About the Small Business Loan Program

There are many ways to secure funding for your small business, but one of the best and most successful ways is to get a Small Business Administration 7(a) Loan. These loans, often referred to as SBA Loans or small business loans, are the best way to finance your business ventures because they offer flexible terms and lower interest rates than traditional loans because they are backed by the federal government.

Although the SBA loans are the most popular financing available through the agency, securing one of these business loans can be difficult. Business owners can be ahead of the game and have a better chance of their loan being approved when they go in already knowledgeable on SBA loans.

Small Business Loans

What Are SBA Small Business Loans?

A Small Business Loan through the Small Business Administration are only available through select participating vendors—usually banks and guarantee 85% of loans less than $150k and 75% of loans over that amount. The maximum SBA Loan is $5 million; however, the average loan is just $425,500.

Small Business Loans can be used for working capital, expanding your operations, or purchasing equipment and software. Microloans are also available through the SBA for needs less than $50,000 but are processed through nonprofits in the community. Another type of small business loan is a disaster loan that funds businesses recovering from natural disasters and other emergencies up to $2 million. Disaster Loans are processed directly through the SBA and not private lenders or banks.

What Are the Terms and Interest Rates for SBA Loans?

No matter which lender or bank a business owner uses for their SBA loan there are certain terms that cannot vary between financial institutions. Lenders must set their interest rates according to the prime rate with additional markup rate. The current prime rate is 3.25% and the SBA is granting business loans up to $25,000 a 7.5% interest rate if paid off in less than seven years and 8.0% if longer than seven years. A loan of $25,000 to $50,000 has a 6.5% and 7.0% interest rate and loans over $50,000 have a 5.50% and 6.0% interest rate under the same seven-year rule.

The APR however between banks will change. The APR is the annual percentage rate and is an interest included on the entire loan amount including loan fees. Most business owners can expect to see an APR of 5.0% to 8.0%. Loans term length can vary between seven years or less, ten years, or up to 25 years depending on how you intend to use the funds. Real estate purchases are allotted the longest amount of time to pay off.

What Is the Process for Applying for a Small Business Loan

The first step to securing a small business loan is to understand what the minimum qualifications are. Lenders will use your personal credit, business credit, business history or plan, and other factors to determine if your business qualifies for an SBA loan. The process for applying can take months so you want to ensure all your ducks are in a row before starting. There is nothing worse than going through the entire loan application just to be denied because you didn’t have the minimum credit qualifications or cash flow.

Here are the documents you will need to gather to be prepared for the loan application:

  • The SBA borrow information details worksheet
  • Statement of personal history
  • Financial statements
  • Past three years of personal tax returns
  • Past three years of business tax returns
  • Business license
  • Business lease

The lender will also want to see capital investment by form of a down payment. The SBA Loan down payments typically must be at least 20% with some banks requiring new businesses to put up a down payment of 30%.

Business owners will also need at least a 680 personal credit score and 160 business score. Meeting the minimum credit score rating is not always enough to get the green light on your small business loan application. Your lender will also look for recent bankruptcies, charge-offs, evictions, or other adversary actions on your credit report to determine your risk and credit worthiness.

Another important fact the lender will examine is the business’s ability to generate cash to repay the loan. You’ll need to be prepared to share your income, spouse’s income, and the expected business income to be generated over the next 12 months. The business tax returns are the best way to project the next year’s anticipated revenue.

The lender will also consider business collateral. The SBA guarantees payment of the loan if you default; however, the lender will want to see your business and personal assets to secure the loan against default regardless of the SBA’s backing of the loan.

You will also need a personal guarantee, owner guarantee of any owners with more than 20%, and your written business plan to present to the bank with your SBA loan package paperwork. These guarantees back the payment of the loan should the business not generate enough revenue to repay.

Business owners must also be U.S. citizens without any criminal charges within six months of their application date. They also cannot be facing pending charges or incarceration, be Green Card holders, or currently on parole or probation. Owner’s going through a divorce are also ineligible under divorces are finalized.

