A Primer on Evaluating SBA Funds for Your Business

Finding capital to support your company’s growth is an ongoing challenge. When searching for funding for your business, you’ll want to look into the loan programs offered by the U.S. Small Business Administration (SBA). The interest rates and terms can compare favorably with other types of loans.

SBA Loans 101

To obtain an SBA loan, you’ll work with a bank, community development organization or other financial institution, because the SBA itself doesn’t actually make the loans. Instead, it guarantees repayment of the funds these financial institutions lend, which helps keep interest rates low.

Your business generally will need to meet a few criteria to qualify for an SBA loan. You must operate for profit in the United States or its possessions, and you must have tried to use other financial resources — including your own assets — before applying for a loan. Your business also may need to meet specific criteria regarding the amount of income it earns or its size.

Some types of businesses, such as banks and life insurance companies, generally aren’t eligible for SBA loans.

Although you’ll negotiate the interest rate with your lender, it can’t exceed the maximum rate established by the SBA. This is calculated from a base rate, such as the prime rate, plus a markup. Lenders also can charge fees.

Some Examples

Among the many SBA loan programs, these are some of the more popular ones:  

SBA 7(a) . These loans can be used to fund start-up costs, buy equipment and refinance existing debt, among other uses. The maximum loan amount is $5 million. The SBA guarantees 85% of loan amounts up to $150,000 and guarantees 75% of loan amounts greater than that.

To qualify for a 7(a) loan, your business must fall within the SBA’s size standards. In general, this means your company must be considered “small” within its industry. Depending on the industry, this may be expressed by either number of employees or annual revenue. You’ll typically repay the loan in monthly payments of principal and interest.

SBA 504 . This loan program is geared to expanding businesses, so the funds can be used to purchase real estate and equipment or to build or improve your facilities, among other uses. The maximum loan amount is determined by the way in which the proceeds will be used. Your company should be able to repay the loan from protected operating cash flows.

Again, you’ll need to meet a few requirements to qualify for a 504 loan. Among them, your business’s tangible net worth can’t exceed $15 million and its after-tax net income must have been less than $5 million during the preceding two years.

SBA Express . This has a maximum loan amount of $350,000, and the SBA guarantees only up to 50%. But the SBA says it responds to applications within 36 hours.

How to Apply

Most lenders ask for information on a business before they’ll lend it money, and the SBA is no exception. For instance, to apply for a 7(a) loan, you’ll generally need to supply a current income statement, balance sheet and cash flow projection. In some cases, you’ll also need to provide a personal financial statement. Owners with a 20% stake or more in the business may need to sign a personal guarantee.

To choose a financial institution with which to partner on an SBA loan, ask how many SBA loans they’ve made. Typically, the more loans they’ve completed, the better they can guide you through the process.

Consult a Professional

Along with the loan types outlined here, the SBA offers other loan programs geared to, for instance, export financing and veteran-owned businesses. Your accounting professional can help you determine how well the different types of SBA loans fit your business’s needs.  

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