An Overview of SBA Loan Options
The 7(a) loan can be used for numerous purposes such as working capital, debt payments, marketing, payroll, equipment, commercial real estate, construction, furniture, acquiring another business, and more. Due to this, the 7(a) loan is the most popular SBA loan program.
Businesses with less than 500 employees, generate under $7.5 million in annual revenues and less than $5 million in annual net income are eligible for this product. In addition, you must prove that you’ve been rejected by other lending institutions. Having no outstanding debt, a low credit score, and proving your funding needs also helps.
How to Apply
First, you’ll need to submit standard business and financial documents. If you’re planning to buy a business, equipment, or commercial real estate, you’ll also need a 10 percent down payment.
With the 504/CDC program, the loan is a combination of efforts from three entities: a lender, the CDC, and you, the borrower. The lender contributes up to 50 percent of the loan, while the CDC covers 40 percent. You’ll have to contribute the remaining 10 percent.
Businesses with a net worth below $15 million and less than $5 million in net revenue are eligible for this program. If you already have 10 percent of the loan amount you want, you’ll likely qualify.
Business-owned buildings must be 51 percent owner-occupied. If you’re planning to build a new structure, it must be 60 percent owner-occupied on opening day. By the tenth year, owner occupancy should climb to 80 percent.
In addition, any equipment you buy must have at least a 10-year lifespan, which rules out computers and software.
Personal guarantees are required for owners of 20 percent or more of the company. Otherwise, the project assets are collateral for this loan.
Lastly, the SBA mandates that you must use 504/CDC funds to create jobs or enhance the SBA’s other goals, through energy efficiency, community initiatives, or public policy.
How to Apply
With over 200 CDCs in the U.S., you’ll likely find one in your area. Along with typically required application materials, submit bank statements showing your 10 percent contribution. Also, you should prepare a statement on how you’ll use the loan to create jobs and support the SBA’s public policy goals.
Express loans are offered for most SBA loan products, and offer an overall faster process, but this comes at the expense of the loan total and repayment terms.
Businesses who don’t need as much capital will benefit from this program. Also, if a lender is offering the main loan program, they’ll probably offer the Express version, too. Overall, express loans can have less stringent requirements and intended uses.
This program makes use of non-profit lenders to provide up to $50,000 to for-profit small businesses and non-profit child care centers. However, the SBA doesn’t guarantee any amount in the Microloan program.
Businesses planning to use the loan for general purposes qualify: materials and supplies, furniture, marketing, inventory, labor, equipment, and more. The SBA explicitly states that Microloan funds can’t be used for purchasing real estate or paying off debt.
Since the SBA doesn’t back Microloans, lenders often view borrowers as high-risk clients. Thus, bringing a statement detailing planned use of funds will help your application.
Lenders will also want a personal guarantee, collateral, and a good credit score.
How to Apply
You must apply with an SBA-approved non-profit intermediary for the Microloan program. Getting approved can take several months, even though the amounts are less than traditional loans.
Disaster Loans cover losses from declared disasters or from losing a key employee, like an executive. There are three types of disasters loans: Business Physical Disaster Loans (BPDL), Economic Injury Disaster Loans (EIDL), and Military Reservists Economic Injury Loans (MREIDL).
BPDLs are low-rate, long-term loans that help rebuild a business that suffered from physical damages. EIDLs are shorter- to mid-term loans that help businesses who were economically injured regain their footing. Lastly, MREIDLs are shorter- to medium-term loans that assist businesses who lost important employees who were called to active duty.
For BPDLs and EIDLs, any business based in the declared area can apply.
Loans must be used for repairs, replacing damaged property, working capital, and operational costs.
If your business qualifies for several types of Disaster loans, you can apply for as many as you need to cover your costs.
The SBA requires a decent credit score with no bankruptcies or outstanding balances. Collateral and showing you have a plan to repay the loan will boost your application as well. Most importantly, include your FEMA registration number, deed or lease documents, and insurance information.
How to Apply
The SBA understands that applying for financing while recovering from a disaster is burdensome. To ensure that you’ll qualify, check the disaster database and see if you’re in the affected area before applying. Often, borrowers find that they don’t qualify because they’re not located in the designated disaster area.
Banks often view high-exporting businesses as risky borrowers, so the SBA can guarantee up to 90 percent of your loan in this program. There are two main types of export loans: Export Working Capital Program (EWCP) and the International Trade Loan Program (ITLP).
Like most SBA loans, businesses with a net worth below $15 million and net income of less than $5 million will qualify for this loan. Submitting collateral assets will increase your chance of qualifying as well.
Of course, there are specific requirements for each export loan. For example, owners holding 20 percent or more of the company must sign a personal guarantee for the EWCP.
These loans have restrictions on how you spend them. Working capital, financing accounts receivable, and purchasing export goods are among the allowed expenses.
How to Apply
Apply with a participating lender, and they’ll send your documents and an underwritten draft of the loan to the SBA for approval.
Typically, lenders that offer 7(a) loans will provide Export loans too. If your business is exporting goods, but it doesn’t make up a majority of your business, you can apply for a 7(a) loan instead. Most likely, you’ll have a better chance of receiving the amount you want by doing this.
CAPLine Line of Credit
This program encompasses five types of needs: seasonal, contract, builders, standard, and small asset-based. Small asset-based lines of credit have a maximum of $200,000, and the other loans have a $5 million limit.
Since this program is for businesses with variable income, the line of credit helps reduce payments. Businesses only pay interest on the amount they borrow, and can pull funds as frequently or as scarcely as needed.
Lenders that participate in the 7(a) Loan program usually offer CAPLines.
Collateral is key to this program. As seasonal businesses and similarly functioning businesses are seen as high risk, the SBA backing will help increase your chance of getting approved.
Owners with 20 percent or more shares must sign a personal guarantee, and a decent credit score is also required.
Depending on the loan you’re applying for, you’ll need to meet other qualifications.
- Seasonal businesses must be operational for over a year.
- Contract credit lines require a confirmation using the contract that you won.
- Standard and short-term loans can’t be used for back taxes, inventory purchases, or buying fixed assets.
How to Apply
Businesses are expected to use the funds for labor and materials needed to fill contracts and purchase orders, so you must submit a statement proving this. Lenders usually pair CAPLines with 7(a) or 504/CDC loans; if your business is well-qualified or can generate more business for the lender, however, you may be offered a stand-alone CAPLine.
Applying for an SBA loan can be stressful. Your application must be perfect, and lenders might be tough when underwriting your loan. Knowing which product is the best fit for your business is half the battle, so we hope this post clarified which loan you should apply for.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.