Learn about three core SBA loan programs — and how they might meet your business needs.

Business owners want to know about opportunities that can help them succeed. The U.S. Small Business Administration (SBA) offers several such opportunities through their loan programs.

The range of SBA loan possibilities might seem confusing, especially if you’ve never applied for an SBA loan before. Here, we’ll explain how SBA loans differ from traditional business loans, demystify some of the most popular types of SBA loans, and explore what each type of loan is meant for. And yes, you can apply for an SBA loan even if you have other business loans and lines of credit.

SBA loans vs. other business loans

SBA loans are a lot like conventional business loans. You apply for both kinds through banks and other lending institutions, and you qualify by showing that your business is creditworthy. Also, just like conventional business loans, the funds can typically be used to build working capital, finance a project, purchase a building, etc.

The difference here is in the details: Because SBA loans are backed by the government, they allow lenders to be more flexible about features like down payments, repayment terms, and collateral.

Take the SBA’s online quiz to make sure your business meets the requirements for receiving an SBA loan.

Most popular SBA loans

Most SBA-backed loans fall into three main categories: 7(a) loans, 504 loans, and microloans. Here’s what to know about each.

7(a) loans: This is the SBA’s most popular program.

  • What they’re for: Can be used for most business needs, such as buying property or equipment. They can also be used to fund business start-up, working capital, and business acquisition — sometimes all in one loan.
  • Terms and considerations:
    • Most are 10 years. When loans are used to fund real estate construction or acquisition, terms can be up to 25 years.
    • Because these loans are guaranteed by the government, they can offer more flexibility than a conventional bank loan. For example, SBA loans may have a lower down payment (10% is typically required) while conventional loans usually require substantial down payments.

Keep in mind that the SBA Express program provides a streamlined approval process and an accelerated turnaround time for SBA review.

504 loans: These loans offer long-term, fixed-rate financing for major fixed assets that are likely to promote growth or lead to job creation.

  • What they’re for: Typically used for the purchase or construction of large buildings, the expansion of existing operations, or for big equipment or machinery purchases. The key piece is that the projects may have an impact on the local economy and may potentially create jobs.
  • Terms and considerations:
    • Because the loans are backed by the SBA, 504 loans offer long terms (up to 25 years), low down payments, and fixed rates.
    • The 504 loan program is managed by Certified Development Companies (CDCs), which are non-profit organizations regulated by the SBA that focus on community economic development. This program actually requires two loans: one from the CDC (which covers 40% of the total amount of the loan) and another loan from a financial institution (which covers an additional 50% of the total amount of the loan). Keep in mind that businesses will need to cover the remaining 10% of the total amount of the loan. Any business in almost any industry looking for funds to help with growth that could lead to economic development or job creation should contact a CDC about 504 loans. You can find a CDC near you through the SBA website.

Microloans: A microloan is a smaller loan meant to help businesses with start-up or other costs.

  • What they’re for: Typically used for the purchase of machinery, equipment, supplies, and other start-up costs. Microloans can’t be used to purchase real estate or pay existing debt.
  • Terms and considerations:
    • Microloans often offer lower interest rates than businesses are likely to get from online lenders, with better financing options and repayment terms of up to seven years.
    • The average size of these loans is typically less than $50,000; the average microloan is $14,434.

Know what you want to accomplish. To get started in any loan application process — including determining which type of loan is right for you — you need a clear goal, along with good credit and some working capital.

What kind of loan is right for you?

The SBA supports a wide range of loan options for small business owners — including small microloans to get a business off the ground, 504 loans that can support economic development and increase employment, and 7(a) loans that can serve a broad range of business needs. Selecting the one that’s right for your business depends on your needs, your desired timeline, and what you hope to accomplish.

So, what’s your next step? To talk to a banker who has experience in business credit, especially SBA lending, to ensure you get a full picture of your options. An experienced banker can work with you to match your business goals with the right loan program. From there, you can move on to the application process — and securing the financing you need.

Source: SBA