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%. The SBA’s Microloan product also carries no fees.
Economic Injury And Disaster Loans (EIDL)
This product was originally 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.
Prior to 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.
Also, if you apply for an EIDL under $200,000, you can be approved without a personal guarantee.