at some of the most popular types of SBA loans:

7(a) Loan Program 

The 7(a) loan program is the most common SBA loan program and provides funding for a wide range of business purposes, including general business expenses, working capital, and equipment purchases. The loan amounts can go up to $5 million. The actual loan amount approved depends on the borrower’s specific needs, financial situation, and the lender’s evaluation. 

The interest rates for 7(a) loans are negotiated between the borrower and the lender  and  loan terms will vary depending on the purpose of the loan. For example, working capital loans generally have a maximum term of seven years, while loans for fixed asset acquisitions can extend up to 25 years.

CDC/504 Loan Program 

The CDC/504 loan program aims to promote economic development and job creation by supporting small businesses in acquiring long-term fixed assets, such as real estate purchases or land or equipment acquisition. It operates through a partnership between the SBA, Certified Development Companies (CDCs), and private lenders.

Under this program, the loan structure typically involves three parties: the borrower, a CDC, and a private lender. The borrower typically contributes a minimum down payment of 10% of the total project cost, while the CDC provides 40% of the financing, up to a maximum of $5.5 million (or higher for certain industries or public policy goals). The remaining 50% comes from a private lender, who holds the first lien on the assets being financed.

The unique aspect of the CDC/504 loan is that the CDC 40% is a fixed-rate, long-term rate with repayment terms of up to  25 years, depending on the asset being purchased. This stability allows businesses to better plan their cash flow over the loan term.

Microloan Program 

If you need a smaller loan amount, typically up to $50,000, the Microloan program can be an excellent choice. These loans are provided through nonprofit organizations and community-based lenders, offering flexible terms for startups and small businesses.

Microloans can be used for various business purposes, including working capital, inventory purchases, equipment or machinery acquisition, leasehold improvements, and other legitimate business expenses. The program does not allow the use of funds for real estate or debt refinancing.

The terms of Microloans can vary, but they typically have shorter repayment periods compared to other SBA loan programs. The repayment terms can range from several months to six years, depending on the loan amount and the borrower’s specific circumstances.

Microloan interest rates are generally higher than those of other SBA loan programs due to the smaller loan amounts and higher administrative costs associated with managing microloan portfolios. The interest rates charged by intermediaries can vary, but they typically fall within a reasonable range.

How do I qualify for an SBA Loan?

Qualifying for an SBA loan involves meeting certain criteria and demonstrating the ability to repay the loan. While specific requirements can vary depending on the loan program and the lender, here are some key factors typically considered when applying for an SBA loan:

Creditworthiness: Lenders assess the creditworthiness of the borrower, including personal and business credit scores, credit history, and existing debts. A strong credit profile increases your chances of loan approval.

Business Plan: A well-developed business plan is crucial when applying for an SBA loan. It should outline your business’s purpose, market analysis, financial projections, and repayment strategy. The plan should demonstrate the viability and profitability of your business.

Collateral and Personal Guarantee: While the SBA generally requires collateral for loans, the lack of sufficient collateral doesn’t automatically disqualify you. However, lenders may ask for personal guarantees from the business owner, indicating your commitment to repay the loan personally if the business is unable to do so.

Financial Stability: Lenders assess your business’s financial health, including profitability, cash flow, and financial statements (balance sheet, income statement, and cash flow statement). They want assurance that your business can generate enough revenue to cover the loan payments.

Industry Experience: Lenders consider your experience and expertise in the industry in which your business operates. Demonstrating relevant experience increases your credibility and the likelihood of loan approval.

Legal and Regulatory Compliance: Your business must comply with all applicable laws, licenses, permits, and regulations. Lenders want to ensure that your business operates within the legal framework and has the necessary permissions to carry out its activities.

Ability to Repay: Ultimately, lenders assess your ability to repay the loan. They evaluate your business’s financial projections, cash flow, and debt-to-income ratio to determine if you have the capacity to meet the loan repayment obligations.

It’s important to know that while meeting these qualifications is essential, individual lenders may have additional requirements and criteria. Preparing a thorough application, addressing the lender’s requirements, and providing supporting documentation will significantly increase your chances of qualifying for an SBA guaranteed loan.

Benefits and considerations of an SBA loan

SBA guaranteed loans offer several advantages to small business owners. SBA guaranteed loans can help ease the financial burden on small business borrowers.

In addition, SBA guaranteed loans provide funding opportunities for businesses that may not qualify for traditional loans due to limited collateral or short operating histories, while timely repayment of an SBA guaranteed loan can help establish or improve the credit profile of a small business, making it easier to secure future financing.

All this being said, it’s essential to consider that SBA guaranteed loans involve a comprehensive application process, including extensive documentation and underwriting, which can be time-consuming. And, although the SBA may be flexible with collateral, lenders may still require business or personal  assets as security for the loan.

SBA and loans at Norway Savings Bank 

Sometimes in order to get to Yes, a loan just needs a little help.  The US Small Business Administration [and other agencies including The Finance Authority of Maine (FAME)] might provide that help in the form of loan guarantees or subordinated debt.  Our lenders have significant experience with each agency and will discern if your loan application could benefit from partnering with one of these or other agencies.  Loan guarantees or subordinate financing are examples of specialized approaches to specific situations that allow us to help our customers.

Putting it all together

SBA guaranteed loans can be a valuable resource for small business owners looking to start, grow, or sustain their business ventures. By understanding the types of SBA guaranteed loans available, the qualification criteria, and the associated benefits and considerations, entrepreneurs can make informed decisions about financing their business goals. Remember, each business is unique, so it’s crucial to evaluate your specific needs and consult with lenders or SBA resource partners to determine the best course of action for your small business. With the right financial support, your small business can thrive and contribute to the economic landscape.

Norway Savings Bank—Business Banking that starts with you

At Norway Savings, we have the privilege of working alongside business owners from start-ups to national expansions. We’re right there with you as you take that first step—and every step afterwards—to listen, strategize, celebrate and advocate. Our lenders have a broad range of experiences and can offer valuable insight and recommendations as you embark on a new path to build or expand your business. If it’s important to you, then it’s important to us. Check out Business Banking or let’s talk.