An SBA loan is a type of financing that is offered through the Small Business Administration, a government backed agency. The SBA’s mission is to “aid, counsel, assist, and protect, insofar as is possible, the interests of small business concerns.” Through partner lenders, the SBA works to help small businesses get the funding they need. SBA loans can come with larger amounts with lower interest rates and longer repayment terms, but they aren’t incredibly easy to qualify for.
The SBA backs a large portion of the loan, thus reducing the risk for the lending partner. The percentage backed can vary depending on the type of SBA loan and amount. For example, SBA 7(a) loans have a guarantee of 85% for loans up to $150,000. SBA loans are available up to $5,000,000 with repayment terms of up to 25 years.
Another reason that SBA loans tend to be more attractive for businesses that can qualify is that the SBA caps interest rates. Currently, the SBA caps interest rates at around 11.25% for fixed-rate loans and around 8% for variable-rate loans. The SBA interest rate caps can be enforced, and lenders will happily comply because they know that the federal government backs a large portion of the loan.
SBA loans work just like other conventional business loans work. To obtain an SBA loan, you must work directly with the SBA or an SBA-approved lending institution. To qualify for an SBA loan, you should have a good credit history, a strong annual business revenue, and several years of time in business.
Additionally, you should be prepared to have a down payment of 20% or more and be willing to sign a personal guarantee. Anyone in the company who holds a 20% or more ownership stake in the business needs to be willing to sign a personal guarantee. For anyone who signs a personal guarantee, the SBA and/or lender reserves the right to seize personal property and assets in the event that you should happen to default on the loan.
Once approved by the SBA and the SBA-approved lender, you will receive the funds you were approved for. The amount borrowed can then be paid back over time with monthly installments for the duration of the loan term. The monthly payment amount, and the number of monthly payments required to pay off the loan plus interest, are agreed upon during the loan application process.
Although SBA loans are extremely popular, they are often much harder to qualify for than conventional business loans. The minimum requirements for qualification are much higher. Additionally, the loan application process requires an incredible amount of paperwork and documentation, and funding can sometimes take up to two months or more from when you first apply.
Overall, if you have a good credit score and your business has strong annual revenue and a few years of successful business operations, then no, it should not be that hard to get an SBA loan. If you meet all of the minimum requirements of qualification, the biggest thing you need to obtain an SBA loan is time and patience. Applying for and qualifying for an SBA loan can require a lot of paperwork, documentation, and time for processing. Some SBA loans can take up to 2 months or more to be funded when you start the application process.
The main reasons that some small businesses may struggle to obtain an SBA loan include the fact that they are a startup, they have no established business credit score, they have inconsistent cash flow, or they have a business owner who has a bad personal credit history. Some SBA loan applications may get rejected simply because the business documentation required is incomplete or disorganized.
How do you qualify for an SBA loan?
To qualify for an SBA loan, your business needs to meet all of the standard criteria mandated by the SBA, along with meeting the minimum financial requirements. When it comes to the standard criteria, a business needs to meet the following requirements at a minimum.
If a business fulfills all the criteria above, it can be considered for an SBA loan. To qualify for an SBA loan, a business must meet the following minimum financial requirements.
Yes. There can be some severe consequences if you do not pay back an SBA loan. It’s important to note that even if you are not required to put up collateral to secure an SBA loan, you and anyone else in your company who has a 20% ownership interest in the business needs to sign a personal guarantee with the SBA and the SBA-approved lender. That means if for any reason you should default on the SBA loan, anyone who was required to sign a personal guarantee is in danger of having personal assets like homes and vehicles seized.
Having personal and commercial assets potentially seized is not the only potential consequence of defaulting on an SBA loan. Defaulting on an SBA loan can have a tremendous negative effect on your business and personal credit scores. Loan defaults can typically remain on your credit reports for up to 7 years or more. Having a loan default on your credit report can make it extremely difficult to obtain any type of credit in the future.
Although the SBA 7(a) and 504 loan programs are the most popular SBA loan programs, there are nine total loan programs to choose from. Here is a quick breakdown of those nine loan programs available through the Small Business Administration.
SBA loans are extremely popular among small businesses for many reasons. However, SBA loans do also contain their fair share of disadvantages. Here is a quick breakdown of the pros and cons of SBA loans.
To apply for an SBA loan, you’ll need to locate an SBA-approved lender that serves your area. The next step is to reach out to them and determine which type of SBA loan is best and what documents you should prepare. Before you apply for any business loan, you should review the health of your business finances, and mySMBscore can help you do just that and more.
The SMBscore was developed to create an industry-specific, tailor-made risk assessment that can be used to determine the financial stability of small and medium-sized businesses (SMBs). It allows business owners to review their finances through a similar lens that a lender will. At mySMBscore you can view insights that lenders look at to approve your financing. Our platform can help you determine areas of improvement so that you can be as prepared as possible before applying for a loan. We can even help connect you to lenders that you have the best chance of qualifying for. Our goal is simple - to help businesses prosper.
Considering an SBA loan? Check your SMBscore before applying!