Bank lending to small businesses is down, but it would be even lower were it not for the U.S. Small Business Administration’s loan guaranty program. The SBA does not make the loans itself, nor does it set rates. Rather, the agency guarantees a portion of the loans (up to 85%) made by lenders including banks and microfinance organizations. By guaranteeing a portion of the loan, the SBA allows lenders to make loans to small businesses that might not otherwise meet their criteria or may be deemed risky. These businesses may not be in a strong enough financial position to obtain traditional bank small business loans, and therefore rely on the SBA guarantee. The government backstop, however, comes with strict requirements and lengthy application timeframes.
SBA loans cover a wide range of business uses, including start-ups, working capital, inventory, debt refinancing, equipment purchases and more.
The two main SBA loan categories are:
The most popular SBA guaranty program, the 7(A) loan allows funds to be used for starting, acquiring or expanding a small business.
Up to $5 million
Eligibility: requires last 3 years of business tax returns and two years of personal tax returns for principals with more than a 20% stake
Rates: from prime +1 to prime +4
Terms: 3-5 years, and up to 7 years
Long term, fixed-rate financing for real estate or other fixed assets
Eligibility: the small business must occupy at least 51% of the real estate asset, cannot have sales over $6 million or more than 500 employees
Rates: prime +1 to prime +2
Terms: 7 to 25 years
The SBA also offers programs for microloans, disaster recovery, export assistance, and veteran and community loans. For more info see: https://www.sba.gov/content/sba-loans
SBA loans have a rep as being painstakingly sloooww. But that is changing. The agency’s SBA Express program promises a turn around time of 36 hours for loans up to $350,000. And, taking a page from the online lenders, the SBA has created its own online lending platform, LINC, to match borrowers with SBA-approved lenders. Borrowers fill out one streamlined application, and the SBA promises they will hear back from lenders within two days. SBA One, a new online platform for lenders, promises to slash loan approval times to as little as 24 hours.
Better interest rates and longer loan terms
No balloon payments or ‘gotchas’
Lenders love the loan guaranty
Strict borrower requirements, including good credit
Drawn out process– it can take several months to get a loan (though that is changing)
The SBA provides a helpful online primer for small business borrowers.
Your first stop should be LINC, the SBA platform for matching borrowers with lenders