SBA Small Business Loans are a bit of a misnomer. The Small Business Administration does not directly lend money. Rather, the agency provides government-backed loan guarantees that mitigate risk for its network of approved lenders. The guarantees range from 50 to 85 percent, depending on the type of loan and the amount.

By reducing banks’ and other lenders’ exposure to risk, the SBA encourages them to provide funding to companies that might not qualify for traditional bank term loans. SBA 7(a) loans also include a guarantee fee that the lender pays the SBA, although it is usually passed along to the borrower when the loan closes for amounts greater than $150,000.

SBA 7(a) Loans

SBA 7(a) Loans are popular because they typically come at attractive interest rates and because of the loan guarantees that encourage banks to lend to businesses that might not initially qualify for a traditional term loan. The loans are quite flexible and can be used for working capital or to buy a business, purchase real estate property or equipment, or to refinance debt. SBA 7(a) Loan amounts range from $350,000 to $5 million.

Maximum Loan Amount: $5 million
Maximum Interest Rate: Prime + 2.75%. Rates are usually variable. Since the Fed has signaled additional rate increases this year, expect interest percentages to rise for SBA loans.
Terms: 5 to 10 Years for working capital, 7 years for a line of credit, 25 years for commercial real estate loans.
SBA Approval Turnaround Time: The SBA typically gets back to a lender with approval of the loan interest rates and terms within 36 hours.
Borrower’s Funding Time from Start to Finish: 45 – 90 Days
Government Guarantee: 75 – 90%
Minimum Credit Score: 680

SBA Express Loans

SBA lending partners can approve a loan or line of credit up to $350,000 through with the SBA Express program. As the name implies, SBA Express loans have a quick turnaround period – usually within 36 hours. However, the loan mounts are relatively small for this type of business loan. As a subset of the popular 7(a) Loan program, SBA Express loans are quite flexible and can used wide range of business purposes. Collateral might be required for loans greater than $25,000.

Maximum Loan Amount: $350,000
Interest Rates: Rates are often variable and are tied to base rates, which include the prime rate. These rates may not exceed SBA maximums, which are up to 6.5% over the base rate for loans of $50k or less, and up to 4.5% over the base rate for loans over $50k+.
Terms: 5 to 10 Years for working capital, 7 years for a line of credit, 25 years for commercial real estate loans.
SBA Approval Turnaround Time: The SBA typically responds to a lender with approval of a loan’s interest rates and terms within 36 hours.
Borrower’s Funding Time from Start to Finish: 30 – 90 days.
Government Guarantee: 50 percent
Minimum Credit Score: 680.

SBA CDC/504 Loans

SBA CDC 504 Loans provides approved small businesses with long-term, fixed-rate financing used to acquire fixed assets for expansion or modernization. These loans are made available through Certified Development Companies (CDCs), SBA’s community based partners. CDC/504 Loans are usually made with for specific uses, including:

  • Buying real estate (land and/or building)
  • Renovating an existing building and its grounds
  • Building a new facility
  • Purchasing big ticket items, including machinery and equipment
  • Refinancing existing debt that was incurred to acquire a fixed asset eligible under SBA CDC/504 loan guidelines.

About CDCs

A Certified Development Company (CDC) is a nonprofit corporation that promotes economic development within its community through 504 Loans. CDCs are certified and regulated by the SBA, and work with SBA and participating lenders (typically banks) to provide financing to small businesses, which in turn, accomplishes the goal of community economic development.

There are over 260 CDCs nationwide each having a defined Area of Operations covering a specific geographic area.   The area of operation for most CDCs is the state in which they are incorporated. To contact a CDC in your area, first use this link to locate your local SBA District Office

SBA 504 loans actually combine two different loans that close concurrently. One is made by the lender, and the other comes from a non-profit Community Development Company that has been established to help generate economic activity in under-served communities.

504 Loans are typically structured with SBA providing 40% of the total project costs, a participating lender covering up to 50% of the total project costs, and the borrower contributing10% of the project costs. Under certain circumstances, a borrower may be required to contribute up to 20% of the total project costs.

An example of how a typical 504 loan is structured follows:

504 Loan Example

Total 504 projects costs for a $1,000,000 project may include the following (eligibility requirements apply to the 504 portion of the project as well as the participating lending  portion):

  • Building Purchase
  • Land
  • Renovation
  • Furniture and Equipment
  • Soft Costs
  • TOTAL $1,000,000

Loan Structure

  • $500,000, 1st lien with bank (loan obtained from a private sector lender covering up to 50% of the total project cost)
  • $400,000, 2nd lien with 504 loan, 20 year, fixed rate  (loan obtained through a CDC, funded through an SBA-guaranteed debenture, covering up to 40% of the total project cost)
  • $100,000, borrower contribution (contribution from the borrower of at least 10% of the total project cost/)

Maximum Loan Amount: $5.5 Million
Interest Rates: Rates are fixed.
Terms: 25 years for commercial real estate loans.
SBA Approval Turnaround Time: The SBA typically responds to a lender with approval of a loan’s interest rates and terms in TIME PERIOD.
Borrower’s Funding Time from Start to Finish: in TIME PERIOD
Government Guarantee Percentage: PERCENTAGE
Minimum Credit Score: 680.

Documentation Required

Not having proper documentation ready for the lender will lengthen the time it takes to process the loan to close and could jeopardize the approval. Submitting an incomplete loan application is the most common cause of rejection. Typically, an SBA Loan package will include:

  • SBA Loan Application
  • Personal Financial Statement
  • Statement of Personal Credit History
  • Current Balance Sheets and P&L Statement
  • Financial Projections
  • Management Team and Experience
  • Licenses or Certificates Required for the Business
  • Three Years of Personal and Business Tax Returns
  • Business Lease or Mortgage
  • Business Plan

Lenders – even ones that are receiving government guarantees – want to be confident that the borrower will be able to repay the money. Providing the documentation and showing increasing sales and profits from year-to-year will help instill that confidence. Having a well written business plan can be a vital tool. The most important part of the business plan is the one or two-page Executive Summary that provides a concise explanation of the company and outlines its goals, operations, sales and marketing efforts and revenue model. This section could indeed be the only part of the plan that a loan underwriter will read.

A successful business plan will have a detailed description of the business, assessment of the local market and competition, and outline product/service differentiation. Be sure to provide explanation of how the firm will be marketed, including the mix of advertising, public relations, social media, trade show attendance, sampling, couponing, and sales promotion. The business plan should include bios of the management team and ownership, including the amount of money each has invested in the venture. Provide a sales estimate, break-even analysis, cash flow projection, sample balance sheet and P&L statements. Include supporting materials, including research, charts, graphs, photos and logos.

Tim Kelly