What are SBA 7(a) loans?
The SBA 7(a) loan is the most popular financing option offered by the agency. The 7(a) was created to level the playing field for small businesses to secure working capital from commercial lenders.
A startup business that wouldn't have the cash flow history to secure a traditional loan, can be eligible to secure an SBA loan since it's partially guaranteed by the federal government (up to 85%).
- Average interest rates: 5% to 10%
- Loan amounts: Up to $5,000,000
- Term length: 10 years for working capital loans, 25 years for real estate loans
- Minimum credit score needed: 640+
- Down payment: 10% to 20% of the total loan amount
Pros:
- Backed by the Small Business Administration up to 85%
- Long term lengths
- Capital can be used for any type of business expense
- Competitive interest rates
Cons:
- High paperwork and documentation requirements to apply
- Time to get funded is long compared to traditional loans
- Requires a down payment
- Some collateral is needed to secure a loan
What are SBA Microloans?
The SBA Microloan program is designed to provide funding to non-profit lenders that in turn provide financing to for-profit businesses. As compared to 7(a) loans, SBA Microloans have a maximum financing amount of $50,000 and are not guaranteed by the federal agency.
- Average interest rates: 8% to 13%
- Loan amounts: Up to $50,000
- Term length: Up to 6 years
- Minimum credit score needed: 575+
- Down payment: not required
Pros:
- Great financing option for underserved business owners like women, veterans, and minorities
- Business owners with limited credit history can qualify
- Low interest rates
- Longer term length as compared to traditional loans
Cons:
- Limited to $50,000 in working capital
- Lengthy process that can take 30 days or more
- Must provide a business plan with estimated financial projections
- Some collateral is needed
Frequently Asked Questions about SBA Loans
On average, it takes around 3 to 6 months to receive funds, though the duration of the process varies depending on a number of factors. Things generally move slowly because the SBA has to work with banks and outside lenders to complete the transaction.
Capital can be used for a wide range of business-related expenses. Common uses include the following: start-ups, emergencies, real-estate, mortgages, and buying equipment.
For COVID EIDL loans, small businesses, U.S. agriculture businesses with less than 500 employees, and non-profit organizations can be eligible. For declared disasters, the list of businesses eligible for funding becomes even more expansive.
The application process tends to be drawn out and paperwork heavy. Lenders will want to carefully review all documentation to make sure all eligibility criteria is met.
