The SBA works with local banks and lenders to set up these loan types for you as the business owner. You will be working with a lender who knows the SBA guidelines and process. The lender may even use some of their own in house lending options alongside the SBA financing.
Here's a breakdown of the common loan types offered by the SBA:
7(a) Loans:
The 7(a) Loan Program serves as the SBA's primary business loan initiative, offering loan guarantees to lenders to assist small businesses with specific needs. These loans can be utilized for:
- Acquiring, refinancing, or enhancing real estate and buildings
- Short- and long-term working capital
- Refinancing current business debt
- Purchasing and installing machinery and equipment
- Procuring furniture, fixtures, and supplies
- Changes of ownership (complete or partial)
- Multiple-purpose loans encompassing any of the above
- Repayment terms can extend up to 25 years, with a maximum loan cap of $5 million. To qualify, businesses must be operational, for-profit entities based in the U.S., meeting SBA size requirements, not engaged in ineligible business types, creditworthy, and demonstrating a reasonable ability to repay the loan.
504 Loans:
The 504 Loan Program offers long-term, fixed-rate financing for significant fixed assets that foster business growth and job creation. These loans are facilitated through Certified Development Companies (CDCs), SBA's community-based partners focused on economic development. Eligible projects include:
- Purchase or construction of existing buildings or land
- Establishment of new facilities
- Long-term procurement of machinery and equipment
- Improvement or modernization of land, streets, utilities, parking lots, landscaping, and existing facilities
504 loans cannot be used for working capital or inventory, debt consolidation, speculation, or investment in rental real estate. To qualify, businesses must operate for profit in the U.S., possess a tangible net worth under $15 million, and maintain an average net income below $5 million after federal taxes for the preceding two years, among other criteria.
Microloans:
The Microloan Program extends loans up to $50,000 to aid small businesses and select not-for-profit childcare centers in their startup and expansion efforts. On average, microloans amount to approximately $13,000. SBA allocates funds to designated intermediary lenders, typically nonprofit community-based organizations with lending experience, to administer the program. These loans can be utilized for various purposes, such as working capital, inventory, supplies, furniture, fixtures, machinery, and equipment. However, they cannot be used to settle existing debts or acquire real estate.
Eligibility requirements for the Microloan Program vary among intermediary lenders, typically necessitating collateral and the personal guarantee of the business owner.
These loans can be used for:
- Working capital
- Inventory
- Supplies
- Furniture
- Fixtures
- Machinery
- Equipment
Proceeds from an SBA microloan cannot be used to pay existing debts or to purchase real estate.
Sba express
The SBA Express program empowers select lenders to utilize their own streamlined processes and procedures while enjoying a reduced SBA guarantee percentage. These lenders are granted delegated authority to independently process, close, service, and liquidate 7(a) loans without direct SBA oversight.
Key features of the SBA Express program include:
- Maximum loan amount of $500,000
- SBA guarantee of 50%
- Negotiable interest rates, capped at the SBA maximum
- Revolving credit line option available for up to 10 years
Lenders are not obligated to require collateral for loans under $50,000. For loans exceeding this threshold, lenders can apply their existing collateral policies, with the caveat that loan approval should not be solely based on insufficient collateral.
Understanding your SBA options will allow your deal vetting move faster, business acquisition to move quicker, and set up favorable terms for your next business purchase.
See our upcoming article breaking down the SBA lending process.
Sources:
https://www.sba.gov/funding-programs/loans
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