SBA Loans 2022 Guide

IN THIS GUIDE

Overview

If you’re looking to expand your small business, you have numerous financing options.

However, not every option is either appealing or accessible, and it can be challenging to determine the right choice.

That’s where the SBA comes in.

The SBA, or Small Business Administration, offers a variety of loan programs—all with attractive rates and terms—designed to be easily accessible for small business owners.

In this article, we’ll give you an overview of these SBA programs, tell you how to qualify for them, how to use these loans, how to apply, and much more.

How do SBA loans work

The SBA does not give out SBA loans.

Instead, the SBA guarantees portions of loans and works with verified lenders to provide financial assistance to small businesses. “Guaranteeing” a loan means the SBA promises to pay back a particular portion of the loan amount if the borrower defaults.

This guarantee incentivizes lenders to loan more significant amounts of capital (up to $5M in some cases!) with quality terms that would otherwise be available to borrowers.

The SBA also sets up the guidelines and regulations that lenders must follow when loaning capital. In doing so, they create a financing environment that benefits borrowers and eliminates both predatory terms and inconvenient repayment plans.

We’ll dive into the specifics of each type of SBA loan later on in the article.

Who can qualify for an SBA loan

SBA loans are meant for “small businesses.”

But what exactly defines a “small” business?

Although different lenders use slightly different metrics to categorize businesses, the SBA focuses on a few specific characteristics.

It’s important to understand that the best metric used to analyze one business may not be the same metric used to analyze a different business. For example, the SBA evaluates some businesses based on the number of employees. It evaluates other businesses based on their 2-year profit.

In general terms, the SBA defines small businesses as businesses with profit that doesn’t exceed $5M over a two-year period. Additionally, most SBA small businesses do not have a net worth that exceeds $15M.

They also look at the number of employees and money earned over a set period (usually a year), verified by their receipts. These numbers vary significantly from business to business.

These qualifications aside, the SBA only offers financial assistance to for-profit businesses operating in the United States.

How to use an SBA loan

SBA loans come with a variety of restrictions and parameters. This section will overview how you can (and cannot) use your SBA loan.

  • SBA loans can be used for:
    • Purchasing real estate if you’re using an SBA 504 or 7(a) loan
    • Working capital if you’re using an SBA microloan or 7(a) loan
    • Inventory and equipment
    • Renovations and expansions
    • Land
  • SBA loans cannot be used for:
    • Non-business related purposes, such as purchasing residential property
    • Non-profit businesses, as well as businesses that are political in nature, associated with gambling, life insurance companies, or passive income businesses
    • If you’re utilizing an SBA 504 loan, you cannot use the loan for working capital
    • If you’re using an SBA microloan, you cannot use the loan to purchase real estate

How to apply for an SBA loan

In order to apply for an SBA loan, you’ll need to take some specific steps. Although the process is straightforward, it’s also time-consuming.

Keep that in mind when you apply.

  1. Check your eligibility and make sure you meet the requirements

The first step of applying to any SBA loan program is understanding if you can qualify for an SBA loan. Your business must be a “small” for-profit business regardless of what loan you’re applying for.

You must also make sure that the loan you’re applying for can be used the ways you want it to be used.

For example, if you’re looking for a loan to supplement your working capital, you CAN use an SBA 7(a) loan, but you CAN’T use an SBA 504 loan.

If you do qualify, calculate the amount of financing you’ll need. Certain SBA loan options won’t suffice if you seek more capital, and guarantees also change depending on how much you borrow.

  1. Gather documents

Gathering documents represents a large chunk of the application process—and it’s probably the most tedious.

You’ll need to fill out numerous forms on the SBA’s official site.

The lender you will eventually be working with can help direct you, but if you haven’t found one yet, the SBA’s site will guide you on what exact forms you need to fill out.

Aside from those, you also need to submit multiple financial documents for both you and your business. These forms include your business balance sheets, financial plans, and business and personal income tax statements. You’ll also need to provide the necessary business licenses.

If it’s necessary, you’ll also document any required collateral at this stage.

  1. Finding a Lender

Finding a lender can be done earlier, but at this point, if you haven’t already, you need to find a lender to work with.

This can be done on your own or with the help of the SBA.

Or, you can try Loanbase. Our platform connects lenders and borrowers based on your exact needs and specifications. Our easy-to-use online wizard collects your data and automatically identifies the lenders best suited for your needs.

While the SBA limits fees and controls terms to some extent, every lender will present different offerings.

It’s essential to shop around and compare the different rates and terms.

  1. Submit your application and close the loan

At this point, you’re ready to submit all necessary documents and close your loan.

There will be a turnaround time for the lender to get back to you. This can take anywhere from a day to a little under two weeks, depending on your loan.

At this time, expect to pay any closing fees, these include processing fees, advisor fees, closing fees, and there may be more, depending on your loan.

How to repay your SBA loan

Your SBA loan will be paid back according to a repayment schedule set by your lender.

This schedule will be over anywhere from 6-25 years, depending on both the type of SBA loan you acquire, as well as the use of the loan.

Microloans have a max term of 6 years.

SBA 7(a) loans can be anywhere from 7-25 years, depending on if the loan is being used for working capital, inventory or equipment, or real estate.

SBA 504 loan repayment periods can last 10, 20, or 30 years.

In a majority of cases, you’ll pay back your loan on a monthly schedule.

If you want to pay off your loan early, you might face additional fees, especially if the loan term is longer than 15 years.

Types of SBA Loans

SBA 504 Loans

While most loans involve two parties (the borrower and lender), SBA 504 loans involve the borrower, the lender, and a certified development company (CDC).

With SBA 504 loans, the lender provides up to 50% of the loan, the CDC covers up to 40%, and the borrower will cover 10%. In total, up to 90% of the cost of your loan can be covered. SBA 504 loans can cover up to $5 million in capital.

