SBA Loans 101

  • By The Able Team
  • Published 12/16/2016

If you are a small business owner, you’ll probably find yourself wanting low-cost capital to help your company grow, buy new equipment, or expand into a new market. The problem is most small businesses can’t qualify for a traditional bank loan, at least not for the amount they want. This conundrum is particularly true for small businesses without valuable collateral.

But the Small Business Administration could help. Using loan guarantees, this government agency helps lenders provide low-interest loans to entrepreneurs, including those business owners who can’t get a traditional bank loan. Because of that, SBA loans are one of the few large business loan options available to small businesses.

Here are the types of loans that the SBA currently offers to small-business owners, along with details of their uses, interest rates, terms and the amounts you can borrow.

1. SBA 7(A) Loan Program

The most popular small-business loan program offered by the SBA is the 7(a) program. This program provides large amounts of capital — up to $5 million — at interest rates of between 6 and 13 percent. The loans also come with guarantee fees that depend on the size of the loan, as well as other customary fees.

You can use an SBA 7(a) loan as a source of working capital; to purchase new equipment, supplies, or real estate; or for acquisition or debt refinancing. Here’s a full list of the basic uses for 7(a) loan proceeds.

You can repay a 7(a) loan over seven years if you use it as working capital. The repayment term is longer for equipment loans (10 years) and for real estate (25 years).

To get an SBA 7(a) loan, you need to meet the eligibility criteria set out by the SBA. You can learn more about whether you qualify for an SBA loan here, and how do so here.

2. SBA 504 Loan Program

The SBA 504 loan program can only be used to purchase fixed assets, such as equipment or real estate. Although the allowed uses for these loans are quite restrictive, they come with some of the lowest interest rates you are likely to find for a business loan, typically around 5 or 6 percent.

Why so low? Because they’re highly secured by the value of the assets purchased with the loan funds, which means you can typically get much lower APRs.

You can borrow any amount up to $5 million, with a fee of 3 percent, over a term of 10 to 20 years.

3. SBA Microloan Program

If you’re trying to get a new business off the ground, the SBA microloan program could be right for you. This program won’t lend you the huge amounts available through some other SBA programs, but there are no fees, which can make this type of loan very attractive to startups operating on tight budgets.

You can borrow up to $50,000 through the microloan program, but the average loan is only $13,000. Interest rates range from 8 to 13 percent and the term of the loan can be up to six years. You can’t use these loans for purchasing real estate or refinancing debt.

4. SBA Disaster Loan Program

Recovering from a natural or economic disaster can be tough. If you have nowhere else to turn, the Small Business Administration can lend you the money you need to replace equipment, inventory, real estate or other assets that were destroyed in a disaster.

Depending on the value of the assets you need to replace, you may be able to borrow up to $2 million at an interest rate of 4 to 8 percent and repay the money over a term of around 30 years.

Note that you can’t use a disaster loan to make improvements to your business, only to return it to the state it was in before the disaster. For more information about the allowed uses of SBA disaster loans, take a look at these guidelines provided by the SBA.

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