SBA Loans 101

The United States Small Business Administration (SBA) is a Federal agency that offers financial assistance programs in support of its mission to “help Americans start, build and grow businesses.” While the SBA does not make direct loans to small businesses, they do offer two key longer-term financing programs that enable new or expanding small businesses to secure permanent working capital and purchase equipment and/or real estate.

The first of these programs is the SBA 7(a) Loan Program, through which participating banks and other small business lenders receive a guarantee that the SBA will repay a portion of the loan if the business borrower defaults on payments. This guarantee significantly reduces the risk to the lending partners, helping new businesses, those with imperfect credit and others who would otherwise have difficulty securing financing. Small businesses may use 7(a) loans for working capital, inventory, machinery and real estate purchases, as well as to start a business or refinance debt.

Participating SBA 7(a) lenders make loan determinations and negotiate terms with borrowers, with fixed or variable interest rate typically up to 2.25% and 2.75% higher than an underlying index for loans up to seven years and more than seven years, respectively. The term of loan is up to 25 years for real estate, 10 years for equipment and seven years for working capital.

SBA 7(a) loans of more than $150,000 each carry a guarantee fee ranging from 3% to 3.75% for loans with a term of more than one year that can be included in the overall loan proceeds. The guarantee covers 85% of loan amounts up to $150,000, and 75% for larger loans up to $5 million. Borrowers must also provide a personal guarantee and a lien will be placed on available assets (both business and personal), though the SBA will not decline a guarantee if the only unfavorable factor is insufficient collateral.

Businesses apply for a 7(a) loan directly through participating lenders, who use their own forms and review business’ submissions such as personal and business tax returns, projected financial statements and business plan to make their determination. In turn, lenders submit their request for a guarantee to the SBA to originate the loan. Alternately the SBA Express Loan Program provides a guarantee of up to 50% for loans of up to $350,000. This program provides small business borrowers an accelerated turnaround time within 36 hours, while lenders offer interest rates of up to 4.5% and 6.5% higher than an underlying index for loans up to $50,000 and more than $50,000, respectively.

The second key SBA loan program is the 504 Loan Program, which provides existing businesses with longer term financing (up to 20 years) of up to $5 million for fixed asset purchases like real estate or equipment. 504 loans are administered through a partnership between an SBA-approved lender that covers 50% of the project cost and a community development corporation that funds up to 40%, with the borrower covering the remaining 10% of the project cost. This structure serves to both reduce a lender’s risk, as they cover only half the project cost, as well as free up the business owner’s funds for ongoing working capital needs.