Owner User/Occupied – Conventional and SBA Guaranteed

  • Up to 90% LTV
  • Bad Credit OK (Not currently in Bankruptcy)
  • Positive Cash Flow Required (current or Projected from use of Proceeds)
  • Foreign Nationals OK in some circumstances
  • Fully amortized loans. No Balloons
  • Competitive variable and fixed rate option
  • Purchase
  • Refinance
  • Debt consolidation
  • Back property taxes
  • Working capital
  • Guaranteed Loans

Popular Types of Small Businesses that Qualify

  • Hospitality (Hotel & Motel)
  • Mini-Storage
  • RV Parks
  • Restaurants
  • Retail
  • Warehouse
  • Industrial/light industrial
  • Office
  • Ground Leases
  • Gas Stations
  • Assisted Living Facilities
  • Equipment Purchase
  • Debt Refinance
  • Convenience Stores
  • Day Care Centers
  • Dry Cleaners
  • Franchises
  • CPA
  • Health & Fitness Clubs
  • Medical & Dental Professional
  • Land
  • Manufacturing
  • Mixed-use
  • Resorts
  • Restaurants
  • Single Users
  • Veterinary Facilities

SBA generally does not specify what businesses are eligible. Rather, the agency outlines what businesses are not eligible. However, there are some universally applicable requirements. To be eligible for assistance, businesses must: Operate for profit, be small, as defined by SBA, be engaged in, or propose to do business in, the United States or its possessions, have reasonable invested equity, use alternative financial resources, including personal assets, before seeking financial assistance, be able to demonstrate a need for the loan proceeds, use the funds for a sound business purpose, not be delinquent on any existing debt obligations to the U.S. government.

Ineligible Small Businesses for SBA Loans

Businesses Not Eligible for Assistance

While SBA doesn’t specify what businesses are eligible, there are many types of businesses that are expressly ineligible:

  • A non-profit business
  • Primarily engaged in lending
  • A passive business owned by developers or landlords that do not actively use or occupy the assets acquired or improved with the loan proceeds that is not an Eligible Passive Company discussed below (e.g. shopping center)
  • A life insurance company (life insurance agents, however, may be eligible)
  • Located in a foreign country or owned by undocumented aliens
  • Selling through a pyramid or multi-level sales distribution plan
  • Deriving more than one-third of gross annual revenue from legal gambling activities
  • Engaged in any illegal activity
  • Restrict patronage for reason other than capacity
  • A government-owned entity (a small business owned or controlled by a Native American tribe may be eligible if the business is a legal entity separate from the tribe)
  • Principally engaged in teaching, instructing, counseling, or indoctrinating religion or religious beliefs
  • A consumer or marketing cooperative (producer cooperatives may be eligible)
  • Earning more than 1/3 of its gross annual revenue from packaging SBA loans
  • Business with an associate who is incarcerated, on probation, on parole, or has been indicted for a felony or a crime of moral turpitude
  • Business in which the Lender or any of its associates owns an equity interest
  • Business which presents live performances of a prurient sexual nature or derives more than 5 percent of its gross revenue from the sale of products or services, or the presentation of any depictions or displays of a prurient sexual nature
  • Business that has defaulted, or has a principal who has defaulted, on a Federal loan or Federally-assisted financing resulting in the Federal government sustaining a loss, (unless waived by SBA for good cause)
  • Primarily engaged in political or lobbying activities
  • Speculative in nature (such as a shopping center developer, oil wildcatting, or primarily engaged in R&D) III. Potentially Ineligible Businesses — The following businesses may be eligible if they meet certain conditions.
  • Pawn Shops. Eligible only if more than 50% of its gross revenue for the previous year was from the sale of merchandise rather than from interest on loans.
  • Hotels, Motels, RV parks, Marinas, Campgrounds, and similar type of business. Eligible only if more than 50% of the business’s revenue for the prior year is derived from transients who stay for 30 days or less at a time.
  • Residential Care Facilities. Eligible if licensed as nursing homes or assisted living facilities.
  • Income derived from Gambling only Eligible if: a) this income is 1/3 or less of gross annual revenue.

Frequently Asked Questions About SBA Loans

What are the Minimum Qualifications for an SBA Loan?

Business owners must meet minimum criteria set forth by the SBA as well as their lenders. Minimum credit score required is 680; however, lenders are allowed some flexibility in terms, interest, and approval criteria.

How Much Can I Get An SBA Loan For?

SBA loan amounts will vary depending on the type of SBA small business loan you are trying to secure. Microloans are less than $50,000 however other loans can go up to $20 million. The limitation on the traditional business loan is $5 million.

How Long Does the SBA Loan Take to Process?

The SBA business loan process can take up to 12 weeks from beginning to funding and sometimes even longer. The more prepared you are, the faster the loan process will go, however.

Where Can I Get an SBA Business Loan?

Business owners can get an SBA business loan through both banks and private lenders; however, not all banks work with the Small Business Administration. Make sure to call ahead to a few banks you are interested in working with to see if they specialize in the business loans you need.

How Long Is A Small Business Loan Term?

The term of the small business loan will depend on the type of loan you secure; however, most SBA loans are for seven years, although up to 25 years is also common.

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