SBA Loans

SBA Loans

Small Business Administration (SBA) loans, or US Small Business Administration federally regulated loans, are designed to meet the financial needs of many types of businesses. Depending on the type of SBA loan, borrowers can use it for a variety of purposes, including:

• Business start-ups
• Acquisitions
• Working capital
• Real estate
• Franchise financing
• Debt refinancing
• Improvements
• Renovations

The actual funds for the SBA loan are not provided by the government but by banks, local community organizations, or other financial institutions. The SBA guarantees these lenders 75% to 90% of the loan amount in the event of default. This encourages lending by reducing lender risk. However, SBA loans require additional documents and additional fees. Additionally, approval can take longer and the strict regulations tend to give business owners less freedom. Additionally, the maximum credit limits may not cover the most expensive needs of some businesses.

SBA Loan Types

Loan

This is the premier small business loan offered by the SBA and is generally what is meant by an “SBA loan.”

loans account for over 75% of all SBA loans and are used by borrowers for a variety of purposes. It can be working capital or various types of purchases. These acquisitions can consist of new machinery, equipment, land, or buildings. You can get loans of up to $5 million over 10 years for working capital or 25 years for fixed assets.

Microloan

These loans are designed for new or growing small businesses. Borrowers can use microcredit for anything that falls under 7(a) loans, except to pay off existing debt or buy real estate. Lenders can approve microloans of up to $50,000, although the average for such a loan does not exceed $15,000.

Real Estate & Equipment Loan (CDC/504)

Borrowers typically receive CDC/504 loans for long-term, fixed-rate real estate or equipment financing and debt refinancing. Because of their limited scope, they cannot use these loans for working capital or inventory.

Disaster Loan

Business owners can use these loans to repair machinery, property, equipment, inventory, or business assets that have been damaged or destroyed by a declared disaster. The maximum loan amount is $2 million, and potential disasters can include earthquakes, storms, floods, fires (natural or man-made), or civil unrest.

Other Loan Types

Conventional Loans

Most traditional business loans come from banks or other financial institutions. Unlike SBA loans, traditional loans do not provide lenders with government security. They usually involve higher rates and shorter terms. Therefore, borrowers with lower credit scores or lacking available funds may find SBA loans more attractive. However, personal loans can have low-interest rates for borrowers with excellent credit ratings. Additionally, these loans involve a faster and less regulated process, making them more attractive to certain borrowers.

Banks offer conventional loans in many different forms, such as mezzanine financing, asset-based financing, invoice financing, business cash advances, and cash flow loans.

Personal Loans

Borrowers can sometimes use personal loans for small business purposes. In some cases, new businesses without an established track record or reputation may turn to these loans to avoid the high-interest rates of business loans. Check out the Personal Loan Calculator for more information or to perform calculations related to personal loans.

Interest-Only

An interest-rate loan differs from standard loans in that the borrower only pays interest for the term of the loan. The entire principal amount is due on the loan due date. An interest-rate loan allows for lower payments over the life of the loan and can be useful if borrowers expect higher incomes in the future.

Business Loan Fees

Like many other types of loans, business loans usually have fees in addition to interest. Banks typically charge this fee to cover the cost of verifying borrower information, completing documents, and other loan-related expenses. The most common fees are setup fees and documentation fees.

Origination Fee

Banks charge this fee for processing and approving a loan application, a process that may involve verifying borrower information. Banks may charge a flat fee or a percentage of the loan amount, typically between 1% and 6%. They often include the origination fees in the cost of the loan.

Documentation Fee

These are standard loan-related fees that banks charge to cover the cost of document processing.

In addition to the preparation and documentation fees, some lenders may also charge an upfront application fee to review the application.

Banks may also charge other fees during the life of the loan. This can include:

• Monthly administrative fees
• Annual fees
• Service or processing fees
• Prepayment penalties
• Referral fees
• Late payment fees
• Wire transfer fees

Not all lenders charge this fee. In addition, certain fees such as late fees or prepayment penalties only apply in certain situations.

The Bottom Line

All of these fees can result in the actual cost or interest rate of the loans being higher than the rate quoted by the lenders. The calculator above can take this cost into account and calculate the true cost of the loan including fees, allowing borrowers to understand all the implications of such a loan.