The Entrepreneur's Cheat Sheet on SBA Loans

  •    Meredith Wood is Editor-in-Chief at Fundera, an online marketplace for small business loans.

The Small Business Administration (SBA) is a branch of the U.S. Government whose mission is to help drive the economy by helping give small business owners access to capital.

Through an SBA-guaranteed loan, you can borrow money for a variety of business purposes, including adding to working capital, purchasing inventory or equipment, refinancing other debts, buying real estate, or even financing the acquisition of other businesses.

It’s important to note that while these loans are SBA-guaranteed, they are not SBA-provided. What does that mean exactly? The most common misconception about the SBA is that the agency lends money to businesses. In actuality, the SBA uses federal money to guarantee a percentage of loans to banks who opt to participate in SBA financing, so financial institutions have more incentive to lend money to small businesses.

Generally, these SBA-backed lenders require a minimum of two years in business and a minimum FICO score of 640 or higher. The SBA offers three fairly complex loan programs (in addition to several other smaller, lesser-known programs), so the best first step is to figure out which SBA loan is the best fit for your company.

​1. The 7(a) Loan Program

The most common SBA loan program is the 7(a) loan program, which offers a great deal of flexibility to the borrower.

Businesses needing to start or expand their company take out a 7(a) loan for up to $5 million for a number of uses, such as buying real estate or equipment, construction or renovation, buying an existing business, refinancing existing debt, or other short and long-term capital needs.

While a 7(a) loan is a great, low-cost way to finance a business, it’s important to consider the rates and fees associated with it.

7(a) Loan Interest Rates

The SBA restricts how much the lender can make off your SBA loan by putting a ceiling on the amount a bank is allowed to apply on top of the loan’s base fixed or variable interest rate. If your 7(a) loan term is less than seven years, the maximum spread will be 2.25%. Longer loans can expect a maximum spread of 2.75%. So your interest rate will be between 6-13%.

7(a) Loan Fees

If your loan is for $150,000 or less, you won’t have a guarantee fee. For amounts more than $700,000, your guarantee fee will likely be about 3.5%. There’s also an additional fee of 0.25% on any guaranteed portion of more than $1 million.

​2. The CDC/504 Loan Program

The CDC/504 program is ideal for small businesses that need loans for a major, fixed purchase such as land, buildings, renovations, construction, machinery or equipment for up to $5 million.

To qualify, applicants need to have a net worth of less than $15 million and have a net income of less than $5 million after taxes for the preceding two years. This is because the SBA wants to be sure you can’t make the purchase with your own funds.

CDC/504 Loan Interest Rates

This SBA loan program has complex financing. Here’s how it works.

The 504 loan incorporates two individual loans. A bank provides 50%, a Certified Development Corporation provides 40%, and you supply a 10% down payment.

The CDC’s portion gets pulled in when all CDCs pool their projects and auction the pool to investors.

This means that you won’t know your exact interest rate until the sale of the pool—about 45 days after you’ve closed your deal with the CDC. That being said, your pooled rate is likely to be between 4-5%. When your loan gets blended with the bank’s rate, you’ll end up with a rate around 5-6%.

CDC/504 Loan Fees

A CDC/504 loan’s fees are usually 3% of the loan amount. Sometimes you are able to finance the fees as a part of your loan.

​3. The Microloan Program

The name gives it away in the SBA Microloan program. These loans are for new or especially small businesses whose needs fall below most lenders’ minimums. SBA microloans fit several different needs, such as working capital, inventory, supplies, furniture or fixtures, machinery or equipment.

Working on a smaller scale to be suitable for particularly small businesses, the maximum loan amount you can receive is $50,000.

Microloan Interest Rates

Rates will vary depending on your lender. Just like the 7(a) loan program, the SBA isn’t as involved with regulating your loan as much as the lender is. Overall, you can plan on an interest rate ranging from 8-13% if you apply and are approved for a microloan.

Microloan Fees

Given the small loan amount, microloans come free of fee attachments. That’s right – no fees on your microloan!

Apply for an SBA Loan

If one of these loans sounds like it could be the perfect financing fit for your business, it’s time to start prepping your application. Because these loans come with such great terms (reasonable interest rates, low down payments, and more), they can be somewhat difficult to acquire. The SBA loan application process is longer process than those of other online lenders both in terms of paperwork and wait times for approval. The upside is, of course, a much more affordable loan if you get approved.