SBA Programs: What Is an SBA Loan, and What Are the Different Types?

Posted at January 31, 2020 » By : » Categories : Business Funding,SBA Loans »
sba programs

The Office of Advocacy at the US Small Business Administration (SBA), reports that more than 90 percent of all companies in the US are considered a “small business.” There are more than 30 million small business companies in operation today.

Luckily these small companies can access plenty of government funding resources available to make their entrepreneurial dreams come true. Some of these funding resources come from the federal government and their SBA programs.

If you’re a small business owner looking into different types of business loans available, now is the time to familiarize yourself with this governmental funding resource that’s here for you now. Look over this helpful guide to learn more about the different SBA loan types and programs. These funding tools may be the answer you’re looking for.

“Small Business” Defined

A “small business” is an independently owned company that has a limited amount of revenue and employees, depending on their industry. A small business enterprise can include a partnership or corporation. You can look up your own industry in the US Census Bureau industry code to see if you fit the definition of a “small business”.

Some industry codes consider a company as a “small business” if it has more than $750,000 in annual revenues. These companies will usually hire 100 workers or less.

Other industry codes state that businesses with annual revenues of up to $38 million, also fit the definition of a “small business.” These companies will hire around 1,500 employees or less.

What is an SBA Loan?

SBA loans are long-term, low-interest loans awarded to a qualifying small company. The federal SBA Office is a government agency that will work with a pre-approved lender to grant loans to these qualifying small businesses.

How Do SBA Loans Work?

The SBA won’t directly lend funds to the qualifying small company. Instead, they will establish guidelines for banks and other micro-lending institutions to provide loans to small businesses. The SBA will guarantee that the loans are repaid. This guarantee helps reduce the risks for these lenders.

The History of Federal SBA Programs

The SBA was first launched in 1953. The US Congress established this office to protect and assist small US business interests. Congress also drafted protocols that guaranteed that a small business could receive a fair shot at securing a government contract as well as surplus property.

In 1954, the SBA created a new loan program to assist small companies who sustained losses from natural disasters. By 1958, the Small Business Investment Company (SBIC) program was established to grant investment funds to small capital investment firms. The SBIC was also charged with helping small investment companies with management assistance and subject matter expertise.

The SBA Today

The SBA today provides a wide variety of funding tools designed to boost small company enterprises. Some of these funding mechanisms include loans specifically for veteran, minority, and women-owned, companies. They also offer assistance to those small business enterprises that work in international trade.

SBA Loan Types

There are three main SBA loan types that a small business can apply for to support their company’s needs. These loan types include:

The 7(a) Loan

The 7(a) loan can support a number of common business costs. These costs might include financing new equipment. A 7(a) loan can also help create a revolving fund that a company leverages, regardless of the fiscal year.

A 7(a) loan can be awarded for a maximum amount of $5 million per business. The 7(a) loan has an SBA guarantee of about $3.75 million or 75 percent.

The CDC/504 Loan

CDC/504 loans offer small companies long-term, fixed rates for major expenses like machinery or real estate. For example, a small company can use a 504 loan to renovate or buy a new building. This loan, however, shouldn’t be used as working capital.

A CDC/504 loan can be awarded for $5.5 million or less. The CDC/604 loan has an SBA loan guarantee for 40 percent of the total loan amount. Commercial lenders and the borrower fund the remaining balance needed. A CDC/504 loan has a 10-20 year maturity period.

Microloans

The SBA’s Microloan program was created to help those businesses that only needed to borrow a smaller, or “micro-level” amount for their company needs. A typical SBA Microloan amount is around $50,000 or less per company.

Non-profit organizations can also apply for a microloan to help pay for start-up costs. Microloans amounts usually average around $13,000.

SBA Loan Qualifying Criteria

SBA loan requirements vary between the different types of loans offered. SBA loan qualifications also differ between individual lenders. There are, however, some common requirements that apply to them all. These requirements include:

  • Companies located and operating in the US
  • Companies that are registered as for-profit entities
  • Companies that fit within the SBA’s “small business” definition within their individual industry code
  • Companies that have been in operation within a certain amount of time
  • Company owners who have invested their own funds and time into the enterprise
  • Company owner stable personal credit record (FICO scores over 650)
  • Companies that have a business plan in place, showing their projected three to five-year financials
  • Companies that report profitability and strong revenue. Companies that demonstrate acceptable debt service coverage ratios between cash flow and company debt
  • Companies that have assets or other collateral they can use to secure the loan.

Next Steps

Are you ready to start your research today to figure out which SBA loan programs are a good fit for you? How much of a loan do you need and what will you use it for? The answers to those two questions will point you to the best loan program that can best meet your business needs.

Collect any records you may have to demonstrate that you meet that minimum SBA loan qualification criteria. Identify any assets you might have that can secure a loan. Request your personal credit score so that you can prove you aren’t a credit risk.

Visit our website for more “SBA Loans 101” information. We’re the place where banks and other industry-specific lenders compete to earn your business. Give us a call today.