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
** SBA Express program promises a turn around time of 36 hours for loans up to $350,000
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
- Better interest rates and longer loan terms
- No balloon payments or ‘gotchas’
- Strict requirements
- Drawn out process – it can take several months to get a loan
- Collateral required
The SBA provides an online primer: https://www.sba.gov/tools/sba-learning-center/training/finance-primer-guide-sba-loan-guaranty-programs
For a list of preferred SBA lenders, see http://www.sba.gov/offices/headquarters/oca/resources/14829
** Web sites such as Better Finance’s SmartBiz promise speedy turnaround on SBA loans—in as little as a week