There are a host of small business financing options available to entrepreneurs, yet SBA loans are among the best available. SBA Loans are the gold standard of small business loans. They offer some of the most competitive terms, the lowest APR, and high loan amounts compared to other loan options for small business owners. However, the requirements for qualifying for an SBA loan can be tough.
Considering that half of all small businesses fail by year 5, it’s a risky proposition for banks to loan them money. That’s where the SBA comes in.
The SBA is an initiative by the SBA (U.S. Small Business Administration), a U.S. government agency, with the intention of incentivize and encourage small business growth in the United States – but they don’t throw money at just anyone. SBA loans are a bit more difficult to obtain than personal loans and there are a number of qualifications before a business owner is able to see the funds in their bank account. A potential borrower will need a solid existing business already in place with proof of a certain amount of annual revenue. New businesses will have a significantly more difficult time acquiring SBA loans.
SBA loans are distributed by traditional banks and credit unions across the country, not by the Small Business Association (SBA) itself. The reason the terms are so favorable is that the SBA guarantees all or part of an approved loan. The lending bank carries relatively little risk should the small business go under.
Here are the 6 most common types of SBA loans, their requirements, and what business they are best suited for.
1. SBA 7(a) Loan
If someone refers to an “SBA loan” in a broad sense, they’re probably talking about the SBA 7(a) Loan. This is the most popular of all SBA loans because it has low-interest rates, long repayment terms, and a very flexible use of loans clause.
SBA 7(a) loans are often used for refinancing debt and other business needs, like buying commercial real estate, buying equipment, or simply to use as working capital. With an upper limit of $5 million, there’s little that can’t be done with an SBA 7(a). Like most loans, they are repaid with monthly payments that include principal and interest.
Unlike most loans, startups can qualify for an SBA 7(a) if they can demonstrate previous experience, have a good personal credit score, and are willing to pay a bigger down payment.
An SBA 7(a) loan is ideal for:
Anyone who needs working capital but doesn’t mind waiting a little while for it. The SBA 7(a) is the best general-purpose loan and should always be the first consideration when applying for loans.
- Companies that need to refinance debt or another type of loan (bridge loans, hard money loans, etc.) from short-term, high interest to low interest, long-term loans.
- The SBA 7(a) is available to both established businesses and new ones. If the company (or founders of a new company) have superior credit ratings, significant experience, and demonstrable growth, it is sometimes possible to have the minimum down payment waived for a 100% TLV.
- With a cap of $5 million, this loan is geared towards small to medium-sized companies. The SBA will prioritize those companies over larger, more well-established ones.
SBA 7(a) loan requirements and terms:
- Funding Amounts – Technically as low as $5k, but in practice not less than $30k. Up to $5 million.
- Required Down Payment – 10% to 20%.
- Required Credit Score – 675+
- Required Time in Business – 0 to 3 years.
- Loan Term – 10 to 25 years.
- Rates and Fees – 6% to 10% APR. Origination fee up to 3.5%. SBA Guarantee fee up to 3.5%. Loan Packaging fee about $3k.
Best vendors for SBA 7(a) loans:
In order to disburse SBA 7(a) loans, sba lenders have to be officially partnered with the Small Business Administration. This isn’t a difficult process, so many banks and credit unions across the country are in the program. Check with your existing bank to see if it’s an option before looking further afield.
Here are our recommended vendors for SBA 7(a) loans:
- Celtic Bank – a business bank that offers loans starting at $300k all the way up to the $5 million cap. In order to receive lower interest rates, they accept collateral in the form of equipment, real estate, and inventory – or whatever it is the loan is financing.
- Northeast Bank – comes at loans from a unique angle. They have teams of experts from most industries – agriculture, manufacturing, retail, etc. – that help walk a borrower through the loan application and disbursement process. Northeast is a great option for first-time borrowers.
- Wells Fargo – should sound pretty familiar. In addition to being one of the largest banking companies in the world, they’re also one of the largest distributors of SBA 7(a) loans in the country. There’s a good chance that a local branch exists in your area, and they’d be happy to consult on SBA loans.
2. CDC / SBA 504 Loan
The CDC / SBA 504 Loan is pretty similar to the SBA 7(a) loan in effect but has a few notable differences that make it potentially a much more impactful loan.
The first thing to know is that it’s actually two loans. The SBA 504 loan is one from the lending institution (usually the bank) and backed by the SBA. It’s similar to the SBA 7(a) in the strict applicant requirements and terms of the loan. However, the SBA 504 will only fund up to 50% TLV (total loan value) … but there’s no upper limit on the funding amount.
The second half of the loan is disbursed from a Certified Developing Company (CDC). They will put up around 40% of the total loan value, leaving the borrower with a standard 10% down payment.
