General questions
How do SBA loans work?
SBA loans are government-guaranteed loans provided by participating lenders. The SBA guarantees a portion of the loan to the lender, reducing the lender’s risk and making it more likely that the loan will be approved. Because the SBA guarantee to the SBA lender, which varies from 50% to 90%, SBA loans are an attractive option for borrowers who cannot obtain a traditional commercial loan.
What is an SBA lender?
An SBA lender is a financial institution that is authorized by the Small Business Administration (SBA) to provide SBA-guaranteed loans to small businesses.
What are the disadvantageous of getting an SBA loan?
Some of the disadvantages of getting an SBA loan include a longer application process, stricter qualifications, and a higher down payment requirement. Additionally, SBA loans are not always the best option for businesses with poor credit or those looking for short-term financing.
What are the advantageous of getting an SBA loan versus a traditional commercial loan?
Some of the advantages of getting an SBA loan include longer repayment terms (10 or 25 years), lower down payments (as little as 10%), no debt covenants, and no collateral required.
What are the advantages of using an SBA preferred lender?
SBA preferred lenders are financial institutions that have been designated by the Small Business Administration (SBA) as being experienced and reliable in processing SBA-guaranteed loans. Some advantages of using an SBA preferred lender include faster processing times and less paperwork. We only refer borrowers to SBA preferred lenders.
What is the SBA 7(a) loan program?
The SBA 7(a) loan program is the most common SBA loan program and provides funding for a wide range of business purposes.
What is the SBA 504 loan program?
The SBA 504 loan program provides long-term, fixed-rate financing for the acquisition or renovation of fixed assets, such as land and buildings. SBA 504 loans are not as popular as 7(a) loans due to the complicated nature of the 504 program and the length of time required to close a 504 loan.
How many SBA lenders are there?
There are over 4,000 banks and financial institutions in the U.S., but on average in any given year, only 1,200 will make at least one SBA loan. As we discuss in our analysis of SBA loan data, the top 13 banks make 33% of all SBA loans.
Loan process
How long does it take to get an SBA loan?
The time it takes to close an SBA loan depends on a variety of factors. The biggest variables impacting timing are size of the loan (smaller is better), loan program (SBA Express is the fastest), SBA lender (experienced, high volume SBA preferred lenders move the fastest), and whether real estate is involved. Real estate deals take longer due to requirements for third-party appraisals and environmental studies. Some loans can be approved and funded within a month, while others may take three or four months.
What is the SBA Express loan program?
The SBA Express loan program is a loan program offered by the Small Business Administration (SBA) that provides small businesses with access to funding quickly and with less paperwork than traditional SBA loans.
Can I have more than one SBA loan at a time?
Yes, you can have more than one SBA loan at a time, but it will depend on the lender’s policies and the type of loan you are applying for.
Can I apply for an SBA loan online?
Yes, you can apply for an SBA loan online with SBA approved lender. Generally, SBA lenders with online applications focus on loans under $350,000.
What documentation is required to apply for an SBA loan?
The documentation required to apply for an SBA loan can vary depending on the lender, but may include financial statements, tax returns, business plan, and personal financial statement. We provide more details on SBA loan documentation requirements.
What is seller financing for a business?
Seller financing for a business is when the seller of a business provides financing to the buyer in the form of a loan. This can include the seller taking a mortgage on the property being sold or holding a note for a portion of the purchase price.
How do I apply for an SBA loan?
To apply for an SBA loan, you will need to find an SBA-approved lender, complete a loan application, and provide documentation such as financial statements and tax returns. Unlike the Economic Injury Disaster Loan (EIDL) program, the SBA does not lend directly through the 7(a) loan program.
Is it possible to obtain an SBA loan without tax returns?
It is possible to obtain an SBA loan without tax returns, but the lender may require additional documentation and the loan application may be subject to additional scrutiny. Most SBA lenders want to see a business having filed two full years’ tax returns.
Loan structure and terms
How many years is an SBA loan?
Ten years or 25 years for real estate.
What is the interest rate on an SBA loan?
The interest rate on an SBA loan is slightly higher than traditional commercial loan. SBA loan rates are comprised of a “fixed rate” plus prime rate. The fixed rate is 2.75% – 4.75% depending on loan size, and the prime rate is determined by the U.S. Federal Reserve Bank.
How much down payment is required for a small business loan?
The down payment required for a small business loan can vary depending on the lender, the type of loan, the creditworthiness of the borrower, the borrower’s industry experience, and the type of business. The SBA requires the borrower to inject a minimum of 10% of the project, but SBA bankers may request a larger down payment. A borrower providing 5% – 20% of the cash needed is not uncommon. A seller can finance a portion of an acquisition purchase price with a seller loan, but seller financing can’t be utilized to circumvent the SBA’s 10% down requirement.
