What Startups Need to Know About SBA Loans

The SBA helps small businesses that may not be eligible for traditional bank loans by guaranteeing large portions of the loan on the entrepreneur’s behalf.

These loans are generally available through your local bank who relies on the SBA to back the loan in order to make it easier for them to take the risk of lending a new business without a significant amount of collateral.

Who’s eligible for a SBA loan?

Although the loans are backed by the SBA, they still require some basic underwriting by the bank to make sure the borrower can manage the loan similar to a standard bank loan.

What about poor credit?

The SBA may be underwriting the loan, but they still want to make sure it can be paid back. Standard credit risk factors (such as your score) will certainly be applied to assessing the viability of the loan. Although your personal credit is not the only factor, you will want to consider a co-signer if you think your personal credit score may hurt your chances of getting approved.

What can a SBA loan be used for?

The most common use of SBA loans are for highly collateralized (read: stuff the bank can repossess and sell back) items like buildings or real estate. That’s also because these items tend to be by far the most significant cost a new business may incur.

Most SBA loans are not used for startup funding per se, but instead are used to help finance the growth of a business that just needs access to working capital and can use its existing revenues as a form of collateral.

What are the different types of SBA loans?

There are actually a few different types of SBA loans including the SBA Express, SBA 7(a) term loan, SBA 504 term loan, and SBA Patriot Express.

SBA Express Loan

The SBA Express loan, as the name implies, offers a more streamlined application process and can exist as either a loan or a line of credit.

The proceeds of the loan can be used for working capital, to purchase land or buildings, equipment and necessary inventory.

The typical credit amount for a SBA Express loan ranges from $5,000 to $350,000.

SBA 7(a) Term Loan

The SBA 7(a) term loan is the most common general purpose SBA loan.

Unlike the SBA Express loan, the more generic SBA 7(a) term loan is intended for larger purchases and capital outlays like equipment, real estate, and larger working capital needs.

The terms vary based on what the capital is to be used for. For example, if the proceeds are to be used for working capital, the term will run about 7 years. However if the proceeds are to be used for real estate, the term can extend up to 25 years.

The typical credit amount for a SBA 7(a) term loan ranges from $25,000 to $5,000,000 depending on the qualifications of the applicant.

SBA 504 Term Loan

For those who are further along in the growth of their business, a SBA 504 Term loan is a more likely candidate. This loan is geared toward expansion, and caters to companies that are likely to create jobs by expanding their facilities and making acquisitions.

This type of loan is targeted toward the purchase of larger assets like real estate or expensive equipment.

There are also some basic civic requirements of the loan’s purpose, such as meeting certain local economic objectives, revitalizing an area, or creating income for an area in need.

The loan amounts available for a SBA 504 Term loan range from $150,000 to $6,000,000.

SBA Patriot Express

As the name would imply, the SBA Patriot Express loan is aimed at veterans and other military community members who need capital to start or grow their business.

The application process for the SBA Patriot Express loan is more streamlined like the SBA Express loan yet offers a larger potential offer – up to $500,000 (versus $350,000 in the SBA Express loan).

The uses of capital for this loan are pretty standard – inventory, working capital, equipment, start-up costs and expansion.

Where do I apply?

Your local bank is the best place to look for an SBA loan because they are most likely to have an existing working relationship with you.

Summary

Contrary to popular belief, a traditional SBA loan isn’t most suited for a startup company that just wants some operating cash with little collateral to show for it. SBA loans may be supported by the government, but they still get issued based on the individual credit qualifications and business collateral of the companies applying for them.