The CDC / SBA 504 loan has some very specific additional requirements to qualify:
- The borrowing company can’t have a net average income of greater than $5 million during the last two years.
- The borrowing company’s tangible net worth must be less than $15 million.
- Total loan amount has to be less than the personal assets of the business owner.
- If the loan will fund new construction, the business must occupy a minimum of 60% of the property initially and 80% within 10 years.
- For every $65k issued, the borrowing company has to create or retain one job.
A CDC / SBA 504 loan is ideal for:
The target audience of this loan should be pretty clear – it’s meant to go to small-but-ambitious companies that have an employee-first mindset.
- A rapidly-growing company that doesn’t have enough liquid assets to put more than 10% down on new equipment or property would benefit from a CDC / SBA 504 loan.
- This loan enables (and requires) a large influx of employees. Companies can utilize the increase in manpower to scale quickly and bring on diverse skill sets.
CDC / SBA 504 loan requirements and terms:
- Funding Amounts – Up to 90% TLV with no funding cap.
- Required Down Payment – 10%
- Required Credit Score – 700+
- Required Time in Business – 3+ years.
- Loan Term – 10 to 20 years.
- Rates and Fees – 5% to 7% APR. Up to 4% SBA Guarantee fee. Up to 2% CDC processing fee. 5% closing cost. $500 appraisal fee.
Best vendors for CDC/SBA 504 loans:
Good news – people interested in a CDC / SBA 504 loan don’t have to apply to both a bank and a CDC. Any bank that offers this type of loan will already have a CDC partner in place.
- Capital CDC – there are two reasons to choose Capital CDC over another CDC. The first is that they work with very niche companies and startups, albeit at a lower contribution rate. The second is that they offer fixed interest rates.
- Liberty SBF – a lender that usually works with companies looking to acquire property. They specialize in hospitality and multiple-use buildings. They will fund up to an impressive $36 million.
- TMC Financing – specializes in startups and single-use facility properties. They don’t require financing or collateral and allow you to add soft costs like closing to the loan amount.
3. SBA Microloans
This is a unique loan for several reasons. Only non-profit small business lending institutions are capable of disbursing an SBA Microloan. And, unlike other SBA loans, this one is not guaranteed by the SBA.
With a maximum loan amount of just $50k, the SBA microloan is only useful to a select group. The average loan amount for the duration of the program is a mere $13k.
Because of the low loan amounts, as well as the fact that it’s not backed the SBA, rates are generally higher than other SBA loans. On the other hand, the requirements to qualify are much lower too.
An SBA Microloan is ideal for:
Unlike many kinds of SBA loans, a borrower doesn’t have to have immaculate credit and an extensive portfolio of successes and experience. With the loan amount so low, however, the microloan has limited applications.
- SBA Microloans are the perfect option for the self-employed, one-man-shows. Since sole proprietorships have only personal credit to loan against (which may or may not be great), the microloan is a good fit. Lower amounts also cater to reduced needs of solo entrepreneurs.
- Startups that have their sights set on smaller goals will find the SBA Microloans useful. It’s an agile loan type that fits well with the scrappy atmosphere of a startup.
- SBA Microloans are specifically earmarked for use in nonprofit child care centers. If that sounds like you, check them out.
SBA microloan requirements and terms:
- Funding Amounts – Up to $50k.
- Required Down Payment – None but need collateral and personal guarantee.
- Required Credit Score – 625+
- Required Time in Business – None.
- Loan Term – Maximum 6 years.
- Rates and Fees – 8% to 14% APR. Origination fee up to 3.5%. Loan Packaging and closing fees vary.
Best vendors for SBA microloans:
Since the vendors for the SBA Microloan have to be nonprofit, there is a much smaller pool to draw from. Furthermore, few of these nonprofits are large, national organizations.
Fortunately, the SBA maintains a list of approved intermediaries. You can find the list here. It is updated yearly.
4. SBA CAPLines
The SBA CAPLine program offers lines of credit, rather than a direct loan. There are four different CAPLines available, each roughly geared towards specific industries.
Although possible to be received as a standalone offer, most SBA CAPLines are bundled with SBA 7(a) loans to well-qualified businesses.
Also note that, in most cases, a business owner has to personally guarantee a CAPLine.
An SBA CAPLine is ideal for:
Businesses that have cyclical finances or upfront expenses before payment.
- Retailers that follow boom-bust cycles or seasonal fluctuations can utilize an SBA CAPLine to maintain cashflow during the offseason.
- Contractors, many of which have Nedt30 or Net60 pay contracts, often have to front money for projects… then don’t get paid until they are well into the next one. A flexible line of credit like the CAPLine mitigates the financial stress.
