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Intro To SBA Loans
SBA Loans are easily the most coveted business loans on the market. No other type of business loan can compete with their interest rates, terms, and borrowing limits. However, these advantages make SBA Loans particularly challenging to qualify for. As if the requirements weren’t challenging enough, the application process often catches business owners off guard due to the various misconceptions surrounding SBA Loans. To earn approval, you must first understand why SBA Loans are so different and similar to the traditional Business Term Loan.
In this guide, we’ll answer the following questions and more:
What Is An SBA Loan?
SBA stands for “Small Business Administration.” The Small Business Administration is a government agency, not a business lender. Applications for SBA Loans are not sent directly to the SBA. Instead, you must apply through one of three types of financial institutions: commercial banks, credit unions, or alternative business financing facilitators like United Capital Source. These loans help small business owners just like you start or grow businesses.
What makes an SBA Loan different than all other business loans is that the SBA guarantees up to 85% of loans up to $150,000 and up to 75% of loans over that amount and up to $500,000. This means that even if the borrower were to default on the loan, the financial institution would still make back 85% or 75% of the borrowed funds.
The SBA, however, does not approve or reject applications. That’s all up to the financial institution, each of which has its own criteria for approval. Once the institution approves an application, it submits its own application requesting the SBA’s guarantee.
How Do SBA Loans Work?
The 7(a) Loan
This is the most popular type of SBA Loan. It can be used for almost any purpose: hiring more people, purchasing new equipment, paying off existing debts, ordering bulk inventory, etc. You can access up to $5M, with repayment terms of up to 25 years, depending on the type of investment. Interest rates range from 5% – 10%. There is a 1.7% fee for loans up to $150K and a 2.25% fee for loans greater than that amount. This fee might be presented as part of the total cost of the loan. There may also be an origination fee or loan packaging fee.
7(a) Loans cannot be used for certain purposes. These purposes include: purchasing a building that will be leased to another business, reimbursing a business owner for a previous investment in the business, and repaying debts owed to the US government.
The CDC 504 Loan
This loan can only be used to purchase major assets, like heavy-duty machinery and commercial real estate. In most cases, the assets being finances are used for collateral.
You can access up to $5.5M, with repayment terms of up to 20 years. Interest rates range from 5% – 6%. Total fees usually add up to 3% of the loan amount, and you’ll have to make a down payment of approximately 10%.
What makes this loan unique is that you must specify the use of the funds. This will determine your borrowing limit, as well as whether or not you are approved at all.
For example, if you use the loan to create jobs, you must create one job for every $65,000 borrowed. Manufacturing businesses must create one job for every $100,000 borrowed. Your borrowing limit will be $5 million.
If you use the loan for something related to public policy (i.e., business district revitalization, minority business development, expansion of women-owned businesses), your borrowing limit is $5.5 million.
Lastly, if you own a small manufacturing business, you must create or retain at least one job per $100,000 guaranteed by the SBA. Your loan must also be used for purposes related to public policy. If you meet these criteria, your borrowing limit will be $4 million.
The SBA Microloan
This product only gets its name from the size of the average SBA Loan. You can access up to $50K, with repayment terms of up to 6 years. Interest rates range from 8% – 13%. SBA’s Microloan product also carries no fees.
Economic Injury And Disaster Loans (EIDL)
This product was created for businesses that suffered physical damage from natural disasters, like floods or tornadoes.
You can borrow up to $2 million, your interest rate will be 3.75%, and the maximum term is 30 years. The first monthly payment will be deferred a full year from the date of the promissory note. There are no fees, including prepayment penalties, and collateral is not required.
Unlike most other SBA Loans, EIDLs cannot be accessed through banks and other third-party lenders. Instead, you must apply directly through the SBA’s website.
Before the CARES Act, eligible businesses had to prove that they were unable to obtain loans or credit from other sources and did not have enough cash or credit to cover operational expenses on their own. This requirement has since been waived. Thus, someone with an existing credit line could still theoretically be approved for an EIDL.
While EIDLs have traditionally only been available for registered entities (LLCs, corporations), they can now be accessed by sole proprietors, tribal businesses, cooperatives, and even independent contractors. One requirement that hasn’t changed is that EIDLs are only available for companies with up to 500 employees.
If you apply for an EIDL under $200,000, you can be approved without a personal guarantee.
