What You Need to Know About the Small Business Loans: Types, Application Process, and Benefits

Last Updated on November 13, 2022 by Selina Parker

If you are a small business owner searching for business financing, your best option could be the Small Business Administration. The SBA doesn’t issue loans directly but guarantees loans issued by approved lenders. It increases the availability of capital and can help reduce your interest rates and loan terms.

However, qualifying for business loans is not easy – only about 30% of applicants qualify. This blog post will give you a comprehensive overview of the different types of business loans and tell you what you need to know to apply.

DIFFERENT TYPES OF SBA LOANS

1. SBA 7(A) LOANS

The SBA’s 7(a) loans are the most prevalent sort of business line of credit. Loans up to $5 million are available and can be utilized for working capital, refinancing debt, or purchasing a business, real estate, or equipment.

The SBA Express Loan and SBA Advantage Loan are two of the 7(a) loan programs’ many options. The SBA 7(a) loans are well-liked because of their lengthy repayment terms and low-interest rates, making them one of the most cost-effective working capital solutions available to small enterprises.

Interest Rate: 2.25% to 4.75% plus prime rate; (5.5% to 8% as of January 2022)

Maximum loan amount: $5 million

Repayment Terms: Working capital loans have a repayment period of up to 10 years, while 25 years for commercial real estate loans

Credit Score Required: 680

Downpayment: Needs 10% to 20% down payment (could be higher for startups)

Collateral: Requires collateral but not necessarily fully collateralized

Personal Guarantee: Required

Origination: 0.5% to 3.5%

SBA Guarantee Fee: Up to 3.75%

Other Requirements: No history of bankruptcies, foreclosures, or tax liens in the past

USE OF LOAN PROCEEDS

• Working capital
• Equipment purchases
• Refinance debt
• Buy a business or franchise
• Buy commercial real estate
• Leasehold improvements

1.1 SBA EXPRESS LOAN

Loans under $350,000 are eligible for the SBA 7(a) Express loan, which has a processing time of 36 hours. The SBA’s guarantee percentage will only be 50% because of the fast turnaround time. The term of the revolving line of credit is up to seven years and can be extended by an additional period at the time of application.

1.2 SBA ADVANTAGE LOAN

The SBA has a new program to help your company access capital: the Community Advantage Loans. These loans assist businesses in underprivileged areas gain access to financing. Low-income borrowers who do not qualify for standard SBA 7(a) loans because of inadequate revenues, insufficient collateral, low personal credit score, or other factors can apply for this program.

HOW TO APPLY FOR AN SBA 7 (A) LOAN

It’s a time-consuming and challenging procedure to apply for an SBA loan. Before applying for an SBA loan, it’s essential to check if you qualify and the lender you choose is experienced working with SBA.

The timeline for receiving an SBA loan is often 90 days or more before approval and funding; however, the process might be sooner because SBA preferred lenders can quickly approve and finance loans.

2. SBA 504 LOANS

The CDC/SBA 504 loan program, run by the Small Business Administration (SBA), assists small companies that want to acquire or construct an owner-occupied commercial property.

The program connects two lenders to finance these projects: a bank or conventional lender and a community development corporation (CDC). The CDC usually provides a loan of 40% to 65%, with the borrower making a down payment of up to 20%.

Interest Rate: 10-year: 2.7%, fixed, fixed; 20-year: 2.9%, fixed; 25-year: 3.1%, fixed

Maximum loan amount: $5 million

Repayment Terms: 10, 20, or 25 years

Credit Score Required: 680

SBA Guarantee Fee: 0.5%

Downpayment: At least 10% of the total cost of the project

Other Requirements: No history of bankruptcies, foreclosures., or tax liens in the past

USE OF LOAN PROCEEDS

• Owner-occupied commercial real estate purchase
• Construction or renovation
• Acquisition of other fixed assets

HOW TO APPLY FOR SBA 504 LOAN

The procedure for SBA 504 loans is comparable to that of SBA 7(a) loans regarding the amount of paperwork and time required to receive funding. Furthermore, you’ll be required to provide documentation regarding the property you’re funding.

3. SBA CAPLINES LOAN PROGRAM

The SBA’s Capital Access Program Lines (SBA CAPLines) program offers four lines of credit options with a maximum lend amount of $5 million to assist small businesses to meet their short-term and cyclical working capital needs.

The SBA’s CapLines are ideal for firms that need a revolving line of credit to make regular payments or plan for unanticipated expenditures.

