Basics of SBA Loans

SBA Loan Programs

• Standard 7(a) Loans: The interest rates for SBA 7(a) loans are set by the lender, but all interest rates must fall below the maximum rates put in place by the SBA. For Standard 7(a) loans, the interest rate is based on the current prime rate. Lenders can add between 2.25% and 4.75% to the prime rate, depending upon the total loan amount taken and the repayment terms. For real estate, repayment terms up to 25 years are available. Business acquisitions and equipment financing come with terms up to 10 years. For working capital, the loan maturity is 7 years.
  
  A one-time guarantee fee up to 3.75% may be passed on to the borrower. Additional fees may also be required by the lender, including but not limited to closing costs or referral fees. A prepayment penalty applies when the loan is paid within the first three years when the repayment terms are 15 years or longer.


• SBA Express Loans: The maximum interest rate for SBA Express loans is slightly higher. Lenders can charge the current prime rate plus an additional 4.5% to 6.5% based on the amount borrowed. Terms are the same for SBA Express loans as Standard 7(a) loans. A guarantee fee of up to 3% can be passed on by lenders to borrowers of Express loans, while additional fees including packaging fees and closing costs may also apply.
  


• SBA Community Advantage Loans: Community Advantage loans have a maximum rate set by the SBA as the prime rate plus 2.75% to 6%. Repayment terms for these loans are similar to Standard 7(a) loans – up to 25 years for real estate and up to 10 years for acquisitions, inventory, equipment financing, and other expenses. Closing costs and fees for appraisals, reports, and other costs may be passed on to the borrower.
  


• Veterans Advantage Loans: Veteran’s Advantage loans come with the same repayment terms and interest rates as Standard 7(a) loans. The difference is in the guarantee fee, which is reduced by 50% for loans from $125,001 to $350,000.
  


• Export Express & Export Working Capital Loans: Repayment terms remain the same as other 7(a) loans, while interest rates are set between 4.5% and 6.5% on top of current prime rates. A guarantee fee up to 3% will also be paid and varies based on the term length and amount borrowed.


• CAPLines:  Repayment terms for CAPLines are up to 5 years. A maximum interest rate of the prime rate plus 2.25% to 4.75% has been set by the SBA. A one-time guarantee fee between 2% and 3.75% will also be charged, as well as additional expenses similar to other SBA 7(a) loans.

SBA 7(a) Loan Borrower Requirements

There are a few requirements set by the SBA that apply across the board for all SBA 7(a) loans. All businesses must be based in the United States and must be for-profit. All applicants must qualify as a small business with 500 or fewer employees and a net worth below $15 million. Businesses must not be engaged in illegal operations.

Borrowers must have a solid credit history, with a recommended score of 680 or higher. Borrowers should be prepared to offer adequate collateral, including personal real estate if needed. Personal guarantees are required. The applicant must also show a legitimate business need for the loan and must have exhausted other financial options before applying.

All applicants should be prepared to show documentation for ownership, personal and business credit, and financial outlooks. Startups are required to have a solid business plan prepared. Anyone applying for the Veterans Advantage program must have a business that is at least 51% owned and controlled by a veteran, servicemember, reservist, or National Guard member. A current or widowed spouse is also eligible to apply.

The SBA CDC/504 Loan Program

The SBA’s CDC/504 loan program is a bit different because instead of working with one intermediary, a borrower works with two: a participating lender and a Certified Development Company.

With these loans, the SBA provides up to 40% of the total cost of a project through a Certified Development Company. A traditional lender, such as a bank or credit union, provides 50% of the total project cost. The borrower is responsible for the remaining 10% of the total project cost. The maximum SBA loan amount distributed through this program is $5 million.

SBA 504 Loan Uses

While there are some limitations, the CDC/504 loan program can be used in a variety of ways to update, expand, or improve a small business. These loans can be used to purchase buildings or land, improve land, renovate facilities, or purchase long-term fixed assets. Debt can be refinanced using these funds provided that the debt is connected to the purchase or renovation of facilities or equipment.

