SBA loans undoubtedly are one of the best ways to finance your small business.
The federal program offers flexible terms and low rates, so borrowers can grow a business without possibly crippling debt. But SBA loans can be tough to get, which is why some small-business owners have grown disillusioned.
“I swore never to do it again,” says Donny Seyfer, owner of Seyfer Automotive in Wheat Ridge, Colorado. “It was just pulling teeth.”
Still, low APRs make the SBA program one of the smartest ways to fund your company. In this article:
What is an SBA loan? SBA loans are guaranteed by the federal government and issued by lenders, mostly banks.
When are SBA loans an excellent option? They are good for long-term investments because they come with the best terms, including a low APR.
What are the repayment terms? Seven years for working capital, up to 25 years for major business needs.
How do you apply for an SBA loan? Be prepared to submit a lot of documents and answer questions about your personal and business finances.
When is applying for an SBA loan not worth the time? This program may not be for you if you have wobbly finances or need cash fast.
What are other types of SBA loans? Microloans, plus real estate, equipment and disaster financing.
What is an SBA loan?
SBA loans, also known as 7(a) loans, are the U.S. Small Business Administration’s flagship financing program. The agency itself does not issue loans. Instead, the SBA guarantees loans issued by participating lenders, mostly banks.
The SBA can guarantee up to 85% of loans for $150,000 or less, and 75% of loans for more than $150,000. The SBA says its average loan amount was $371,628 in 2015, although the agency could guarantee amounts up to $3.75 million.
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When are SBA loans are an excellent option?
If you’re looking to expand to a new location, hire employees, or refinance an existing loan, SBA loans are a great financing option. SBA loan rates and terms are typically more manageable than other types of financing.
For example, major online small-business lenders offer financing with annual percentage rates in the high single to triple digits; the APR is typically much lower with SBA loans. Participating lenders set the final rate in keeping with SBA rules, which are based on the prime rate plus an additional markup rate known as the spread.
- If your loan term is shorter than seven years for loans more than $50,000, the rate is based on the prime rate with a maximum spread of 2.25%. As of February 2016, that means a maximum rate of 5.75%.
- If your loan term is seven years or more for loans more than $50,000, the maximum spread will be 2.75%. As of February 2016, the maximum rate is 6.25%.
- At SmartBiz, the online lender that specializes in SBA loans, the APR is 7% to 8%.
What are the repayment terms?
Another advantage of an SBA loan: You’ll have more time to pay it back.
The loan term depends on how you plan to use the money. If it’s for working capital or daily operations, you have seven years to pay back the loan. If it’s for buying new equipment, you have up to 10 years. For real estate purchases, the terms go up to 25 years, according to the SBA.
Just like with other types of loans, such as a mortgage or a student loan, a longer term for a small-business loan means a lower interest rate and lower regular payments. That means you’d have more funds available for other business needs.
That’s often not the case with many online small-business lenders that offer financing with shorter terms, such as six months to a year, which usually means a higher interest rate and higher regular payments.
In fact, SBA loans can provide a way out of a damaging financial situation. Terry Trumbull, owner and president of Trumbull Meats in Hamburg, Michigan, got an SBA loan that allowed him to refinance much more burdensome financing: It was “killing me,” he says, and the SBA loan provided relief. He did have to wait a couple of months and deal with many requirements, he says.
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How do you apply for an SBA loan?
The best place to start is the SBA site, which includes a loan application checklist.
Be prepared to submit loads of documents, including your tax returns and business records.
Here’s a partial list of the documents required:
- SBA’s borrower information form.
- Statement of personal history.
- Personal financial statement.
- Personal income tax returns (previous three years).
- Business tax returns (previous three years).
- Business certificate/license.
- Business lease.
- Loan application history.
The first step is to find an SBA-approved lender, which you can do by checking with your local SBA district office. The agency also recently set up the SBA LINC tool to help match potential borrowers with lenders. Banks follow SBA guidelines but use their own underwriting criteria when evaluating loan applications.
