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SBA Loans: Four Facts You Should Know

Some might consider Small Business Administration (SBA) loans the Rodney Dangerfield of loans. Perceived as cumbersome to apply for and harder to get, SBA loans just don’t seem to get the respect they deserve. But the reality is that SBA loans can be a viable option for businesses looking to expand or finance current operations. Here are four facts you should know about SBA loans.

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Surprise: SBA Doesn’t Make Loans — It Guarantees Them
The SBA was created in 1953 as an independent agency of the federal government to help businesses obtain debt capital by providing an additional government guarantee for the lender. It’s technically incorrect to say that the SBA makes loans. The loans are actually made through lenders, with the SBA backing them, and thus lessening the lenders’ risk in the event of default. While other lenders can originate them, SBA-preferred lenders can approve and fund SBA loans more quickly than lenders who don’t carry the preferred lender designation.

It’s Not Difficult to Qualify for an SBA Loan
You’ll need to meet the SBA’s definitions of a small business, demonstrate profitable operations, and show that your business has a sound purpose. As with other loan applications, your personal and credit history will be important. You’ll need to show a solid credit history, cash flow, collateral, and no delinquencies, among other factors.

SBA-guaranteed loans also come with restrictions based on the number of employees or gross revenue, depending on your industry code. If your business is classified with a wholesale or manufacturing industry code, you can qualify for an SBA loan if you meet the following criteria:

  • Wholesale Sector — You have no more than 100 employees.
  • Manufacturing — You have no more than 500 employees.

If your business is classified with a construction or retail/service industry code, you can qualify for an SBA loan if you meet the following criteria:

  • Construction Sector — Your average annual sales (over three years) are not more than $28 million.
  • Retail/Service — Your average annual sales (over three years) are not more than $29 million.

The SBA Guarantees a Wide Range of Loans
You’ll want to do your research, because the SBA offers guarantees on a wide range of business loan types, from loans for exporting, to ones specifically for veterans. Two of the most popular are the 7A loan program and the 504 loan program.

  • The 7A program offers loans for most general business needs, including inventory, equipment, accounts receivable, working capital, business acquisition, and real estate. They can be amortized for up to 25 years for real estate and equipment, and seven years for working capital (based on the useful life of the collateral).
  • The 504 loan program provides long-term, fixed-rate financing for real estate acquisition and/or construction, along with long-term equipment financing.

SBA loans are available for up to $5 million.

You Can Streamline the Process
As with conventional loans, you will be asked to provide detailed documentation with your loan application. If you choose to work with an SBA-preferred lender, you’ll get help streamlining and speeding up the process. A preferred lender knows the ins and outs of eligibility requirements and will be able to guide you to the best loan structure for your situation. Preferred lenders typically can close loans quickly (sometimes within 30-45 days, depending on the loan’s purpose and your timeliness in providing the necessary information).