Are you considering whether or not to pursue an SBA loan? Or maybe you’d just like to know more about the topic to be prepared for the future? This post is here to help!
Candidly, this is a dense topic with a lot of minute details for each SBA loan program (and there are a lot of them). But we won’t be getting into the nitty-gritty here. This post will serve as a primer, covering the basics and summarizing the main takeaways. Even if you know nothing about SBA loans, by the end of this article, you’ll have a solid foundation on what they are, how they work, and whether they might be a good fit for your business.
But if you’re looking for more detailed information, check out our post on Understanding SBA Loan Programs.
What Are SBA Loans?
First, the SBA, or Small Business Administration, is a department of the U.S. government that reports on and supports American businesses with fewer than 1,500 employees. This is a critical service because small businesses are the backbone of the U.S. economy. After all, small businesses make up 99% of all enterprises in the U.S., employ nearly half of the American workforce, and account for about 44% of all U.S. economic activity.
The SBA provides loan programs for small businesses that facilitate development, promote expansion, and ease financial strain during disasters or other economic distress.
It works like this:
A business can apply for a loan with an SBA-approved lender to have a portion of the loan backed by the U.S. government. That means a percentage is guaranteed to be repaid, even if the borrower defaults on their loan. The SBA usually guarantees between 75 – 85% of the loan amount. With this help, small businesses can secure larger loans than they would typically qualify for alone.
What Are the Downsides of SBA Loans?
The U.S. government is going out on a limb, staking the hard-earned dollars of American taxpayers on the borrower’s ability to repay. For that reason, there are several caveats to obtaining an SBA loan.
Complex Application: The SBA application process is involved and requires a lot of paperwork. But the high requirements for documentation dissuade scam artists from even trying to obtain one.
Slow Approvals: The process is also slow, with SBA loans taking an average of 30 - 90 days to be approved.
Restrictions on Acceptable Use of Funds: There are some restrictions on how SBA loans can be used. Luckily, the range of acceptable purposes is quite broad. The SBA is aware it’s hard to definitively categorize the unique needs and circumstances of every small business in America. That’s why it offers several different SBA loan programs, each with its own acceptable and prohibited uses. To learn more, check out our Introduction to SBA Loans.
Low-Credit Applicants Typically Don’t Qualify: While having government backing does allow those with lower credit to borrow higher amounts than they could qualify for alone, those with a credit score below 680 are unlikely to be approved for an SBA loan.
Collateral and Personal Liability: Generally, shareholders are not personally liable for the company's debts. In the case of an SBA loan, borrowers are legally obliged to repay. That means personal assets, even a family home, may be seized to cover the unpaid portion of an SBA loan.
We don’t relay these facts to scare you but to illustrate why pursuing an SBA loan requires careful consideration and strategy. These loans are not intended to be “free money” but to serve as reasonable aid for small businesses. These restrictions ensure that borrowers only take as much as they need and always consider their ability to repay.
What Are the Upsides of SBA Loans?
Despite the restrictions and complexities of the SBA loan programs, they are still wildly popular with small businesses. That’s because these programs offer enticing benefits that borrowers can’t find elsewhere.
Low Downpayments: While a traditional lender may require a 20 – 30% equity downpayment, SBA loans are very accommodating, requiring as little as 10% down.
Loans Can Be Big or Small: The SBA offers a wide range of loan amounts. Some may be as small as $500, and others as large as $5.5 million. This flexibility allows borrowers to get the amount that’s exactly right for their business.
Capped Interest Rates: The SBA sets limits for interest rates on loans issued through its programs. Interest rates on SBA loans have two elements, a base rate and an additional percentage for the lender. The SBA determines the base rate, which is typically based on the prime (what banks charge their most credit-worthy borrowers) or Libor rate (the benchmark that major global banks use when lending to each other). The lender’s additional percentage must be below the overall SBA interest rate cap. To learn more about this, check out our blog on Understanding SBA Loan Programs.
Long Repayment Terms: The SBA allows for long repayment periods, which means lower monthly payments. That can make a huge difference for small businesses struggling with cash flow. The maximum repayment terms for working capital, inventory, and equipment loans are ten years, while real estate loan terms can be up to 25 years. And for loans with terms less than ten years, there is no prepayment penalty.
Continued Business Support: The SBA has resource centers that offer business owners general assistance, SBA loan information, and additional support for underserved communities. For example, business owners may have access to business counseling, training, or online learning programs at little or no cost.
What Does it Take to Get an SBA Loan?
While the documentation required can be time-consuming, determining eligibility for an SBA loan is actually fairly straightforward. Generally speaking, the following requirements must be met to receive an SBA loan:
Is a registered, legal for-profit enterprise
Is physically located and operating in the United States or a U.S. territory
Meets the SBA size standards within its industry
Is not receiving funds from other lenders
Has adequate cash flow to repay the requested loan amount
The business owner:
Has invested their own time and money in the business
Has tried to acquire funding from another financing institution and been unsuccessful
Has adequate managerial experience
Has a personal statement attesting to their upstanding character and demonstrated experience repaying debts.
Has a feasible business plan.
Though it does come with additional requirements, it is even possible to receive an SBA loan as a nonimmigrant living and working in the U.S.! Check out our Introduction to SBA Loans to learn more.
If you’re interested in pursuing an SBA loan for your small business, Visa Business Plans is here to help. We create masterful business plans that can make your application shine and get you one step closer to the funds your company needs to thrive. Contact Us today for a free consultation to get started!
Visa Business Plans is led by Marco Scanu, a certified coach from the University of Miami with a globally-based practice coaching Fortune 1000 company executives, entrepreneurs, as well as professionals in four different continents. Mr. Scanu advises clients on turnaround strategies and crisis management.
Mr. Scanu received a bachelor’s degree in Business Administration (Cum Laude) from the University of Florida and an MBA in Management from Bocconi University in Milan, Italy. Mr. Scanu was also a Visiting Scholar at Michigan State University under the prestigious H. Humphrey Fellowship (Fulbright program) with a focus on Entrepreneurship, Venture Capital, and high-growth enterprises.
At present, Mr. Scanu is the managing partner and CEO at Visa Business Plans, a Miami-based boutique consulting firm providing attorneys and investors with business planning services in the areas of U.S. and Canadian immigration, SBA loans, and others.