🏦 SBA loan types, pros, and cons
Got long-term goals?
Searching for ways to start, grow, and build a resilient small business? SBA loans are perfect for small businesses who are looking to sustain long-term development.
Get the specifics on types of SBA loans, their pros and cons, and newest SBA rules, effective as of August 1, 2023, down below! 😜
Most common types of SBA loans
The most popular SBA loan is called the 7(a) loan. In 2022, nearly 47,700 of these loans were guaranteed by the SBA. Although qualifying for a 7(a) loan may be challenging, it is an excellent option for business financing due to its extended repayment periods and low-interest rates. Moreover, these loans can be used for various purposes such as covering da—to-day expenses, growing a business, or purchasing equipment and supplies.
Also known as CDC loans, provide long-term financing (up to 25 years) for major business purchases like real estate or machinery. These loans typically cap at $5 million, however some projects can qualify for up to $5.5 million. A 504 loan is ideal for small-business owners who want to make big purchases (as long as they qualify and can afford to wait for funding).
Express loans are a type of SBA loan that are easier to get and faster to receive than standard 7(a) loans. They are a good option for small businesses because they have competitive interest rates and flexible repayment terms. You can borrow up to $500,000 from participating lenders as either a term loan or line of credit. These loans can be used for various purposes such as working capital, business expansion or renovation, equipment purchases, real estate purchases, and debt refinancing.
The two types of SBA loans this update affects are: 7(a) and 504 loan programs.
Loan sizes: Have been redefined as loans greater than $500,000, while 7(a) small loans are $500,000 and less.
Down payments: Or “equity injections,” are now subject to the lender’s discretion, except in cases where there is a complete change of ownership (which then requires a 10% down payment).
Use cases: SBA loans can now be used for partial changes of ownership and religious activities.
Interest rates: Variable rate loans now have a maximum interest rate that ranges from the prime rate plus 3% to the prime rate plus 6.5%. The interest rate you get depends on the size of your loan, not how long it takes to pay it back. These rules apply to all types of 7(a) loans, except for Export Working Capital Loans.
Fees: Lenders can charge a flat fee of up to $2,500 on any SBA 7(a) loan.
Collateral: SBA lenders do not need collateral for loans under $50,000 (previously $25,000). For loans over $50,000, lenders must follow their existing collateral policies for non-SBA commercial loans of similar size.
Job creation requirements: For every $90,000 that the CDC lends, you must create or retain at least one job. Small manufacturers must create/retain one job for every $140,000. These numbers increased from $65,000 and $100,000, respectively.
Updates for both 7(a) and 504 loans:
Personal resources: Previously, you had to show that funding was not available from your personal resources as part of the “credit not available elsewhere” qualification requirement. Now, SBA lenders are not required to consider the personal liquidity of borrowers as part of their review.
👍🏾 Pros and cons 👎🏾
✅ longer terms
✅ competitive rates
✅ low fees
✅ large loan amounts
❌ slow to fund
❌ personal guarantee required
❌ hard to qualify
❌ collateral could be required
Sometimes we know less than what we think. Trivia is one of the funnest ways to exercise our brain and expand our knowledge. See what you know this week!
(T/F) The U.S. Small Business Administration (SBA) makes SBA loans to small business owners directly.
SBA Loans differ from a traditional bank term loans because ____.
(T/F) The SBA sets the interest rates charged on SBA loans.
(T/F) SBA Loans are usually a good source of funding for startups.
SBA Loans can be used for: a) startups or business acquisitions b) equipment purchases c) working capital d) all of the above
(T/F) A credit score below 650 automatically disqualifies applicants seeking an SBA loans.
Scroll to the bottom to check your answers!
False. It works with partner lending institutions like banks.
SBA loans come with a government guarantee against default.
False. The interest rates are set by the agency’s approved lending partners—but it does set limits on what they can charge.
D. All of the above.