SBA Loans – Research, Facts & Reports
#1. In 2019, the SBA approved 100,495 loans
#2. In 2019, these loans totaled 32.7 billion
#3. More than 50% of Americans either own or work for a small business. Small businesses create about 66% of new jobs in the U.S.annually.
#4. Research suggests that 70 percent of small businesses want loans of less than $250,000.
#5. On the financing front, credit demand held steady in 2018 (the most recent year for which data is available), with 43% of firms seeking external funds for their businesses.
#6. In the 2019 fiscal year, the Congressional Research Service reports the average SBA loan amount was $446,487.
What Are The Advantages of SBA Loans?
Much of the appeal for SBA Loans come from their incomparably low interest rates. For many borrowers, interest is the most important factor they look for when shopping for business loans. Business Term Loans from banks carry low rates as well, but rarely as low as 5%. These two products are much cheaper than newer or alternative options. Short-term financing products, for example, can have APRs as high as 99%.
SBA Loans also carry very high borrowing limits and very long terms. If you use the loan for the right purpose, it can revolutionize your business. These are the kind of loans business owners pursue when they have significant investments on the horizon. Not only can you access the capital to afford your investment, but the low interest and low terms prevent you from damaging cash flow in the process. With more expensive products, you might have to cut expenses or put other plans on hold to make monthly payments. With SBA Loans, on the other hand, you’ll probably have no trouble making payments while covering operational costs. This also makes SBA Loans the ideal choice for businesses looking to maximize their ROI.
What Are The Disadvantages of SBA Loans?
Anyone who has shopped for business loans knows that convenience comes with a cost. Since SBA Loans are as convenient and advantageous as it gets, they must, therefore, carry the strictest requirements.
Aspiring borrowers might assume that since the SBA guarantees a large percentage of the loan, SBA Loans should logistically be easier to access than Business Term Loans. From a rational standpoint, this should be true. But 85% is not 100%. The financial institution still stands to lose some money in the event of a default. Thus, they are only slightly more generous with SBA Loan applications. If you don’t think you’ll be approved for a traditional Business Term Loan, your chances of being approved for an SBA Loan are slim.
And remember, each institution creates its criteria for approval. This is another significant disadvantage of SBA Loans: the lack of concrete, universal requirements. Individual institutions might favor specific industries or types of businesses. For example, banks are notoriously biased towards established companies with massive bank balances.
Aspiring borrowers must be warned that applying for SBA Loans requires tremendous patience. Significant paperwork is often involved, and it could be at least three months before you learn whether or not you’ve been approved. Applicants might have to meet with multiple institutions before being accepted and may even be told to come back in a year when their finances have improved. The point is, SBA Loans usually aren’t as simple as filing one application to one institution and then getting your money a few days later.
- Lowest interest rates
- Longest repayment terms
- Use for a variety of business services
- Lengthy approval process
- Large amount of paperwork
- Might require collateral
- Good-excellent credit required
SBA Loans Compared To Other Products
|Loan types||Max Amounts||Rates||Speed|
|Merchant Cash Advance||$7.5k – $1m||Starting at 1.09||1-2 business days|
|SBA Loan||$50k-$10m||Starting at 5%||3-5 weeks|
|Business Term Loan||$10k to $5m||Starting at 5%||1-3 business days|
|Business Line of Credit||$10k to $250k||Starting at 8%||1-3 business days|
|Receivables/Invoice Factoring||$50k-$10m||Starting at 5.8%||1-2 weeks|
|Equipment Financing||Up to $5m per piece||Starting at 5%||3-10 business days|
|Revenue Based Business Loans||$10K – $5m||Starting at 9%||1-3 business days|
Who Qualifies For SBA Loans?
For most alternative small business loan products, an applicant only has to have been in business for a minimum of 6 months and provide documentation of steady sales. However, the SBA has more stringent rules.
Business lenders often rely on business credit scores as part of the credit approval process. According to CNBC, the SBA now also uses the Small Business Scoring Service or FICO SBSS to qualify borrowers for SBA loans.
The likelihood of a business making their payments on time helps create the scores, which range from 0 to 300. Lenders usually prefer scores in the 140 to 180 range.
To apply for an SBA loan, you and your business must meet the following requirements:
- Corporation or LLC with at least 10 employees
- In business for at least 2 years
- Annual gross sales of at least $360,000
- US citizenship or legal permanent residency
- No bankruptcies or foreclosures within the past 3 years
- No defaults on government-backed loans
- No outstanding tax liens
- No outstanding collection accounts
Approved businesses generally met the following criteria:
How To Apply For SBA Loans:
United Capital Source has partnerships with selected SBA lenders. This allows us to approve and distribute loans in as little as three weeks. Here’s how to get started:
Step 1: Make Sure You Qualify
If you’re looking for long terms and the lowest possible interest rate, make sure you fulfill the general requirements with flying colors. Your credit score should be well over 650-700, and your cash flow should be highly consistent month-to-month. Depending on your borrowing amount and
Also, since SBA Loans are designed for large-scale investments, you should be able to support your desired investment with sufficient data. This is the only product where the funds’ purpose plays a considerable role, regardless of where you apply.
Step 2: Gather Your Documents
SBA Loans require the following documents and information:
- Driver’s License
- Business license or certificate
- Voided Business Check (for business bank account information)
- Bank Statements
- Credit Report/Statement of Personal Credit History
- Business Tax Returns
- Credit Card Processing Statements
- Personal Tax Returns – 3 Years
- Business Tax Returns – 3 Years
- Business Plan (Not in all cases)
- Personal Financial Statement
- List of Real Estate Owned
- Debt Schedule/Loan/Rent/Lease Documentation
- Deeds/Title/Ownership documentation for any collateral/Security
- Current Profit & Loss Statements and Balance Sheet Year-to-Date
- A/R and A/P Reports
- United Capital Source 1 Page Application
Step 3: Fill Out Application
You can begin the application process by calling us or filling out our one-page online application. Either way, you’ll be asked to enter the information from the previous section along with your desired funding amount.
Step 4: Speak to a Representative
Once you apply, a representative will reach out to you to explain the repayment structure, rates, and terms of your available options. This way, you won’t have to worry about any surprises or hidden fees during repayment.
Step 5: Receive Approval
SBA Loans through our network generally take 3-5 weeks to process. Once you’re approved and your file is closed, funds should appear in your bank account in a few business days.
Your SBA Loan Gets Set Up – Now What?
Your business loan isn’t just a way to get financing for your business. It’s also an excellent opportunity to start building (or improving) your credit.
Regardless of the type of business loan you get, make all of your required payments on time and in full. If you get a business credit line or another form of revolving credit, keep your balance below the credit limit.
Consistently making your business financing payments on time and in full will positively impact your credit. And that means preferred rates and terms when you next need business financing.
What If I’m Declined For An SBA Loan?
Due to the many requirements for approval, applications can get declined for a host of reasons. This also makes it easy for requirements to go overlooked. Thus, you should only apply if you are 100% certain about your institution’s requirements. You’ll probably have to contact the institution directly to obtain this information.
Thankfully, getting declined for an SBA Loan doesn’t mean you won’t qualify for other advantageous options. These products might not have the lowest rates or the highest borrowing amounts on the market. But in most cases, business growth takes a lot longer than expected. You might have to start with a standard Business Term Loan or Business Line of Credit. Creating a solid track record of timely payments can boost your credit score and prove your ability to make regular payments without damaging cash flow.
If you still have trouble qualifying for other options, we may recommend alternative business financing tools like business credit cards or even personal loans. Both are significantly easier to qualify for than business loans and can be accessed through UCS. We often find that poor credit is what’s stopping business owners from obtaining financing. In this case, you should consider our credit repair services. We can help you boost your credit score by eliminating the issues keeping your score down.
People Also Ask:
How Long Does SBA Loan Approval Take?
This depends on where you apply. At UCS, our network can approve loans in as little as 3-5 weeks. On the other hand, banks can take at least three months to determine whether or not you’ve been approved. The lengthy approval process is yet another sacrifice you have to make in exchange for the various advantages of SBA Loans.
Is It Hard To Get Approved For SBA Loans?
Though each institution has its own criteria for approval, the short answer is yes. Since SBA loans are the most advantageous business loan, it only makes sense that they carry the steepest requirements. While other products require excellent credit and high annual revenue, only SBA Loans are exclusively reserved for established businesses. This is also the only product where the intended purpose of the funds can significantly impact your application.
How Much Collateral Is Needed For SBA Loans?
For 7(@) loans greater than $350,000, your collateral may need to match the value of your borrowing amount. You’ll have to contact each institution to learn their collateral policies since some institutions do not accept certain forms of collateral.
Can I Get an SBA Loan with Bad Credit?
SBA Loans are not available to borrowers with bad credit. However, if you can provide collateral and fulfill the other requirements with flying colors, you may be able to access an SBA Loan with good credit instead of the typical requirement of excellent credit.
Aspiring borrowers who cannot meet these criteria should consider other products like Working Capital Loans or Business Term Loans. Paying off these loans on time could dramatically raise your credit score and help you qualify for the highly convenient borrowing amounts, interest rates, and terms associated with SBA Loans.
What Do SBA Loans Cost?
SBA loans have some of the lowest costs available, which is why so many small business owners seek them. Like any other business loan, your costs will vary depending on your credit score, your loan length, etc. United Capital Source clients often get better rates on business loans than they would from other lenders. Our lender network’s SBA loans start at just 5%. Most lenders start their SBA loans at more than 7%. The lower costs available through UCS come from the “marketplace” atmosphere that we described above.
Lenders offer these loans at Prime rate plus a percentage, which depends on the program.
While SBA program loans are known for their low-interest rates, they also come with a guarantee fee, the fee the SBA charges the lender to guarantee the loan. And the lender then passes that fee on to the borrower. Also, some lenders could charge an additional administration fee.
Fees and Rates:
Are you wondering where to get the best SBA rates? First, get an idea of how much this loan could cost. Here’s a quick overview of what you could pay for SBA-backed credit. Keep in mind that your credit score and the term or length of your loan impacts the interest rate you get offered.
7(a) Program Loan Fees and Rates:
- Interest rate of Prime Rate + 4.25% for loans less than $25K (for loans with terms less than 7 years – term loans greater than 7 years come with a rate of Prime + 4.75%), Prime Rate + 3.25% for loans between $25,001 and $50,000, and Prime + 2.75% for loans $50,001 and up
- Guarantee fee of 1.7% for loans up to $150K, 2.25% for loans over $150K
- A guarantee fee could be rolled into your loan
Microloan Program Fees and Rates:
These community-administered loans don’t come with guarantee fees. Interest rates vary, yet in 2019 the average rate for an SBA Microloan was 7.5%. However, keep in mind the short repayment terms of under six years.
CDC/504 Fees and Rates:
- Fees of approximately 3% of the loan – could be rolled into your loan
- Interest Rates – the rates for CDC/504 loans depend on several factors and require complex calculations. Talk to your lender to get an idea of your rate.
SBA Disaster Loan Fees and Rates:
According to the most current fact sheet, SBA disaster loans for businesses come with low rates of 3.58% and repayment terms of up to 30 years.
SBA Quick Reference Chart:
|GROSS LOAN SIZE||FEES (SEE NOTE 1)||NOTES|
|Loans of $150,000 or less (See Note 2)||2% of the guaranteed portion Lender is authorized to retain 25% of the fee.||Maturities that extend 12 months|
|SBA Express loans to qualified Veterans & Spouses up to $350,000||Zero (When the program is zero subsidy.)|
|$150,001 to $700,000||3% of guaranteed portion.|
|$700,001 to $5,000,000 (See Note 3)||3.5% of guaranteed portion up to $1,000,000 Plus 3.75% of guaranteed portion over $1,000,000|
|Short Term Loans – up to $5 million||0.25% of the guaranteed portion||Maturities of 12 months or less|
|SBA On-Going Guaranty Fee||A percentage of the outstanding balance of the guaranteed portion. The fee is set at the time of approval.||Paid by Lender and cannot be passed on to the Borrower.|
|1st Note: SBA specifies the amount of certain fees each fiscal year for all loans approved during that year. 2nd Note: For example, the guaranty fee on a $100,000 loan with an 85% guaranty would be 2% of $85,000 or $1,700, of which the Lender may return $425. 3rd Note: For example, the guaranty fee on a $5,000,000 loan with a 75% guaranty ($3.75 million guaranteed portion) would be 3.5% of $1,000,000 ($35,000) PLUS 3.75% of $2,750,000 ($103,125), which totals $138,125.|