Funds from these loans can’t be used for repaying or refinancing debt (other than the refinancing of debt as described above). It also can’t be used to purchase inventory or for use as working capital.

SBA 504 Loan Rates & Fees

The interest rates for 504 loans are based upon the market rate of 5-year and 10-year Treasury issues. The portion that is funded through a traditional lender will be subject to the lender’s own interest rates. Repayment terms of 10 years and 20 years are available for the SBA-funded portion of the loan. Funding fees, processing fees, and closing fees may also apply and can be financed with the loan.

Funds from these loans can’t be used for repaying or refinancing debt (other than the refinancing of debt as described above). It also can’t be used to purchase inventory or for use as working capital.

• Borrowing Amount: No maximum, but the SBA will only fund up to $5 million
  
• Term Lengths: 10 or 20 years
  
• Interest Rates: Fixed rate based on US Treasury rates
  
• Borrowing Fees:
• CDC servicing fee, CSA fee, guarantee fee, third party fees (however, most of these fees are rolled into the interest rate or cost of the loan)
• Possible prepayment penalty
• Personal Guarantee: Guarantee required from anybody who owns at least 20% of the business
• Collateral:  Collateral required; usually the real estate/equipment financed
• Down Payment: 10% - 30%
  

SBA 504 Loan Borrower Requirements

SBA 504 loan borrowers must meet all standard requirements set by the SBA. Borrowers must operate a for-profit business and should not be involved in nonprofit, speculative, or passive activities. Borrowers must show a legitimate need for the financing. They must also find a CDC and additional lender that operates in their area. Collateral is generally required, although typically the assets that are being financed serve as collateral. Personal guarantees are also needed from all applicants and owners of 20% or more. Read on to learn more about SBA 504 loans.

Should I Choose an SBA 504 Loan or a 7(a) Loan?

Wondering which SBA loan is right for you? Here’s a quick comparison of the two:

Loan Usage

Rates and Terms

Borrower Requirements

The SBA Microloan Program

Small business owners looking for a smaller loan can apply for the SBA Microloan program. Through this program, borrowers can work with nonprofit intermediaries to receive up to $50,000 in low-interest funding.

SBA Microloan Uses

SBA Microloan funds can be used in almost any way to operate or expand a business. Purposes for these loans range from working capital to purchasing supplies and equipment. However, microloans can’t be used for purchasing real estate or refinancing debt.

SBA Microloan Rates & Fees

The interest rates for microloans are based primarily on the intermediary’s cost of funds. The intermediary may charge this rate plus a maximum of 7.75% on microloans exceeding $10,000, or up to 8.5% on loans that are $10,000 or less. The maximum maturity for microloans is six years.

Packaging fees between 2% and 3% may also be charged by intermediaries. Additional fees, including but not limited to credit reports, filing fees, recording fees, or other closing costs, may also apply. Find out more about the rates, terms, and fees of microloans before applying.

• Borrowing Amount: $500 - $50,000
  
• Term Lengths: Up to 6 years
  
• Interest Rates: 6.5% - 13%
  
• Borrowing Fees: Possible fees from the loan issuer
• Personal Guarantee: Guarantee required from anybody who owns at least 20% of the business
• Collateral:  Collateral normally required, but depends on the lender
• Down Payment:
  
• No down payment for most businesses
• Possible 20% down payment for startups
• Possible 10% down payment for business acquisition loan

SBA Microloan Borrower Requirements

Microloans are subject to the same standard requirements set by the SBA, including qualifying as a small business. All businesses must be for-profit, although non-profit childcare centers also may apply.

Applicants seeking more than $20,000 must pass the SBA’s “no credit elsewhere” test. This simply means that any borrower must have sought other non-federal means of financing before applying. There must also be a legitimate need for the financing, and it should be proven that the small business is set up for a profitable and successful future.

Collateral may be required, but this decision falls upon the lender. The SBA simply requires the lender to use “prudent lending practices” when determining whether a microloan should be collateralized. Credit is also a consideration and scores should be at least 680 upon applying.