The 2020 pandemic has greatly affected small businesses across America. As entrepreneurs prepare for the 2020 holiday season, they may need assistance for inventory, marketing, and more. The Small Business Administration (SBA) can help during these trying times.
Congress created the SBA in 1953 to "aid, counsel, assist and protect, insofar as is possible, the interests of small business concerns.”
Today, SBA loan programs are more important than ever to prop up small businesses in all areas. Specialized programs have been put in place for women, minorities, and veterans. SBA also provides loans to victims of natural disasters like flooding and wildfires along with specialized help in international trade. The government agency is looking out for business owners during the 2020 pandemic.
While the words “government agency” might make you balk, the Small Business Administration’s low-cost loan programs are helping small business owners across America reach their entrepreneurial dreams. Here’s what’s available, who qualifies, and how they work.
The CDC/504 Loan Program
This program is described by the SBA as a win-win-win for the small business, the community, and participating lenders. The CDC/504 Certified Development Company Loan program conserves your working capital by requiring only a 10 percent borrower contribution. If you do not qualify for conventional financing, the SBA-backed 504 loan may be right for you.
Certified Development Companies (CDCs) are nonprofit corporations that promote economic development within their communities.
The SBA authorizes CDCs to provide financing to small businesses with the help of
third-party lenders (typically banks) 504 loans.
Maximum SBA loan amount:
The maximum SBA loan amount for 504 SBA loans is capped at $5 million. Certain eligible energy-efficient or manufacturing projects may qualify for more than one 504 loan up to $5.5 million each.
Below-market interest rates are fixed for the life of the loan. The SBA sets the maximum interest banks can charge on CDC/504 loans. As of August 2020, 20 and 25-year interest rates at 2.214% and 2.269%, respectively.
A low down payment (10 percent in most cases) conserves your working capital.
10, 20 or 25 year terms. The longer the terms, the lower monthly payments will be.
Use of proceeds
The CDC/504 Loan Program: How It Works
The 504 Loan Program was created to give small businesses low cost funds for expansion or modernization.
Typically, up to 50% of project costs are funded by a lender backed by the SBA. CDCs (Community Development Corporations) typically fund up to 40% of the project cost. The final 10% is a cash down payment expected to come from the borrower.
Who are 504 Loans For?
A 504 SBA loan might be a good fit for small business owners interested in purchasing a commercial real estate property and if their unique business circumstances fit with the public policy goals of your local CDC.
Minimum 504 Loan Requirements
Your business must be for profit, you’ll need to present a comprehensive business plan and relevant management expertise is required. Additionally, you must meet the following conditions:
- Operate your business in the United States or its territories.
- The business net worth must be less than 15 million dollars
- Your business must have an average net income less than $5 million
- You must have the ability to repay the loan on time based on cash flow
The Microloan Program
The Microloan Program is for very small businesses, including start-ups and provides loans of up to $50,000. (Although SmartBiz Loans does not offer microloans, we do offer SBA 7(a) loans from $30,000.)
Borrowers can apply for up to $50,000 with the average loan size funded by the SBA just $14,215 in 2016.
Microloan Interest Rates
Microloans have interest rates between 8%-13% and must be fixed rate and fixed term with regularly scheduled payments.
Generally, intermediaries require some type of collateral as well as the personal guarantee of the business owner.
Loan repayment terms vary according to several factors:
- Loan amount
- Planned use of funds
- Requirements determined by the intermediary lender
- Needs of the small business borrower
- The maximum repayment term allowed for an SBA microloan is six years.
Use of Proceeds
Proceeds from an SBA Microloan can be used for most business expenses such as:
- Working capital
- Inventory or supplies
- Furniture or fixtures
- Machinery or equipment
You cannot use a SBA microloan to refinance existing debt or to purchase real estate. If you need to refinance debt or purchase real estate, you should consider other SBA loan programs, such as a 7(a) commercial real estate loan.
How It Works
An SBA Microloan is a loan of up to $50,000 from an intermediary nonprofit to the owner of a small business or startup. The money originates from the SBA, which initially lends the money at a discounted rate to the intermediary. In other words, there’s a multi-step process.
Who Are Microloans For?
These small loans help small business owners who need less than $50,000 to strengthen and grow their business.
Check with your individual lender as requirements can vary. In general:
- Credit score of at least 640 is required.
- The business owner will need to either put up collateral or sign a personal guarantee.
SBA 7(a) loans
An SBA 7(a) loan is generally known as the “gold standard” in small business funding because of low rates, long terms, and very low monthly payments.
Banks in the SmartBiz network fund SBA 7(a) loans from $30,000 - $5 million
Interest rates are variable and range from 4.75% - 7.00%
A lien on business assets is required for SBA loans, but there is no minimum requirement for the value of those assets.
The term for an SBA 7(a) working capital loan is 10 years with low monthly payments. The term for an SBA 7(a) commercial real estate loan for purchase or refinance is 25 years with no balloon payment.
Use of proceeds
A big draw of SBA 7(a) loans is the wide use of proceeds. These include:
- Debt refinancing
- