Federal Small Business Loans Explained
Of all types of small business funding, Small Business Administration 7(a) loans are one of the best ways to finance your small business. They’re guaranteed by the federal agency, which allows lenders to offer them with flexible terms and low interest rates. Getting one can help you grow your business without taking on possibly crippling debt.
SBA loans, as the 7(a) loans are also known, are the agency’s most popular type of financing. There’s one big downside, however: It can be tough to get a loan from the SBA. many businesses utilize loan packagers or brokers to assist in the application process.
Still, low annual percentage rates make the SBA program one of the smartest ways to fund your small business. With some know-how and preparation, you may be able to secure the best business financing available. And if your small business needs fast funding, there are other alternative lending programs to help your small business get funded in a matter of days. For now, let’s look at SBA small business loan options.
What is an SBA loan?
SBA loans are small-business loans guaranteed by the SBA and issued by participating lenders, mostly banks.
The SBA can guarantee up to 85% of loans of $150,000 or less and 75% of loans of more than $150,000. The average 7(a) loan amount was about $425,500 in 2018, according to the agency’s lending statistics. The program’s maximum loan amount is $5 million.
If you’re looking to open a new location, hire employees, purchase new equipment, or refinance an existing loan, SBA loans are a great option. Typically, SBA rates and terms are more manageable for borrowers than other types of financing.
Summary of SBA loan types
|Loan type||What you need to know|
|7(a) loan program (SBA’s flagship loan program)||Federally guaranteed term loans of up to $5 million.
Funds for working capital, expansion, equipment purchases.
Processed through banks, credit unions, specialized lenders.
|504 loan program||Federally guaranteed loans of up to $5 million.
Funds for buying land, machinery, facilities.
Processed through private-sector lenders and nonprofits.
|Microloans||Loans of up to $50,000.
Funds for working capital, inventory, equipment, starting a business.
Processed through community-based nonprofits.
|SBA disaster loans||Loans of up to $2 million.
Funds for small-business owners affected by natural disasters and other emergencies.
Processed through the SBA.
What interest rate and terms can I get on an SBA loan?
In keeping with SBA rules, participating lenders set their interest rates based on the prime rate plus a markup rate known as the spread.
SBA 7(a) loan interest rates in 2020
|SBA loan size||7(a) loan paid off in under 7 years *||7(a) loan paid off in over 7 years *|
|$25,000 or less||7.50%||8.0%|
|$25,001 to $50,000||6.50%||7.0%|
|More than $50,000||5.50%||6.0%|
|*Rates calculated with the current prime rate of 3.25%. Updated March 2020.|
Note that the APR on a loan differs from the interest rate. The APR is a percentage that includes all loan fees in addition to the interest rate.
In contrast, major online small-business lenders that don’t do SBA loans offer financing with APRs that can be in the triple digits. Commonly known as merchant cash advances or MCA’s, they can devastate a small business’ cash flow with high daily or weekly payments.
In addition to the low APRs, another perk of SBA loans is that you get more time to repay them than you would get on non-SBA forms of lending from banks or online lenders.
The loan term depends on how you plan to use the money, according to the SBA:
- Working capital or daily operations: seven years.
- New equipment purchases: 10 years.
- Real estate purchases: up to 25 years.
For SBA loans, a longer term means a lower interest rate and lower regular payments. That means you’ll have more money available for other business needs.
What is an SBA loan guarantee?
Lenders provide the funds that make up an SBA loan, but the agency guarantees a portion of the amount, up to a $3.75 million guarantee. That means if you default on the loan, the SBA pays out the guaranteed amount. This guarantee lets lenders offer longer terms for repayment than they otherwise could, which means your monthly payments will be lower.
The SBA also requires a personal guarantee from every owner with at least a 20% ownership stake and from others who hold top management positions. A personal guarantee puts you and your personal assets on the hook for payments if your business can’t make them.
How do I get an SBA loan?
For years, small business owners shared some common ideas about the SBA process. Although it can be a difficult process, choosing an experienced loan packager like Ponte Investments LLC will help you expedite your loan request adn get your small business funded. Notwithstanding, your chances of being approved are greater if your personal and business finances are in good shape.
If your business is struggling,Ponte investments LLC offers debt settlement services as well as an in-house business financing program you may be eligible for.
Here are some of the documents you’ll need before applying:
- SBA’s borrower information form
- Statement of personal history
- Personal financial statement
- Personal income tax returns (previous three years)
- Business tax returns (previous three years)
- Business certificate or license
- Business lease
- Loan application history
The SBA has another financing program called SBA Express, which aims to respond to loan applications within 36 hours. If your credit and small-business finances are in excellent shape, the wait may be shorter. The maximum amount for this type of financing is $350,000, and the maximum amount the SBA could guarantee is 50%.
How do I pick the right bank?
That is what we are here for. Our team of professionals understands your business and how to navigate the SBA process. Our company has long term relationships with several of the largest SBA Preferred Lending Partner banks . Start the application today. APPLY NOW