If you’re out there looking for financing to start or grow your business, I want to make sure one option is on your radar: loan programs through the U.S. Small Business Administration.
Here’s why I bring this up so often with clients. Down payments, interest rates, and borrowing fees are typically lower than what you’d find elsewhere, and the application requirements can be more flexible too. Some of these programs even come with counseling and education built in, which is genuinely valuable if you’re a first-time business owner navigating this for the first time. But, and this is important, you need to pay attention to the details, because SBA loans can restrict how you’re allowed to use the funds. So let’s walk through the basics and the more popular programs.
Here’s something people don’t always realize: the SBA guarantees these loans, it doesn’t actually make them. You’ll work with a bank, a community development organization, or another financial institution to actually get the funds.
Your business generally needs to meet a few criteria to qualify. You typically must operate for profit here in the United States or its possessions, and you’ll need to show that you’ve already tried to use other financial resources, including your own assets, before applying. Your business may also need to meet specific income or size criteria, and some types of businesses, like lenders or life insurance companies, generally aren’t eligible at all.
Now, you will negotiate your interest rate with your lender, but it can’t exceed the maximums the SBA sets. Rates get calculated from a base rate, like the prime rate, plus a markup. That markup depends on things like your loan size, your repayment terms, and your business’s overall financial profile. And keep in mind, lenders can also charge fees on top of that: packaging fees, legal service fees, out-of-pocket expenses. So look at the whole picture, not just the headline rate.
This is the SBA’s most popular offering, and for good reason. You can get fixed- or variable-rate loans up to $5 million, and they can be used to buy real estate, buildings, equipment, furniture, or even to refinance existing debt. The SBA guarantees 85% of loan amounts up to $150,000, and 75% of anything above that.
To qualify, your business has to fall within the SBA’s size standards, meaning it’s considered “small” within its own industry. Depending on the industry, that might be measured by number of employees or by annual revenue. You’ll typically repay this one in monthly payments of principal and interest.
There’s also a 7(a) Working Capital Pilot program worth knowing about, built specifically for growing smaller businesses. These come as monitored lines of credit, and both you and your lender get one-on-one counseling with the SBA’s subject-matter experts. That guidance piece is not something you get with a typical bank loan.
This one’s designed for long-term, fixed-rate financing to help you purchase major assets, the kind that actually help drive business growth and create jobs. The maximum here is $5.5 million, and your business should be able to repay it out of your projected operating cash flow, generally over 10, 20, or 25 years.
There are qualification requirements here too. Your business’s tangible net worth has to be under $20 million, and your after-tax net income has to have been under $6.5 million for each of the preceding two years. One more detail worth knowing: 504 loans are only available through Certified Development Companies, not through a regular bank.
If you need a smaller amount, this is worth a look. The maximum microloan is $50,000, but the average microloan is actually much smaller, around $13,000. You can put these funds toward working capital, inventory, or equipment purchases.
Interest rates depend on the intermediary lender, usually certain community-based nonprofit organizations, but you’re generally looking at somewhere between 8% and 13%. The maximum repayment term the SBA allows here is seven years.
Most lenders want a lot of information before they hand over money, and the SBA is no different. For a 7(a) loan, for example, you’ll generally need a current income statement, a balance sheet, and a cash flow projection. In some cases, you’ll also need a personal financial statement. If you own at least 20% of the business, you may need to sign a personal guarantee, and larger loans usually require some form of collateral.
The SBA’s website can walk you through choosing the right program for your situation. But honestly, this is exactly the kind of decision where a conversation helps more than a webpage.
Reach out to us. We can help you calculate how much your business actually needs, walk through the best practices for borrowing, and think through how you’ll repay it before you ever sign on the dotted line.