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Updated on Wednesday, December 19, 2018
Starting a new company or growing an existing business costs money, and you’ll probably need to borrow funds to help you along the way. Loans from the U.S. Small Business Administration (SBA) are among the most popular and desirable financing options for small business owners. SBA loans typically have competitive terms and interest rates, and businesses that do not qualify for traditional business loans may be approved for SBA loans. Because these loans are in high demand, the application process can be strenuous. Before you get started on an application, we’ll help you understand the top loan options from the SBA and where to find them.
What is the SBA?
The SBA was created in 1953 to protect the interests of small-business owners and help them start and grow their entities. The SBA serves business owners in the U.S., Puerto Rico, U.S. Virgin Islands and Guam.
The SBA provides resources to guide new entrepreneurs through each step of launching a business, from making a plan to registering their businesses and managing day-to-day operations. The SBA has several funding programs to assist small-business owners in need of capital. These programs offer business loans, investment capital, disaster assistance, surety bonds and grants.
Rather than lending money directly, the SBA works with lending partners to issue loans to small businesses. These partners could include banks, community development organizations and microlending institutions. The SBA guarantees loans and reduces the risk for lenders, which makes it easier for small-business owners to be approved for financing.
To be eligible for an SBA loan, you must operate a for-profit business in the U.S. or its territories and you must have invested your own time or money into the business. The SBA also considers your business purpose, location, size, ability to repay and your personal character. You must have exhausted all other financing options before applying for SBA loans.
3 types of SBA loan programs
Three SBA programs are the 7(a) loan program, the 504 loan program and the microloan program. These loans range from small to large and can be used for a variety of business purposes. The SBA also offers export assistance loans, short-term and working capital loans. An SBA-approved lender can make sure you apply for the right loan for your business needs.
SBA loan programs at a glance
|SBA Loan Type||Loan Amount||Term||Interest Rates||Fees||Best For|
|7(a) loan||Up to $5 million||Up to 25 years||Maximum of 12.81% for fixed-rate loans; maximum of the prime rate* plus 4.75% for variable-rate loans||Guarantee fee of 0.25% to 3.75% of loan amount||Startup costs, business expansion or machinery, furniture or supply purchases|
|504 loan||Up to $5.5 million||10 to 25 years||Fixed rate determined when loan is issued, though typically lower than 7(a) rates||About 5% of loan amount in fees||Real estate or equipment purchases|
|Microloan||Up to $50,000||6 years||6.5%-9%; the average in fiscal year 2017 was 7.5%||No guarantee fee, but borrowers may be charged application and origination fees up to 2% of the loan||Low-income, minority, veteran and women entrepreneurs|
* Prime rate based on the current market interest rate.
7(a) loan program
The SBA’s most popular program is the 7(a) loan program. For small-business owners, 7(a) loans can cover the purchase of new property, machinery, furniture or supplies. You could also use a 7(a) loan to pay for startup costs or refinance existing debt. Before applying for a 7(a), you must be able to prove you have used all other sources of capital, including your personal assets.
The 7(a) loan program offers lower down payments and more flexibility than other financing options. Most 7(a) loans require monthly payments of combined principal and interest. Fixed-rate 7(a) loans would require the same payment each month because the interest rate would remain constant. Variable-rate 7(a) loans would require a different payment amount each month as the interest rate changes.
504/CDC loan program
The SBA’s 504 loan, also called a Certified Development Company loan, helps small-business owners expand through real estate and equipment purchases. You could use loan funds to buy land, existing buildings, long-term machinery or new facilities. But 504/CDC loans cannot be used to fund working capital or inventory, or to consolidate or refinance debt. You also cannot use the funds to invest in rental real estate.
Similar to a 7(a) loan, you must have used all other financial resources, including personal funds, before applying for a 504/CDC loan. To be eligible, your business must be worth less than $15 million and you must have a net income no higher than $5 million after taxes for the two years before applying. You must also be able to repay the loan on time using the projected cash flow of your business.
SBA microloans are smaller than average business loans, usually amounting to about $13,000. The SBA microloan program provides funding to nonprofit microlenders who then issue loans to women, low-income, veteran and minority business owners. Each microlender has its own lending and credit requirements, but applicants would generally be required to provide collateral, a personal guarantee and possibly complete a training program.
Microloans can be used to fund working capital, inventory purchases, furniture, machinery or equipment. You cannot use a microloan to pay off existing debt or to purchase real estate. The amount of your loan, your planned use for the funds and your business needs would determine the repayment terms on your microloan.
Top SBA lenders
Top 7(a) lenders
If you’re looking for an SBA loan, you may want to apply for a 7(a) loan, as it’s the most popular offering from the SBA. You would need to submit an application at an SBA-approved lender in your area. Here are the 10 most active SBA 7(a) lenders, per the most recent available data:
1. Live Oak Banking Co.
Approval amount: $1.27 billion
Approval count: 858
2. Wells Fargo Bank, National Association
Approval amount: $1.20 billion
Approval count: 3,898
3. The Huntington National Bank
Approval amount: $826.28 million
Approval count: 4,628
4. JPMorgan Chase Bank, National Association
Approval amount: $605.07 million
Approval count: 2,604
5. Newtek Small Business Finance Inc.
Approval amount: $559.21 million
Approval count: 767
6. Byline Bank
Approval amount: $513.65 million
Approval count: 454
7. Celtic Bank Corp.
Approval amount: $421.43 million
Approval count: 1,213
8. Compass Bank
Approval amount: $357.78 million
Approval count: 821
9. First Bank
Approval amount: $357.46 million
Approval count: 332
10. U.S. Bank, National Association
Approval amount: $351.06 million
Approval count: 2,286
Top 504/CDC lenders
If you need funding to make a large real estate or equipment purchase, a 504/CDC loan may be your best bet. Here are the 10 most active 504/CDC lenders*:
1. CDC Small Business Finance Corp.
Approval amount: $298.93 million
Approval count: 250
2. Mortgage Capital Development Corp.
Approval amount: $238.23 million
Approval count: 213
3. Empire State Certified Development Corp.
Approval amount: $213.63 million
Approval count: 204
4. Florida First Capital Finance Corp.
Approval amount: $191.69 million
Approval count: 201
5. Florida Business Development Corp.
Approval amount: $158.59 million
Approval count: 192
6. Mountain West Small Business Finance
Approval amount: $146.01 million
Approval count: 175
7. Business Finance Capital
Approval amount: $125.92 million
Approval count: 116
8. California Statewide Certified Development Corp.
Approval amount: $120.17 million
Approval count: 119
9. Small Business Growth Corp.
Approval amount: $108.23 million
Approval count: 168
10. Colorado Lending Source Ltd.
Approval amount: $98.21 million
Approval count: 114
*As of Aug. 31, 2018
The bottom line
Business owners typically covet SBA loans because they offer longer terms and lower interest rates than other term loans. Because the SBA backs the lenders issuing SBA loans, borrowers can often receive favorable conditions.
But the application process could be lengthy, and it could take 60 to 90 days before you receive funding. Application requirements could include collateral, a down payment and a minimum personal credit score of 680. The SBA also prefers profitable businesses that have been operating for at least two years and generate at least $50,000 in annual revenue.
If you’ve got the time and patience to withstand the underwriting process, an SBA loan could be a suitable option to fund your business needs. Be sure to check with an SBA-approved lender to make sure you apply for the right product to fit your business. Take into consideration the projects and purchases you plan to fund with your loan, as that would impact which financing option would be best for you.