What are the different types of SBA loans?

An SBA loan is one of the most desirable loan options in the market. They offer some of the largest loan amounts and lowest interest rates with best repayment terms. Having said that, they are not a good fit for business owners looking for funding quickly as the process typically takes between 2-4 months. Before applying it’s important to understand the different options that are available. The SBA have development a variety of loans depending on your needs. 

These are different SBA loan options and their requirements to apply: 

SBA 7(A) loan: 

This is the most popular SBA loan. They are a good fit for business owners that were not able to meet all the requirements needed for a traditional business loan. One of the benefits of this loan is that it can be used for a variety of purposes such as working capital, debt refinancing, marketing and hiring employees for example. These loans can be up to $5m and the loan terms can be up to 7 years for working capital and 25 years for a commercial real estate purchase. The rates generally range from 6%-13% and the loans all have a monthly repayment schedule. One drawback is that the loans typically require a down payment of 10% and collateral. 

To apply for a 7(a) loan, you’ll need to provide a year-to-date balance sheet, a year-to-date profit and loss statement, a business license, 2 years of business tax returns, 2 years of personal tax returns and a debt schedule. The typical minimum credit score is 680. You’ll also need to submit a detailed business plan and a summary outlining the use of funds. 

SBA CFC/504 loans:  

Unlike the SBA 7A loan the CDC/504 loan has to be used for a very specific purpose. It is limited to purchasing a fixed asset such as equipment or real estate. Although this loan is more restrictive than the 7a, the benefit is that it comes in at a lower cost. They also do not require any collateral but do still require a 10% down payment. The rates typically range from 5-6%, terms range from 10-25 years and there is also commonly a 3% closing fee on these deals.

If you are purchasing land it will typically be a longer team deal closer to 25 years vs buying equipment which would be closer to 10 years. Your business must have a net worth of over $15 million to qualify. You will also need to prove that over the last 2 years you’ve had average net income of $5 million or less. This loan typically requires a minimum credit score of 680.

SBA Micro loans:   

SBA micro loans are great for startups! People who are self-employed or companies with just a few employees. The max loan amount is $50,000, the loan repayment terms are up to 6 years and the rates typically range from 8%-13%. Although the loan amounts are smaller than the other options, you’ll have a lot of flexibility with what you can use the financing for. 

SBA Express loans:    

SBA express loans are typically funded quicker than the 2-4 months that it takes the other SBA loans to close. With these loans you could reduce processing time by 2-3 weeks compares to another SBA loan. These express loans only guarantee the lenders 50% vs 75%-85% for other SBA loans. As a result of this the lender is taking more risk so the terms, they lender will offer are not as good. These loans are capped at a maximum funded amount of $350,000 and can be structured as either a line of credit or term loan. 

SBA CAPlines:     

SBA Caplines are typically lines of credit. One of the nice parts of this option is that some of these lines of credit are revolving. You can access the full amount again once you’ve paid off the line of credit. The SBA Caplines are typically for seasonal businesses that see significant fluctuations in deposit volume throughout the year. The maximum amount that you can borrow is $5,000,000 and the term lengths are up to 10 years. The interest rates are approximately the prime rate+ 2.75-4.75%. There are also commonly additional fees of between 0.25%-3.75%.

There are 4 types of CAPlines that are available:

1. Working Capital CAPlines: 

These are lines of credit that can be used for a short term. It can be used for operating expenses or payroll.

2. Contract CAPlines:  

These are lines of credit for contractors to cover the costs of an individual contract.

3. Seasonal CAPlines: 

These lines of credit are offered to support seasonal businesses during their busy months. It is not supposed to be used to cover costs during your slow period. 

4. Builder’s CAPlines: 

These lines of credit are used to support the construction of commercial and residential buildings that will be resold. It can be used for equipment, raw materials, labor and other costs associated with the construction of the building. 

SBA Disaster Loans:      

Thankfully the SBA also issues loans to businesses recovering from physical and economic damage caused by economic or natural disasters. This is a great option for business owners that have had property, inventory or equipment damaged or destroyed by a disaster. The SBAs goal is for the loan to help you get the business back to where it was before it was impacted by a disaster. These loans are typically up to $2 million with rates of 4-8% and terms of up to 30 years. 

Some of the things to consider before applying are: 

•   What are the minimum requirements to qualify? 
•   Minimum/maximum loan amount I can receive? 
•   What are the rates/repayment terms available? 
•   How long will it take to receive the funding? 
•   What are the collateral/down payment conditions?
•   Is there a personal guarantee and how many owners have to sign it?

Conclusion

SBA loans are great option for business owners that have a lot of time to put into the application process and are able to wait a few months typically to receive the financing. If you are looking for funding faster although it will be more expensive a short-term loan from an online lender may be a better option for you. Let us know when you’re ready to apply!