Small Business Administrator (SBA) loan is a term familiar to any small business owner in the United States. Though it is known to many business owners for giving out small business loans, this is a common misconception.

In reality, the SBA is an arm of the U.S. government that does not give out business loans itself but enables other lenders to increase the frequency and amount of loans granted to borrowers by guaranteeing 75% to 85% of the loan. This allows the lenders to lose very little of their original amount even if the borrower defaults that is why they offer lower interest rates on loans guaranteed by SBA.

. If you are looking to apply for a SBA loan to finance your business then you need to familiarize yourself with the details so that you have better chances of having your loan approved.

What are the main types of SBA loan?

SBA offers four main types of loans that each have their own set of eligibility criteria and cater to specific set of businesses depending on their size, industry, and loan requirements. Let us take a look at each type.

1. SBA 7(a) Loan program

SBA 7(a) loans are the way to go if you are a small business with limited funds that is looking to expand operations, purchase equipment, or require some extra capital 2. This loan is offered up to $5 million and is generally considered more flexible than other types of SBA loans. It is easy to decide how to choose a small business loan for your business when you know the requirements beforehand.

Here is what you need to qualify for a SBA 7(a) loan program:

  • You must be considered a small business within your own industry. This means your business needs to have less than 500 employees but this number varies from industry to industry.
  • Your time in business must be at least 2 years.
  • You must be operating within the United States, independently and for profit.
  • You must show that your business has the capability of repaying the loan along with the interest. This is accomplished by exhibiting a detailed business plan that shows financial projections for the next 3 to 5 years.
  • There must be no bankruptcy or foreclosure charges against your business in the last 3 years.3
  • It is also necessary to have a good credit score to qualify for SBA loans; usually a score of 640+ is considered sufficient.

2. CDC 504 Loan Program

The Certified Development Company (CDC) loan is appropriate if you are looking to buy major fixed assets for your business such as building, land, or equipment. This loan also has an upper limit of $5million just like the SBA 7(a) loan program but differs in terms of interest rates and lenders. The interest rate depends on the time period for which the loan is taken.

It is important to note here that the Annual Percentage Rate (APR) is not the same as an interest rate in the loan, since the interest rate only determines how much interest will be paid on each repayment where as APR is the year round cost of borrowing the funds that includes all loan fees.

To get a CDC 504 loan, small businesses should have a stable average net income. Usually, it’s a requirement that the average net income should be less than about $5 million. This is after two years of taxes.

The best way to apply for any SBA loan is through an online lending platform, which makes the loan application process much easier. Orumfy for example provides you with all the necessary information regarding SBA loans and their requirements. You can then access authentic and trusted lenders through the online lending platform and complete the process without any hassle.

3. SBA Microloan Programs

Microloans are designed for newly established or growing businesses that need very small amounts of loans to keep up with administrative expenses, buying equipment and furniture or for inventory and supplies. The maximum microloan at the SBA is $50,000 and application and credit decisions are made at the local level 5. Microloans have longer repayment terms that extend up to six years. This is a considerably longer repayment term as compared to other SBA loans due to the small scale of businesses that apply for them. The interest rates usually vary from industry to industry but are generally from 8% to 13%.

4. Disaster Loan Programs

These SBA loans are for businesses that suffer losses due to declared natural disasters. Disaster loan programs have lower interest rates. Compared to all other SBA loans, they are offered to businesses of all sizes, even if they are private not-for profit organizations. These loans also have a faster rate of financing since they are always required under emergency conditions, brought on by unforeseen circumstances.

SBA loans remain the best way for businesses all across the United States to get small business loans that will satisfy all their business needs. You can apply online or in person for SBA loans however online loan applications are processed faster.

Published by Joel Borthwick