What are SBA Loans?

By Turtle Credit Team

SBA stands for “Small Business Association” the SBA helps out small businesses in various areas such as planning, launching, managing, and growing the business. Financing small businesses are one area where SBA, in particular, has been very instrumental over the years.

SBA has got a range of loan products aimed at small businesses, to help them grow and meet their needs. It must be understood that SBA is not a lender, so the loans are not directly funded by SBA. Instead, SBA provides the guarantee for the loan to commercial lenders. The funds are disbursed by commercial lenders to borrowers. Since these loans are backed by SBA, they carry more flexible terms and lower rates than similar loans offered by conventional banks. In this article, we will explore SBA eligibility, SBA rates, and types of SBA loans.

The mechanism for SBA loans

As mentioned above, SBA provides the guarantee for loans, which are then released by commercial lenders such as banks and credit unions to borrowers. Therefore, the borrowers start their application process for an SBA loan by either applying directly to an approved lender or filling out the application form on the SBA site.

Application and Eligibility

SBA loans are aimed at businesses looking to grow, and for a business going through financial difficulties that may not be eligible for a loan. However, SBA has not stated any particular eligibility requirement for borrowers. The terms stated on the SBA site only require the borrower to have a business that is

Operating for profit
Have sufficient owner equity to invest
Must have used alternative financing options before seeking SBA assistance

The borrower must have documents such as personal and business tax returns, financial statements, and other relevant documents ready at the time of submitting the application. It is better to have all the required documents available to prevent any delays in the application process.

The application process for an SBA loan takes anywhere between 4 weeks to a couple of months. This time period also depends on the lender chosen and the amount of funding required.

Terms and Rates

As mentioned above, SBA provides a guarantee to lenders for the loans that are given out to eligible borrowers. The extent of this guarantee depends on the value of the loan. SBA has created two tiers for the guarantee that they provide

For loans up to $150,000 the maximum guarantee that is provided is up to 85%
For loans greater than $150,000 the maximum guarantee that is provided is up to 75%

This is the guarantee that SBA provides to the lenders so that if the borrower defaults on payment, SBA will back the loan up to the guaranteed amount. The exact amount of guarantee depends on various factors such as the borrower’s loan amount and creditworthiness. Apart from the lenders’ guarantee, SBA also asks for an unconditional personal guarantee from the borrowers having 20% or more stake in the business. Thus, in the case of any default, the borrowers’ personal assets can be used to pay back the loan amount.

SBA is not a direct lender, so it cannot set the interest rates implicit in the loans, SBA however, overwatches their guaranteed lenders and has created ceilings within which the lending institutions can charge the interest rates. Therefore, SBA loans have interest rates calculated by adding the lenders spread or markup over the prime rate.

The following table lists the rates that can be expected on SBA7(a) loans.

Loan Size	Maturity less than 7 years	Maturity over 7 years	Fixed Rates
Less than $25,000	Base rate plus 4.25% which comes roughly around 7.5%	Base rate plus 4.75% which comes roughly around 8%	8%
$25,000 to $50,000	Base rate plus 3.25% which comes roughly around 6.5%	Base rate plus 3.75% which comes roughly around 7%	7%
More than $50,000	Base rate plus 2.25% which comes roughly around 5.5%	Base rate plus 2.75% which comes roughly around 6%	6%
More than $250,000	–	–	5%

SBA loans can be both fixed and variable in nature, once again, the rates are determined by negotiations between the lender and the borrower, and SBA does not have any input in the whole process. The ceilings have been created by SBA to keep the SBA loans cheaper than conventional banks’ loans.

The maturity period of the loan depends on the purpose of the loan. For instance, the maximum maturity of loans taken out to finance non-current assets is based on the expected useful life of the non-current asset in question, but the term is limited to 25 years. It has been seen that usually, real estate loans have terms of 25 years, whereas equipment and working capital finance loans have terms of 10 years. The terms and low rates make SBA loans very flexible and attractive for small businesses compared to conventional banks’ loans.

Types of SBA loans

There are different types of SBA loans, the most popularly known one is the SBA 7(a) loan program, which takes up the bulk of funding. The following table lists the SBA loans and their particulars.

Loan Program	Funding Limit	Lender	Purpose
SBA 7(a)	Up to $5 million	Commercial Banks Credit Unions Specialized Lenders	Working Capital Finance Equipment Finance Capital Expansion
SBA 504	Up to $5.5 million	Commercial Banks Certified Development Companies	Long term funding for non-current assets such as property, plant, and equipment
Micro-Loan	Up to $50,000	Community-based non-profit organizations	Working Capital Finance Inventory Finance

SBA 7(a) loan is the most popular and flagship loan program of SBA because it covers small businesses’ growth needs and is easily accessible for businesses with good financial fundamentals.

To conclude this, SBA loans offer a flexible and low-cost funding alternative to small businesses that do not want to go for the more expensive funding options offered by the commercial banks. The only downside to SBA loans is the amount of time it takes for a loan to be approved. It is therefore advised to apply for the loan well in advance.

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