Small businesses are constantly in need of capital to grow their businesses but often find it difficult to come by, particularly in the early years or during times of transition.
The good news is that many small businesses can access better terms and cheaper loans through the Small Business Administration, or SBA. The SBA is a government-backed agency whose mission is to ensure the viability of small businesses in the United States through capital, contracts and counseling. The SBA doesn’t lend directly, but rather it partners with local and regional lending institutions across the country to offer its products.
Here are the basics of what every small business owner should know about SBA loans.
1. There are Many Types of SBA Loans
Loans made through the SBA reduce the risk for participating lending institutions by typically guaranteeing up to 85 percent of the loan. There are several types of SBA loans–for capital improvement, for microloans, for disaster recovery, even for land and buildings.
SBA loans fall under four categories: The most common is 7(a) loan program, which is used for startups, working capital, machinery, renovation and debt refinancing. The microloan program is much like the 7(a) but tops out at $50,000 and can’t be used for debt refinance or to buy real estate. The third is a low-interest loan program for businesses in federally declared disaster zones to help them get back on their feet. A fourth is the CDC/504 loan program, which offers long-term fixed-rate loans for real estate up to $5 million.
2. Size Matters When Applying for an SBA Loan
Size matters when it comes to qualifying for an SBA loan. The SBA ranks small businesses by the number of employees and annual revenue, although size qualifications vary from one industry to the next. (Use this tool to see industry parameters.) In general, for-profit U.S.-based companies with fewer than 1,500 employees and less than $35.5 million in annual revenue qualify as small businesses under the SBA.
Terms for most popular 7(a) SBA loans tend to be more business-friendly than traditional business loans—especially for companies with less-than-stellar financials. The rates currently have a ceiling of 11.25 percent but often come in lower and extend to seven years in length for the most popular loan. The rates are usually variable and calculated as market prime rate (recently 4.25 percent) plus 2.25 percent to 4.25 percent, depending on the amount of the loan.
Another benefit is the length of an SBA loan, which can range from five years to 25 years, depending on how the proceeds are used.
3. SBA Loans Can Be Used to Finance Property
A lesser-known application of SBA funds but equally crucial to small business growth is that it can be used to fund buildings and other business property. Under this program, funds can be used to buy or to renovate an existing building, to buy or to construct a new building, to buy land or to buy machinery. To qualify, a company’s tangible net worth must be less than $15 million, and its average net income less than $5 million after taxes for the preceding two years. The maximum amount of the loan is $5 million.
4. Don't Rush the Process
SBA loans can be a great option for small businesses, but the process can often take longer than other avenues of financing. Typical requirements include: personal and business financial statements; three years of profit-and-loss statements; projected financials; income tax returns; and details about the business prospects and key people.
Fortunately, small businesses need not go through the process alone. Fifth Third offers flexible SBA solutions and expertise to help small businesses understand the best options for getting the capital they need.