This guest article was written by Meredith Wood, the Head of Content and Editor-in-Chief at Fundera, an online marketplace for small business loans.
The Small Business Administration (SBA) can be a life-saver for small businesses that are unable to qualify for traditional bank financing. Offering multiple loan programs for small business owners, there are various options for those in different stages of business. Here are the 4 SBA programs you need to know more about:
The SBA 7(a) Program
Due to the flexibility of the SBA’s 7(a) loan program, you have the freedom to use this loan for pretty much any business purpose: working capital, purchasing new or used equipment, purchasing real estate, construction, refinancing more expensive debt… you name it.
Depending upon your qualifications and needs, you can borrow up to $5 million with either short or long terms—you have seven years to pay back working capital, 10 for equipment, and 25 years for real estate. The interest rates for 7(a) loans vary with each lender, but are subject to SBA guidelines and maximums.
Loans guaranteed by the SBA come with an additional fee called the guarantee fee. Initially the lender pays the guarantee fee, but has the option to pass it on to the borrower.
The Microloan Program
If you lack business credit history and are looking to get your foot in the borrowing door, or own a business with low capital requirements, you may be interested in SBA’s Microloan program. With this loan, you could receive up to $50,000 for working capital, inventory or supplies, furniture or fixtures, and machinery or equipment.
To apply for a Microloan, you have to go through one of the SBA’s approved intermediary lenders. These lenders are typically non-profit, community-based organizations with experience in lending, management, and technical assistance for small business owners. Because of this, you may be required to fulfill training or planning requirements before your loan is considered.
The maximum repayment period for one of these loans is six years, with interest rates between 8% and 13%. And since these are for those who don’t have a lot of borrowing experience, you’ll often be asked to put up some form of collateral in order to secure the loan.
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The CDC/504 loan is for more established small businesses that are looking to make one large purchase.
With this SBA loan program, you can borrow up to $5 million—just be aware that the CDC/504 loan has the most limitations in terms of spending flexibility, so if you were planning to use this loan for things like working capital or for paying off existing debt, think again.
Instead, the money from this business loan is to be spent on fixed assets, including purchasing land or existing buildings, purchasing equipment, funding a major construction or renovation project, and so on. Borrowers are typically expected to pay 10% of project costs.
If the regulated uses for this loan align with your business needs and you meet the qualification standards, you’ll benefit from long repayment terms of 10 to 20 years.
The revenue stream of your business can be greatly hindered in the event of a natural disaster. If your company has been affected, naturally you’ll want to get things back up and running as quickly as possible—but if your insurance doesn’t fully cover your losses, you may need to seek additional financing in the form of an SBA Disaster loan.
If you qualify for an SBA Disaster loan, you could borrow up to $2 million, which can help mitigate the costs of losses that are not fully covered by your insurance. The money from this loan can be used to replace or repair machinery, real property, fixtures, leasehold improvements, equipment, or lost or damaged inventory.
The idea of this loan is to help businesses get back on their feet, which is why they’re quick to secure and slow to pay off. The repayment terms can go up to 30 years, with interest rates between 4% to 8%.
The application process for an SBA loan can be pretty extensive. Further, it could take months to receive financing, as both the SBA and the lender need to review and approve your loan application. And while the SBA aims to make borrowing easier for small business owners, not everyone who applies will qualify.
Even so, if your business meets the requirements for an application, the SBA can help you secure the funding you’ve been waiting for. If you want to improve your your chances of getting approved for the financing you need, be sure to review the qualifications for each of the SBA’s loan programs, and tailor your application accordingly.