If your credit and small-business finances are in excellent shape, the wait may be shorter. The SBA has a financing program called SBA Express, which aims to respond to loan applications within 36 hours. The maximum amount for this type of financing is $350,000, and the maximum amount the SBA could guarantee is 50%.
If you’re applying through a traditional bank, it helps to work with a lender that has a track record of processing SBA loans. Patty Staples, chief credit officer at California Business Bank, suggests that you ask a potential lender:
How many SBA loans do you make?
How often do you fund SBA loans?
How experienced is your staff in the process?
What is the dollar range of the loans you make?
In general, a bank with multiple years of experience processing SBA loans would be able to provide you guidance, including letting you know what your chances are of being approved.
“If you choose the right bank,” she says, “the lending staff will facilitate that process and make it as easy as possible.”
Going online is another option: SmartBiz, which uses an online application system, could shorten the approval time. If you have all your information and documents in order, your SBA loan application could be approved within a week.
If you’re ready to get started with SmartBiz:
Read our SmartBiz review and learn about the application process
When is applying for an SBA loan not worth the time?
Applying for an SBA loan can take weeks, even months.
Your chances of being approved are greater if your personal and business finances are in good shape. “If a company has been in business for at least two years, is profitable and has cash flow to support loan payments, it’s likely a good candidate for an SBA loan,” SmartBiz President Evan Singer says.
But if your business is struggling, an SBA loan is probably out of the question. And if your small business falls into any of the categories the SBA spells out in detail on its site, don’t bother applying.
For example, SBA loans aren’t for you if your company is in the lending business, if you present live performances “of an indecent sexual nature,” or if you get more than one-third of your gross revenue from legal gambling activities.
Remember, applying for an SBA loan is a time-consuming process that might take your focus away from running your company. For some small businesses, especially those just starting out, that’s tough to do, and applying for an SBA loan may not be worth the hassle.
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What are other types of SBA loans?
MICROLOANS
The SBA offers microloans of up to $50,000 with a maximum term of six years. The loans, which are administered through nonprofit community-based organizations, can be used for such business needs as working capital, inventory or supplies, and machinery or equipment. The funds can’t be used to pay an existing debt or to buy real estate.
REAL ESTATE AND EQUIPMENT LOANS
The SBA guarantees loans of up to $5 million to help small-business owners with major investments. These include buying land, machinery and equipment and building new facilities. Each loan is structured with a private sector lender, such as a bank or a credit union, covering 50% of the project cost and the borrower covering 10%. A certified development company, which is a nonprofit corporation set up to address economic development issues in a community, covers 40% of the cost with the SBA serving as guarantor.
DISASTER LOANS
The SBA also offers loans geared toward helping small-business owners affected by natural disasters and other kinds of emergencies.
- Home and personal property loans are available for individuals, including small-business owners, in a declared disaster area.
- Business physical disaster loans are offered to small-business owners in declared disaster areas who suffer property damage.
- Economic injury disaster loans are available to entrepreneurs in declared disaster areas who are injured economically by the calamity.
- Military reservists economic recovery loans are available to small businesses with an essential employee who is a military reservist called to active duty. These small businesses can apply for loans intended to help ease their operating expenses.
Find other small-business loan options
If an SBA loan is not the right fit, look for small-business loans to meet your needs and goals with the help of NerdWallet’s comparison tool. We gauged lender trustworthiness and user experience, among other factors, and made recommendations based on categories including your revenue and how long you’ve been in business.
Compare business loans
Benjamin Pimentel is a staff writer at NerdWallet, a personal finance website. Email: bpimentel@nerdwallet.com. Twitter: @benpimentel
To get more information about funding options and compare them for your small business, visit NerdWallet’s small-business loans page. For free, personalized answers to questions about financing your business, visit the Small Business section of NerdWallet’s Ask an Advisor page.
This post was updated May 17, 2016. It was originally published Dec. 17, 2015.
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