Because two other parties are loaning you capital, you should know that they each will have their interest rates and may require collateral.

These loans can exist on 10, 20, or 25-year terms, and you can’t use them for working capital.

SBA 7(a) Loans

With the SBA 7(a) loan program, the SBA guarantees up to 85% of the loan in the event of default. This means lenders are more willing to loan money under conditions that still heavily benefit the borrower.

Repayment terms with these loans exist in 7, 10, and 25-year terms. These terms are based on the loan’s usage: 7 years for working capital, ten years for equipment or inventory, and 25 years for real estate.

The SBA caps interest rates on SBA 7(a), but borrowers and lenders can negotiate about what the borrower will end up paying.

Microloans

Microloans, as their name implies, are lower capital loans for small businesses. They can be applied to certain non-profit businesses, such as childcare centers, unlike the other loan options the SBA provides.

These loans can be used for working capital, inventory, furniture, and equipment, but not real estate. The value of these loans goes up to $50,000, with a maximum term of 6 years.

Interest rates will vary from lender to lender, and these lenders are community-focused organizations in partnership with the SBA. The application process is, by and large, the same as both SBA 504 and 7(a) loans.

Sample SBA loan terms

Type of SBA LoanMicroloan
Maximum Amount$35,000
Grant Amount$7000 (20% of Max)
Grant Reasoning (if applicable)Training staff
Timeline6-year term
Interest Rates7.80% over cost of funds
Fees (Processing, Closing, Intermediary costs) 2% (fees prior to closing) + 0.5% (closing)
= $875
Use of ProceedsNon-profit childcare center – working capital for staff wages
CollateralPhysical assets of business – furniture and business vehicle

Pros of SBA loans

  1. Wide range of eligible businesses

Thanks to the SBA’s generous loan eligibility requirements, many for-profits (and even a few non-profits) businesses are eligible for financial assistance through any of the available SBA loan programs.

As long as your business is registered for-profit (exceptions for non-profits seeking microloans) and operates within the U.S, the SBA will be able to provide you some form of loan, provided you meet the other requirements they set.

  1. A wide range of loan programs means more options for borrowers

The three main SBA loan categories all have various options when it comes to how much money you’re borrowing, for what reasons, and for what reason.

Whether you’re looking to expand your business by purchasing real estate, inventory, or even working capital, the SBA has a program that can help!

This range also hits different price points for a wide variety of borrowers. From those seeking to borrow $50,000 to those looking for more extensive financing like $5 million, the SBA can work with their partner lenders to fulfill these loans.

  1. Lender safety means better terms and rates for you

SBA loans are appealing for borrowers because they structure their loan programs to provide safety to their lenders. They either guarantee a large portion of the loan or partner lenders with CDCs in order to reduce lender risk.

This means that lenders can provide loans on terms that heavily benefit borrowers because the SBA mitigates losses in the event of a default.

Cons of SBA loans

  1. Lengthy Application Process

With the numerous application forms required by the SBA, as well as a hefty amount of documentation centered around both your business and personal finance, the application process often drags on.

This process can feel drawn out and tedious. For those who want funds exceptionally quickly, the SBA process pales compared to other, faster, more streamlined options.

  1. Collateral can seem daunting.

Above certain loan thresholds, almost every SBA loan requires some form of collateral in case of default.

This is a harsh condition for many borrowers, especially those worried about failing to make payments or those unfamiliar with the loan process.

  1. Stringent conditions to qualify

While easily accessible to most, SBA loans have strict qualifications that make them unattainable for those who fail to meet the criteria.

The main factors that prevent individuals from obtaining SBA loans for their businesses are low credit scores and/or failing to meet the minimum annual income for a specific type of SBA loan.

You will need a minimum credit score of around 620-680 to qualify for most SBA loans. You’ll also need an annual income baseline of about $100,000.

These numbers can change depending on the lender you work with, but it’s essential to understand that just meeting the minimum requirements of the SBA and a lender will often not be enough to secure your loan.

FAQ’s

Is it hard to get an SBA loan?

While not necessarily difficult, the process can be lengthy and certain qualifications make it unattainable for some business owners.

If you do meet the criteria for the type of loan you’re trying to secure, the process is very straightforward and appeals to a wide variety of for-profit businesses.

Should I take out an SBA loan?

If you qualify for one that suits your financial situation and will help your business grow, definitely! SBA loans, across the board, are a very attractive option to help your business flourish.

The SBA provides generous loans on terms that no other provider will be able to match, due to their guarantees and partner CDCs that mitigate lender risk.

You will be hard stuck to find a lender that will give you $5 million in loans over a 25-year term, with only slightly higher than prime interest rates from a non-SBA-affiliated lender.

What is the best type of SBA loan?

There isn’t really a “best” type of SBA loan.

Each type has its own use-cases and qualifications that cater to a specific kind of borrower.

It depends on your financial situation, in addition to your specific needs and goals!

Will SBA loans be forgiven?

Loan forgiveness bills exist (or have existed) for SBA loans, such as the Economic Aid Act of 2021.

The SBA offers something called the PPP, or Paycheck Protection Program, which is used to forgive portions of loans given certain conditions are met.

If you’re concerned about a specific case of loan forgiveness by the SBA, ask a certified lender or the SBA!

Final Thoughts

If you’re a small business owner looking to scale your business, SBA loans can be a great option.

There are tons of options that present different terms and conditions that benefit you, as the borrower.

Wherever you are in your financing journey, we’d love to help! Visit Loanbase to learn more about how we match you with lenders that meet your specific needs.

Financing your business (or your commercial property) shouldn’t be a hassle. Loanbase makes it easy to find the financing you need.

We’re excited to help you expand your business!

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