Starting and running a small business is anything but calm. In fact, on the best of days, it can be downright chaotic. The Small Business Administration is like the calm in the middle of that storm. It can be of help and hope to all who come. From help writing a business plan to guaranteeing major loans, the SBA has been the government’s way of supporting small businesses for many years. The number one way it does this is through SBA loans.
How SBA Loans Can Be a Life Raft for Your Small Business
Many small businesses are finding themselves in the midst of a huge storm right now. The recession brought on by the coronavirus pandemic has been devastating. The SBA is still here. Not only that, but they are adjusting to offer SBA loans that can help even more in these turbulent times. More on those adjustments later.
Find out why so many companies use our proven methods to get business loans, even during a recession.
New Information on SBA Loans Related to COVID-19
The federal government recently poured $50 billion into SBA loan programs for coronavirus relief. They are also waiving upfront fees on loans to veterans up to $1 million when it comes to the SBA Express program.
As for the SBA Disaster relief fund, the SBA can now exercise available authority. They will use funds to provide loans to businesses that are affected by coronavirus. Funds can be used to help overcome disruptions caused by the pandemic.
Additionally, the CARES Act was recently passed. CARES stands for Coronavirus Aid, Relief, and Economic Security Act. This bill addresses and responds to the economic impacts of the COVID-19 outbreak. With respect to small businesses, the bill establishes, and provides funding for forgivable bridge loans. It also provides additional funding for grants and technical assistance.
How does this affect SBA loans? Basically, the SBA can delegate lenders to determine eligibility and creditworthiness. Lenders can do so without going through SBA channels, speeding things up significantly.
What Makes a Borrower Eligible for SBA Loans Under the CARES Act?
To determine eligibility, lenders must consider if the borrower was in operation on February 15, 2020. In addition, did they still have employees or contractors they were paying?
There are business size requirements as well. Any small business, non-profit, veterans’ organization, sole proprietorship, independent contractor, eligible self-employed individuals, or tribal small business concern is eligible for a loan if they employ no more than the greater of 500 employees, or if applicable, the SBA size standard for the industry.
Employees include anyone employed on full-time, part-time or another basis. For businesses with more than 1 physical location, the 500 employees can be measured per physical location.
SBA Loans: What Hasn’t Changed
Here is what hasn’t changed. The SBA still holds to their mission to help U.S. small businesses not only survive, but thrive. That is despite the current economic situation. They still offer a broad range of products through their programs. Some have even been expanded to help more. Still, they do not lend money directly. They work through partner financial institutions to guarantee loans. In this way, they are able to leave the administration of the loans and disbursement of funds to those who do it on a regular basis.
How Do SBA Loans Work?
Loans from the SBA are guaranteed by the Small Business Administration and issued by participating lenders, mostly banks. They can guarantee up to 85% of loans of $150,000 or less. In addition, loans that are more than $150,000 will guarantee up to 75%. The maximum loan amount they offer is $5 million.
Due to the government guarantee, financial institutions are able to offer these loans at lower interest rates than they would be otherwise even before the rate cut. They are also able to approve loans to borrowers with lower credit scores than would be possible without the guarantee.
Who Qualifies for SBA Government Loans?
To be eligible for SBA Loans, you must meet certain qualifications. These include:
- Your business must be for profit.
- Your business must be inside the US.
- Business owners must invest equity.
- You must have exhausted all other financing options.
- Your business must qualify as a small business.
- Your business must be in an eligible industry.
Keep in mind these can change given the current situation with the coronavirus.
Repaying SBA Loans
One perk of SBA loans is that you get more time to pay them back than you would otherwise. According to the SBA, the terms depend on how you intend to use the funds.
For example, working capital loans have a repayment term of seven years. However, funds for new equipment purchase have a term of 10 years. On the other hand, real estate loan terms extend even longer to 25 years. Of course, the longer the term the lower the interest. That means lower regular payments.
How Does the SBA Loan Guarantee Actually Work?
With little exception, the SBA does not actually provide the funds for the loans they guarantee. The lenders that partner with them provide the funds. Currently, they will guarantee up to $3.75 million.
The SBA guarantee reduces the risk to the bank. As a result, lenders are able to offer better interest rates and terms than they would be able to otherwise. If the borrower defaults on the loan, the Small Business Administration will pay out their guarantee amount.
How to Apply for SBA Loans
One of the downsides to loans from the SBA is that they have a lengthy and somewhat complicated application process. There is a lot of red tape involved. It is understandable considering it is the federal government and they are guaranteeing a huge chunk of the loan. This may relax somewhat during the coronavirus outbreak.
Find out why so many companies use our proven methods to get business loans, even during a recession.
