More than 60% of new jobs created in 2017 were hired by small businesses around the country. That means having a healthy small business market is an enormous economic driver for the communities which the businesses serve. But small businesses also fail at a pretty high rate -- estimates are around 30%.
That’s one reason why, in 1953, the government created the Small Business Administration, or SBA. The mission of the SBA is to support small businesses with advice and resources, but also provide help to business owners seeking to secure small business financing to open their doors -- and create jobs.
What is an SBA Loan?
SBA loans are a small business loan funded with the support of an organization designed to help small businesses succeed. SBAs provide support in the form of business advice that can range from market research and creating a business plan to help with banking, insurance and real estate.
You can also find advice from other business leaders in your community and learn about qualified professionals, like accountants, that you might need to run your business at the SBA.
The SBA does not loan money directly. Rather, they match business owners with a lender, such as: a bank, a community development organization, or a micro-lending institution, and then guarantees up to 85% of the loan to the lender. If a borrower defaults on the loan, the SBA pays back the money, up to the agreed upon percentage. Lenders are more likely to approve a SBA loan because it lowers their risk of losing the borrowed money.
Chris Baumann, a Loans & Investments Team Leader at Socotra Capital, explained. “I have found that the SBA performs exceptional work, and they are very supportive of the greater small business community. The SBDC [Small Business Development Council] provides free counseling services, and as far as I understand, SBA loans can finance up to 80-90% of a real estate and business acquisition. It is incredible to know that there is that type of financial backing available for the business community.”
How do SBA Loans work
You can take out an SBA loan for any amount between $500 and $5.5 million dollars, and the funding can support many business needs, from start up costs, equipment purchasing, to day-to-day working capital. In 2018, the average SBA loan was for $425,500.
The loans typically come with lower-than-standard interest rates and long repayment terms, giving businesses the flexibility they need to start their businesses on a healthy financing footing.
When deciding on an SBA loan, a business owner will typically go to the SBA and explain why they need funding. Then, the SBA will work with the owner to refine and define the business need, helping to make a strong case for borrowing. Lastly, the SBA will match a borrower with a lender.
One special aspect of SBA loans is that because the SBA recognizes the realities of starting a small business, many loans also require a lower-than-average down payment. The SBA also offers benefits for minority owned businesses.
Because of the benefits of SBA loans, owners, or potential owners, should be prepared for the SBA loan process to take a few months to complete. For most, however, the benefits outweigh the downside of having to wait a little longer for funding.
How to get an SBA Loan
When applying for an SBA loan, borrowers fill out loan applications like any other, however, with an SBA loan, you’ll likely need extra documentation. But you’ll also have special support with pulling together your application.
Some of the documentation you’ll need can include:
- A business plan
- Financial statements or projections for your business
- Your personal credit score
- Information about any collateral you can offer against the loan
Once you’ve gotten your application in order, you’ll submit it to the lender and wait to find out if they can fund your loan.
How do you qualify for an SBA loan?
The biggest factor in qualifying for an SBA loan is a solid credit score. Most experts suggest it needs to be at least 680 to qualify. Your business also has to be located in the United States. You’ll also need to explain what your loan is for, and demonstrate your ability to pay back the loan.
All of the documentation you’ll prepare to apply for your loan will support the above.
Your business will also need to prove that you’re actually a small business. The SBA has special guidelines for number of employees and annual receipts that you need to fit within to make sure you qualify.
Are SBA loans hard to get?
SBA loan requirements can be more stringent than some other loans. They don’t necessarily require a higher credit score, and in fact they often require less of a down payment.
You’ll need to have your business paperwork in order when applying for the loan. And the process for getting an SBA loan can take three to four months, which might be a long time depending on your business needs.
What is a typical down payment on an SBA loan?
SBA loans typically require a 10-20% down payment, or the equivalent in collateral or equity against the loan.
However, some micro-loans, or loans of less than $50,000, can require no down payment and can be a good financing option for some borrowers.
How long does it take to get an SBA loan?
The process of applying for and getting an SBA loan can take three to four months. However, it can also take as little as two weeks for some lenders to grant an SBA loan.
That said, if your business needs short term financing, an SBA loan is probably not the way to go.
Can you refinance with an SBA loan?
You can refinance with an SBA loan, but it’s not easy. According to the SBA, to refinance a loan through the SBA, you must have at least 36 months of payment history on the loan with no past due payments.
If you’ve purchased a business and acquired debt with it, you’ll need to have 24 months of recorded payments to refinance.
What are the best types of SBA loans for my needs?
There are a few kinds of SBA loan options you’ll want to consider. The best fit will depend on the loan amount you need and what you need the loan for.
The different types of SBA Loans include:
- SBA (7a) loans. This is a standard SBA loan that comes with the benefits of lower interest and long repayment terms.
- SBA CDC/504 loans. This is a special kind of SBA loan that is designed to be used for purchasing equipment or real estate for your business. A CDC is a Certified Development Company and will provide at least a portion of the funding for this kind of loan.
- SBA Micro-loans. These loans provide less than $50,000 in financing and come with a term of six years or less.
- There are also special kinds of SBA loans designed to help businesses recover after a disaster. If you’re facing the prospect of recovering your business after something has happened, the SBA can help.
How to apply for an SBA loan
When you’re ready to apply for an SBA loan for your business, you’ll want to make sure you have the best chance for approval. If you need to, spend a few months improving your credit score by paying outstanding debt and clearing up any inconsistencies or errors in your credit report.
Then, you’ll need to decide which kind of SBA loan is the best fit for your business and find a lender. The SBA will help match you with a lender that will suit your business needs.
The last step is pulling together your paperwork and filling out an application. If your application is approved, you’ll be on your way to becoming a vital part of the business community as an SBA supported small business owner.