SBA CAPLine requirements and terms:
- Funding Amounts – Up to $5 million.
- Required Down Payment – 0% to 10%, occasionally collateral.
- Required Credit Score – 675+
- Required Time in Business – 1 to 3 years, depending on which CAPLine program is used.
- Loan Term – 5 to 10 years.
- Rates and Fees – 7.5% to 10% APR. SBA Guarantee fee up to 3.5%. Origination fee up to 3.5%. Loan Packaging fee about $3k.
Best vendors for SBA CAPLines:
- Most vendors that offer SBA 7(a) loans will also offer CAPLines. Since they are bundled together, we recommend that you utilize the same lending institution for both. Refer to the recommended vendors for the SBA 7(a) loans.
- It is difficult to receive a CAPLine without also taking out a loan. Inquire with any SBA loan vendor about the process.
5. SBA Export Loans
This loan program aims to help small businesses in America take their products and services abroad. It’s designed to expand export activities and facilitate international transactions to that the recipient can penetrate foreign markets.
There are several types of SBA Export loans, including Express, Working Capital, and International Trade Loans. Each has slightly different terms.
An SBA Export loan is ideal for:
The SBA Export Loan requires that a business have previous history of exportation (or that the principles of a business have experience). The terms of the loan stipulate that the money be used to develop business abroad. Ergo, the loan caters to a very specific audience.
- Manufacturers in America that want to bring products overseas but need working capital to navigate all the red tape can benefit from the SBA Export Loan.
- Manufacturers that already export products but want to expand to other countries internationally are also a good candidate.
SBA Export Loans requirements and terms:
- Funding Amounts – Up to $5 million.
- Required Down Payment – 10% to 20%.
- Required Credit Score – 675+
- Required Time in Business – 2+ years.
- Loan Term – 3 to 20 years.
- Rates and Fees – 7% to 10% APR. SBA Guarantee fee up to 3.5%. Origination fee up to 3.5%. Loan Packaging fee about $3k.
Best vendors for SBA Export Loans:
Generally, any lending institution partnered with the SBA will offer export loans although the amount offered may differ. Check with the bank your company is already using, but if they don’t offer it, try one of these:
- SmartBiz – the largest online marketplace for SBA Loans, including Export loans. Their extensive experience and specialization with SBA loans has distilled the application process to a science. Small business owners can select from a number of online lenders and the application process is fast and easy.
- GBC International Bank – a bank that deals primarily in export loans, so they’re a great option. They mostly work with small businesses of less than 20 employees – which actually makes up a majority of US exporters.
- Live Oak Bank – a nationwide bank that specializes in loans guaranteed by the SBA for 16 industries, including accounting & tax, health care, and commercial real estate loans.
- Ondeck – A global online lender of small business loans that allows one to apply and get approved for many different types of loans significantly quicker than with a brick and mortar business lender.
6. SBA Disaster Loans
As the name implies, the SBA Disaster Loan is only applicable in a very specific case. The business applying for the loan has to have evidence it was physically or economically impacted by a disaster (as declared by the SBA).
There are a few sub-varieties, and you can apply for more than one at the same time if it’s relevant. Of particular note is that the SBA Disaster loans include the Military Reservist Economic Injury Loans. If a critical employee in the reserves is called to active duty, a business qualifies for a loan of up to $2 million to meet normal operating expenses.
An SBA Disaster Loan is ideal for:
A company that has suffered as a result of a natural disaster (flood, earthquake, etc.) or an economic recession.
- Building or inventory damage from a wildfire (rather than an anthropologically-caused fire) would make a business eligible.
- Funds from an SBA Disaster Loan can be used for repair, replacement, working capital, or operating expenses. That makes it a very flexible loan for a creative businessperson trying to get out from under a local economic depression.
- This loan type has lower requirements than other loans yet has an extremely competitive interest rate. It’s the best option for a business to bounce back from catastrophe without enslaving itself to debt.
SBA Disaster Loan requirements and terms:
- Funding Amounts – Up to $2 million.
- Required Down Payment – Not required, although collateral usually is.
- Required Credit Score – 650+
- Required Time in Business – None, but typically given to businesses older than 3 years.
- Loan Term – Up to 30 years.
- Rates and Fees – 4% to 8% APR.
Best Vendors for SBA Disaster Loans:
Since the SBA quite generously caps the interest rate at a remarkable 8%, the rates aren’t a huge consideration when looking for vendors.
It’s also the only type of SBA loan where a borrower has the option of receiving it directly from the SBA itself. If you don’t mind waiting a little longer, that’s the most effective way. Here is the SBA website with disaster loan information.