Gather the Information
The first thing you have to do is gather the information you will need. This includes:
- The SBA borrower loan information form
- Statement of personal history
- Personal financial statement
- Personal income tax returns for the previous 3 years
- Tax returns for the business for the previous 3 years
- Business certificate or license
- Business lease
- Loan application history
This list along with links to forms and templates is available at SBA.gov. Once you have this information, you can start looking for a lender.
Realize that once you and the lender determine which loan program will work best for your needs, there may be additional paperwork, as each loan has its own set of requirements. This is a general list for beginning the application process for all loans.
Types of SBA Loans
These are the standard types of loans available through the SBA.
7(a) Loans
This is the Small Business Administration’s main loan program. It offers federally funded term loans up to $5 million. The funds can be used for expansion, purchasing equipment, working capital and more. Banks, credit unions, and other specialized institutions in partnership with the SBA process these loans and disburse the funds.
The minimum credit score to qualify is 680, and there is also a required down payment of at least 10% for the purchase of a business, commercial real estate, or equipment. The minimum time in business is 2 years. In the case of startups, business experience equivalent to two years will suffice.
This is by far the most popular loan program the SBA offers. Funds are available for a broad range of projects, from working capital to refinancing debt, and even buying a new business or real estate.
504 Loans
These SBA business loans are also available up to $5 million. Funds can pay for machinery, facilities, or land. Generally, they are for expansion. Private sector lenders or nonprofits process and disburse the funds. They work especially well for commercial real estate purchases.
Terms for 504 Loans range from 10 to 20 years, and funding can take from 30 to 90 days. They require a minimum credit score of 680. The asset that is being financed has to be used as collateral. There is also a down payment requirement of 10%, which can increase to 15% for a new business.
Furthermore, to qualify you be in business at least 2 years, or management must have equivalent experience if the business is a startup.
Microloans
Microloans are SBA business loans available in amounts up to $50,000. They work for starting a business, purchasing equipment, buying inventory, or for working capital. Community based non-profits administer microloan programs as intermediaries, with financing coming directly from the Small Business Administration.
Interest rates on these loans are 7.75% to 8% above the lender’s cost to fund. Terms go up to 6 years. They can take upwards of 90 days to fund. The minimum credit score is 640, and the collateral and down payment requirements vary by lender.
SBA Express Loans
These SBA business loans max out at $350,000. They have a maximum interest rate of 11.50%. Also, terms range from 5 to 25 years, and the SBA guarantee is less than with their other loan programs at 50%. To qualify, your credit score must be above 680, and you must have a debt to service ratio of 1.1 or higher. If the loan is greater than $25,000, collateral may be necessary depending on the lender.
The turnaround for express loans is much faster. In fact, the SBA takes 36 hours or less to give a decision. Necessary paperwork for application is less also. Consequently, express loans are a great option for working capital, among other things, if you qualify.
SBA CAPLine
There are 4 distinct CAPLine programs that differ mostly in the expenses they can fund. Each of them carries a maximum amount of $5 million and an interest rate that ranges from 7% to 10%. Funding can take 45 to 90 days.
The four different programs are:
- Seasonal CAPLines -Financing for businesses preparing for a seasonal increase in sales.
- Contract CAPLines -Financing for businesses that need funding to fill a contract.
- Builder’s CAPLines -Financing for businesses taking on a real estate or construction project.
- Working capital CAPLines -Financing for businesses that are struggling with a short-term slump in sales.
Credit score must be at least 680 to qualify. There is no minimum time in business requirement unless you are getting a seasonal CAPLine. That one carries a one year business requirement.
SBA Community Advantage Loans
This program is a pilot set to either expire or extend in 2020. Its purpose is to promote economic growth in underserved areas and markets. Credit decision makers overlook factors such as poor credit or low revenue if the business has the potential to stimulate the economy or create jobs in underserved areas.
Loan amounts range from $50,000 to $250,000 with a maximum interest rate of 11%, while terms range up to 25 years.
Find out why so many companies use our proven methods to get business loans, even during a recession.
Other Programs
In addition to SBA loan programs, they still offer these other programs for certain groups as well. These include:
- Veterans Advantage- General-use business loans with no guarantee fee for majority veteran-owned small businesses.
- International Trade- General-use financing for businesses actively involved in international trade or hurt by competition from imports.
- Export Working Capital Program- Short-term working capital for exporters backed by invoices or other business assets.
SBA Loans Could Be the Anchor Your Business Needs
Now is the time to apply for SBA loans. No one ever wants to have to weather a storm. However, when your ship is being tossed by rough waters, you have to reach for something to keep things steady. While SBA loans don’t solve all the world’s problems, they can for sure buy some time while you get back on your feet. If things are going well, you can use that time to make your business even stronger.
If your business is suffering due to the business impact of the coronavirus, you could be eligible for other help as well. The federal government has signed a huge relief bill, and many states have their own relief options. In addition, tons of charities and organizations are stepping up to fill the gaps and try to help America’s small businesses survive.
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