Complete Guide to the SBA’s Most Popular Loan Programs

There's a popular saying that loan is like rocket fuel. It’s what gives your company the power needed to continue on to the next leg of your journey. But since the 2008 recession, many local banks have raised their lending standards, leading to a near-total freeze on small business lending. As a result, it can be quite tricky
to qualify for bank loans through the traditional channels. However, all is not doomed. Thanks to the Small Business Administration (SBA), there are some great funding options out there for you and your business.

While the SBA does not directly finance companies, they do partner with banks and other financial institutions, guaranteeing a portion of certain loans. This helps lower risk and incentivizes banks to invest in some of the amazing small businesses around the nation.

The SBA offers a few different loan programs, each of which is designed for small businesses with various needs and circumstances. Thinking of pursuing one for your own business? Read on to determine which loan program may be the right fit for you:

7(A) program

As the most popular and the most flexible of the SBA’s loan programs, 7(a) is a great option for almost any entrepreneur looking to start a new business venture or expand a current one. Loans for working capital are available for up to $5 million in short or long terms.

One of the best things about 7(a) loans is that they can be used for almost any business purpose — construction, renovation, purchasing new or used equipment, real estate… you name it. You can use 7(a) loan funds simply to have an adjustable infusion of working capital, and in some cases, even to refinance existing debt.

Interest rates for 7(a) loans are determined by each individual lender, but are still subject to SBA guidelines and maximums. Keep in mind that you may also be responsible for additional fees, like a guarantee fee, so be sure to ask your lender about any extra charges.

Microloan program

Business owners in search of small amounts of funding can be particularly vulnerable to traditional loan standards, as banks typically don’t service loans under $50,000. Luckily, there’s a fix for this.
To address the challenge, the SBA created the microloans program, which helps entrepreneurs obtain funding between $3,000 and $50,000 from approved intermediary lenders. These lenders are typically non-profit, community-based organizations with experience in lending, management, and technical assistance for small business owners.

Each lender has their own credit requirements, but because these loans are for those who have little to no borrowing experience, you’ll often be asked to put up some sort of collateral to secure it. Also keep in mind that microloans must be repaid within six years, and they typically come with higher interest rates than the ones you’ll find with a few of the other SBA programs.

CDC/504 loan program

Similar to the 7(a) program, CDC/504 is another choice for businesses seeking up to $5 million in funding. Unlike the 7(a) program, however, this one is geared specifically for small business owners seeking funds to make a single large purchase of fixed assets.

For example, this may include purchasing equipment, machinery, land, or buildings. This program could also be a fit if you’re looking to fund a major construction or renovation project. Keep in mind that CDC/504 loans cannot be used for general working capital, or to purchase inventory.

Borrowers through the CDC/504 program are expected to pay 10 percent of project costs out of pocket, which can be a challenge for some business owners. However, those who qualify will benefit from the monthly payments and extended terms of up to 10 to 20 years.

Disaster loans

While not suited for every situation, disaster loans are a good option to be aware of in case your business is ever impacted by a natural disaster.

Disaster loans cover losses not fully mitigated by insurance, making up to $2 million in funding available for those who qualify. Disaster loan borrowers may use this money to repair or replace any machinery, real property, fixtures, leasehold improvements, equipment, or inventory. And with interest rates in the range of just four to eight percent and terms of up to 30 years, these loans can be a lifesaver for businesses in need.
Remember that even though the SBA makes it easier for small businesses to obtain bank financing, it doesn’t mean everyone will qualify. Businesses seeking a loan will need approval from both the lender and the SBA, who will look into your personal and business credit history, your company’s financial history, and more.

Because of these two steps, applying for an SBA loan can sometimes be a lengthy process with tons of paperwork. But with the right preparation, you can do it. And once you make it through, you’ll be rewarded with the tools you need to turn your business into a smashing success.

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