What is an SBA loans?
An SBA loan is a business loan that is guaranteed by the U.S. Small Business Administration (SBA).
An SBA loan is the Holy Grail when it comes to small business expansion. Small business owners can use these funds in a multitude of ways with the aim of business growth through the SBA 7(a) or wealth creation through the SBA 504 loan program.
The SBA essentially guarantees a portion of a loan that is acquired through an SBA approved lender. There are two main SBA funding programs which we focus on. SBA 7(a) and SBA 504.
Why choose an SBA Loan?
Applying for an SBA loan
The only difference is that SBA loans are moderately easier to qualify for than traditional loans.
Qualifying for an SBA loan doesn’t have to be an elaborate and time–consuming process if you choose the right lender. The application process for an SBA loan can seem daunting, but again if you choose the right lender, they will be able to seamlessly walk you through the process.
One of the main determining factors, as with most financing, will be your credit score. Most business owners who qualify have an annual revenue stream of over $350,000 per year, have a credit score of 650, and have been in operation for over three years, but there are many exceptions to these.
Choosing the right SBA Loan
the two most popular programs by far are:
- The SBA 7(a) Loan Program (general financing needs)
- The SBA 504 Loan Program (owner occupied commercial real estate and/or heavy equipment). The SBA loan you qualify for will depend on several factors, mainly about the use of proceeds.
SBA Loans: The Basics
SBA 7(a) loan program
- A maximum loan amount of $5 million.
- Repayment periods of up to 10 years for working capital loans or up to 25 years for commercial real estate loans.
- To be used for general financing needs
The 504 loan program
- No maximum loan amount, but for practicality’s sake, around $22 million
- Repayment period of 10 to 20 years
- To be specifically used to buy fixed assets
SBA Loans Cost
SBA 7(a) Loan Program Fees
The SBA charges a fee for providing additional security for the loan, known as the guarantee fee. Though the lender usually pays the guarantee fee, they can pass it along to the borrower as an expense of the loan.
They charge a guarantee fee of 1.7% of the loan amount for loans up to $150,000, 2.25% for loans between $150,000 and $700,000, and 2.625% on loans exceeding $700,000. For loans over $1.333M, the fee increases slightly based on the loan amount. If you’re in that bracket, we can calculate the exact fee for you.
Depending on the lender from which you acquire the loan, you may be liable to pay an origination fee or loan packaging fee. The fees may seem like a burden but they are paperweight compared to the burden a smaller, faster to process but much more expensive loan would be.
SBA 7(a) loans come with either a fixed or variable interest rate which is usually adjusted every quarter. The lender that finances your loan will be the one to decide which to offer.
The SBA has a cap on the spread a bank is allowed to place above the loan’s base interest rate, minimizing how much profit the bank can make off your SBA loan. This protects you as a borrower.
If your loan amount exceeds $50,000 and the repayment period is less than 7 years, the loan’s interest rate will be determined by the Prime Rate and the maximum allowed spread on the rate is 2.25%.
If your SBA loan is more than $50,000 and has a repayment period of more than 7 years, the loan’s interest rate will be determined by the Prime Rate and the maximum allowable spread will be 2.75%. It is paramount to understand that the interest rate on an SBA loan is also determined by your credit history and the repayment terms.
SBA 504 Loan Program Fees
To put it in extremely simple terms, you should expect an interest rate of 4-5% on the loan. However, you will not know the exact interest rate on the loan until 45 days after acquiring the loan.
The reason for the complication arises from the fact that a 504 loan comprises of two separate loans.
One is from the lender which makes up 50% of the total loan amount and the other loan is from the Certified Development Company (CDC) and makes up 40% of the total loan amount. The other 10% comes from your down payment.
SBA Loan requirements
However, generally speaking, a business should qualify for an SBA loan if they have been in operation for at least 3 years, have a good credit history, have not recently experienced any bankruptcies or foreclosures and have enough cash flow to make monthly payments on the loan for the entire duration of the loan. Startups will be considered depending on the lender, if you have a solid business plan and relevant experience in the industry which the business is operating.
The ability to come up with cash flow to make the monthly loan payments should be demonstrated using tax returns and financial statements from both the business and the owner. Moreover, the business should not have any delinquencies or have defaulted on any government loans in the past to qualify.
To qualify for a commercial real estate loan through the SBA, the real estate needs to be majority owner-operated. This means that at least 51% of the square footage of the property you plan on purchasing or refinancing should be occupied by and used by your business to qualify for an SBA loan.
Also, there are exceptions.
The business owner must be a US citizen or a legal permanent resident of the United States.Fountainhead’s policy is that the business owner’s credit score must be 650 or above for SBA loans up to $350,000 and a credit score of over 660 for commercial real estate loans up to $15 million.
To qualify for an SBA loan, there are certain documents you’ll need in your possession. You should have these documents ready before applying for the loan in person or online. The more readily available and easily retrievable your documents are, the faster you will move through the application process.
Applying for an SBA loan online is better in this regard as you can have all the necessary documents in one folder ready to upload when prompted. On the contrary, if you forget a single document when visiting a bank’s physical location, it will set you back weeks on the application process.
You can consult an accountant or tax attorney before compiling the necessary documentation. The following are the most requested documents when applying for an SBA loan: