The SBA approved over $29 billion in loans to small businesses in 2013, and has a substantial network of lenders and financiers to help small businesses achieve their goals. Before applying, here’s what you need to know.
1. The SBA doesn’t make loans – they make it easier for banks to make loans
The SBA isn’t a bank. It doesn’t make loans directly. Rather, it offers banks and other lenders a guarantee that mitigates the lender’s risk when they offer a loan to small businesses which are less stable and often have less collateral than larger or more established organizations. Think of the SBA as a facilitator — they grease the wheels and encourage lenders to work with businesses that otherwise may not have a chance of getting a loan.
2. The 7(a) loan is the most popular SBA loan
The 7(a) is the most common and most accessible type of SBA loan. There is no minimum amount, the average loan is around $340,000 (sba.gov), and the maximum 7(a) amount is $5 million (sba.gov). While it may be the easiest type of SBA loan to apply for and receive, there are some barriers to entry. Cross-check your business with this eligibility list to see if you qualify. There are also special versions of 7(a) loans for increasing export capacity and establishing working capital.
3. You don’t need an extensive financial history to apply or be accepted
The SBA guarantee makes it easier (read less risky) for a bank to offer a loan to a business with minimal financial history. This should not be interpreted to mean the SBA doesn’t maintain a credit threshold every borrower must meet. For example, a personal credit score below 660 will make it difficult to get an SBA loan.
4. The interest rates are relatively low and are negotiated with the bank
Interest rates for an SBA loan are negotiated between the small business borrower and the lender subject to SBA maximums. Fixed and variable interest rates are available. The maximum interest rate is based upon a base rate and an allowable spread. The SBA recognizes the following as an acceptable base rate:
- The prime rate published in a daily newspaper*
- The London InterBank one month prime, plus 3%**
- The SBA peg rate***
5. Think “pile of paperwork”
Aside from the actual application form, there are income tax returns, background statements, projected business financials, business licenses, and other documents to have ready. The required documents will vary depending on the type of SBA loan you are applying for. Some of the documents, like a resume for each of the principles in your company, are not asked for by other lenders, so make sure to cross-check what you’ve got with the full checklist here.
6. The process usually isn’t terribly fast
Once you submit your application, a decision on your loan could be as quick as 10 days or could take several weeks. If you’re approved, depending on the type of loan you’re applying for, expect a minimum wait time of 60-90 days before the process is complete and your loan is funded. Whether your loan is finalized and the money is transferred in 65 days or 85 days depends on your lender.
7. SBAExpress offers a quicker turn-around
Applications through SBAExpress are processed much quicker than other SBA loans. The decision to approve or reject the application is made within 36 hours of submission, and the funds are usually available within a month or less. The maximum loan amount under the SBAExpress program is $350,000, and these loans will typically have higher rates than other SBA Loans. For more details on program functionality and eligibility, look here.
8. There’s a special loan for that
The SBA offers loans designed to provide growing businesses with long-term, fixed-rate financing for major assets like property and buildings (CDC 504), smaller loans for newly established or growing businesses made available through non-profit community lenders (Microloan Program), disaster assistance loans designed to provide financial assistance to repair or replace damage following a declared disaster, loans designed to reduce the economic injury caused in a declared disaster, in addition to export assistance loans, and loans to help veteran-, women-, and minority-owned businesses. For more details, click here.
*The prime rate is probably the most widely used benchmark for setting interest rates. It originally indicated the interest rates banks offered to their best customers—those with the best credit. The basis for the prime rate is the federal funds rate, which is set by the Federal Reserve Board and is the rate commercial banks use to lend to each other
**The London Interbank Offered Rate (LIBOR) is established much the same way as the prime rate. The British Banker’s Association sets the rate on a daily basis and it’s derived from a filtered average of the world’s most creditworthy bank’s interbank deposit rates for larger loans with maturities between 24 hours and a full year.
***The SBA peg rate is similar to the LIBOR rate in how it’s calculated. It’s the weighted average of rates the U.S. Federal Government pays for loans with maturities similar to the average SBA loan.