Are there any fees associated with SBA loans?
The SBA charges a one-time guaranty fee that ranges based on the loan size. The maximum guaranty fee is 3.75%.
For an SBA acquisition loan, am I required to purchase 100% of the business?
Yes, to finance an acquisition, the seller cannot remain as an owner post-closing. The buyer most purchase 100% of the equity of the seller.
Is collateral required to get an SBA loan?
Collateral is not required, which is an attractive feature for borrowers. However, any collateral that does exist will be pledged.
Are SBA loans personally guaranteed?
SBA loans require a personal guarantee from any owner of >20% of the business, meaning that the owner is personally responsible for repaying the loan.
Eligibility requirements
How much can I qualify for with an SBA loan?
The amount you can qualify for with an SBA loan can vary depending on the lender, the type of loan, the creditworthiness of the borrower, and most importantly, the cash flow of the business. During periods of high interest rates, loan capacity is less.
A formula we use to estimate lending capacity is 1 / (10% + current SBA loan interest rate) if a non-real estate loan and 1 / (4% + current SBA loan interest rate).
The 10% or 4% figures come from the amortization periods of 10 years or 25 years. In other words, the principal repayment on a 10-year loan is ~ 10% per year. For example, the maximum loan amount for a real estate loan if current SBA loan rates are 9%, would be 7.7 annual cash flow from the business (1 / 4% + 9%). If the business generates $100,000 in annual cash flow, the maximum loan amount would b $770,000. A more detailed explanation of loan capacity can be found here.
What is the minimum credit score for an SBA loan?
The minimum credit score for an SBA loan can vary depending on the lender. Generally, a credit score of 680+ is ideal, 640 – 680 may be sufficient for some SBA lenders, and scores below 640 are challenging for most lenders unless there are mitigating circumstances. We have not seen borrowers with credits scores in the 500s be approved for an SBA loan.
Is it possible to get an SBA loan with bad credit?
It is very difficult to get an SBA loan with bad credit. However, if a borrower can provide a detailed explanation behind the credit score that is satisfactorily to the SBA banks, a loan may still be issued if other aspects of the loan application are stellar. A common example if a borrower with strong personal and business income that had a credit score damaged due to a divorce.
Uses of loan proceeds
Can I use an SBA loan to start a new business?
Yes, you can use an SBA loan to start a new business, but startup SBA loans are hard to obtain. Borrowers with direct industry experience, successful franchise opportunities, or doctors/dentists looking to branch out on their own are more likely to obtain startup financing.
Can I use an SBA loan to buy an existing business?
Absolutely, you can use an SBA loan to buy an existing business. In fact, most of the loan inquires we receive at SBALenders.com are for SBA acquisition loans.
Can I use an SBA loan to expand my business?
Yes, you can use an SBA loan to expand your existing business. This could include purchasing additional equipment or real estate, or hiring new employees.
Can I use an SBA loan for working capital?
Yes, you can use an SBA loan for working capital, which can include expenses such as payroll, inventory, and bills. However, in general large working capital loans above $350,000 are rare as banks do not like making 10-year loans to borrowers with short-term lending needs.
Can I use an SBA loan for marketing and advertising expenses?
Yes, you can use an SBA loan for marketing and advertising expenses.
Can I use an SBA loan for franchise fees?
Yes, you can use an SBA loan for franchise fees, which are the costs associated with starting a franchise business.
Can I use an SBA loan for real estate?
Yes, you can use an SBA loan for real estate, which could include purchasing a building for your business or renovating an existing property. SBA lenders view SBA real estate loans as attractive as these loans are often fully secured by the real estate.
Can I use an SBA loan for debt consolidation or to refinance an existing loan?
Yes, you can use an SBA loan for debt consolidation, which can help you to lower your monthly payments and simplify your finances.
What SBA loan can be used for?
SBA loans can be used for a variety of business purposes. Here are the most common uses of SBA loans that we see at SBALenders.com:
- Business acquisition loans
- Real estate, but not passive income projects
- Business expansion
- Working capital loans (typically <$350,000)
After the SBA loan is obtained
Can SBA loans be discharged in bankruptcy?
SBA loans are dischargeable in bankruptcy. However, borrowers are required to personally guarantee their SBA loans, so they will still be responsible for repaying the loan even if the business files for bankruptcy. The SBA loan may be discharged from the borrower in the case of bankruptcy filings for both the business and the borrower(s).
Can SBA loans be refinanced or repaid early?
SBA loans can be refinanced or paid off, but an SBA loan can’t not be utilized to refinance an existing SBA loan. However, a borrower can take out additional SBA loans with the same or different lenders up to the maximum SBA loan capacity of $5,000,000.