Interest Rate: 5.50% to 8.00% (Prime plus 2.25% to 4.75%)

Origination Fee: 0.5% to 3.5%

Loan Packaging Fee: $2000 to $4000

SBA Guarantee Fee: Up to 3.75%

Maximum loan amount: $5 million

Repayment Terms: 10 years for seasonal, working capital, and working CAPLines; 5 years for builder CAPLines

Credit Score Required: 680

Other Requirements: No history of bankruptcies, foreclosures, or tax liens in the past

USE OF LOAN PROCEEDS

• Assist in the management of short-term or seasonal working capital requirements
• Purchase or fulfill contracts
• On an eligible project, you may do the construction or significant improvements.

HOW TO APPLY FOR AN SBA CAPLINE CREDIT

Obtaining an SBA line of credit through the CAPLine program is similar to an SBA 7(a) loan. Participating lenders in the SBA 7(a) program, such as banks and credit unions, will likely join the CAPLines program.

For example, a well-qualified borrower or one with the potential to generate a lot of new clientele for a bank may be able to get an SBA CapitalLines line of credit from a lender. However, a regular SBA 7(a) loan or a CDC/SBA 504 loan bind the CAPLines loan.

4. SBA EXPORT LOANS

The Small Business Administration (SBA) offers export loans of up to $5 million to assist small American businesses in expanding their export operations, entering new foreign markets, and engaging in international trade. These loans are available to companies that operate primarily in foreign markets and develop their processes in those areas.

INTEREST RATES:

• SBA Export Express: 7.75% to 9.75%
• SBA Export Working Capital: 6% to 10%
• International Trade: 7.50% to 10.00%

LOAN AMOUNTS:

• Up to $500,000 for SBA Export Express
• Up to $5 million for SBA Export Working Capital
• Up to $5 million International Trade

REPAYMENT TERMS:

• SBA Export Express: Up to 7 years for a line of credit; 10 to 25 years for a term loan
• SBA Export Working Capital: Up to 2-3 years
• International Trade: Up to 10 to 25 years

Credit Score Required: 680

USE OF LOAN PROCEEDS

You can use it to start or expand a small company’s exporting and foreign trade transactions.

HOW TO APPLY FOR AN SBA EXPORT LOAN

Most SBA-approved 7(a) lenders will qualify you for an Export Loan. Finding a suitable lender is an essential aspect of the application procedure.

5. SBA MICROLOAN PROGRAM

The Small Business Administration’s Microloan program gives nonprofit intermediaries loans up to $50,000 and then lends money directly to small for-profit firms and nonprofit childcare facilities.

The Small Business Administration does not make any assurances regarding the loans funded through the SBA Microloan program. Microloans have terms of up to six years, and the average loan amount is roughly $13,000.

Interest Rate: 6%-9%

Origination Fee: 0.5% to 3.5%

Maximum loan amount: Up to $50,000

Repayment Terms: Up to 6 years

Credit Score Required: 640

Collateral: Others will be required

Personal Guarantee: Required

USE OF LOAN PROCEEDS

• You can use it to start or grow a small business
• It is not possible to refinance the debt or acquire a property using it

HOW TO APPLY FOR AN SBA MICROLOAN

Working with an SBA-approved intermediary is necessary to apply for a Microloan from the SBA. SBA Microloans are smaller than conventional SBA loans, and approval and funding can take 90 days or more.

6. SBA DISASTER LOANS

The SBA provides disaster loans to individuals and businesses hurt by a declared physical or economic calamity. Each disaster loan has its purpose, and you may apply for several types of loans at the same time to best meet your requirements.

TYPES OF SBA DISASTER LOAN

ECONOMIC INJURY DISASTER LOANS

It is a type of loan that assists eligible firms that suffered severe economic damage due to a disaster and cannot meet their usual operational expenses.

MILITARY RESERVIST ECONOMIC INJURY LOANS

It is a type of loan that assists firms that lose an essential worker due to being called up for active military service and the loss of the employee, which causes them to be unable to meet basic operational costs.

BUSINESS PHYSICAL DISASTER LOANS

Loans for low-interest, long-term financing help businesses recover from a disaster declaration that they have been affected by property loss or damage and are not under insurance.

Interest Rate:

• Economic Injury Disaster Loans – 2.75% to 3.75%
• Military Reservists Economic Injury Loans – 4%
• Business Physical Disaster Loans – 4% to 8%

Origination Fee: 0.5% to 3.5%

Maximum loan amount: Up to $2 million

Repayment Terms: Up to 30 years

Credit Score Required: At least 575 for a $500,000 loan and 625 for $500,000 above

Collateral:

• More than $25,000 for Economic Injury Disaster and Business Physical Disaster Loans
• More than $50,000 for Military Reservist Economic Injury Loans

USE OF LOAN PROCEEDS

• To repair or replace affected properties
• Working capital
• Operating expenses

CONCLUSION

A business loan is a valuable resource for small businesses more than personal loans because it can increase cash flow but can be challenging to qualify. By understanding the different types of SBA loans available, you can avoid paying too high interest, increase your chances of being approved, and get the financing you need to grow your business.