Looking for Business Loans? Here Are The Programs the Small Business Administration Offers

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Types of SBA Loans

The SBA loans money to small businesses primarily through two different programs. Knowing which program you fit into best will help you move through the loan application process more quickly.

small business administration loans

7(a) Loans

Most of SBA's loans come from the 7(a) program. This is the traditional SBA lending program that guarantees loans made by banks to businesses. It's important to note that the SBA doesn't lend money directly to businesses. Rather, it guarantees the loans that are made by banks. Since the SBA is the one who may ultimately have to pay the money should the business fail, the SBA sets eligibility requirements, loan terms and amounts, and definitions on how the funds can be used.

Under the 7(a) program, the SBA will guarantee loans as follows:

  • They will guarantee up to 85% of loans up to $150,000.
  • They will guarantee up to 75% of loans above $150,000.
  • The maximum loan amount through the 7(a) program is $5 million and the maximum amount that the SBA will guarantee is 3,375,000.

To be eligible for a 7(a) loan guaranteed by the SBA, a business must me the SBA's definition of being small. Those definitions vary by industry, so there's no universal standard on what defines a small business.

  • Businesses that primarily lends money to individuals or other businesses.
  • Businesses who will use the money to buy real estate that will not house the business or will be used as rental property.
  • Businesses that require a membership and limit that membership for any reason other than capacity.
  • Businesses that receive more than one third of their revenue from legal gambling.
  • Life insurance companies.
  • Businesses that operate outside the United States.
  • They must be profitable.
  • They must operate within the United States.
  • They must intend to use the funds for a sound business purpose.
  • They must have a real need for the funds.
  • They must have owner equity.
  • And they must have exhausted all other financing sources before applying for the SBA loan.

SBA loans through the 7(a) program have various terms. Loans for real estate can be repaid over a period of up to 25 years. Loans for equipment can have a 10-year duration, while loans for working capital generally must be repaid within seven years.

The interest rate on the loans is negotiated between the lender and the business. Generally, the interest is made up of the prime rate plus a negotiated and allowable spread. The spread can vary based on the duration of the loan, the use of the loan, and big businesses credit profile. Loans of more than 150,000 may also have to pay a 3 percent fee for setting up a loan.

SBA Micro Loan Program

business microloans

For businesses that need smaller loans, they may want to consider the SBA's micro loan program. These loans are designed for businesses that need no more than $50,000 in funding. The average microloan in 2012 was for $13,000. Microloans are negotiated between lenders and businesses, much like 7(a) loans. The SBA guarantees the loans so the lender can have more confidence in getting repaid.

The micro loan program has much more flexibility than the 7(a) program. Loans can be extended for nearly any purpose and eligibility is very flexible. Many loans are facilitated by local nonprofit organizations. If a business doesn't meet the required criteria, the nonprofit organization may ask them to complete training counseling to better prepare them for running a business.

Fees and interest in microloans are also flexible. The typical interest rate on a micro loan is between eight and 13 percent.

Our previous article of this series explains How to Apply For an SBA Loan

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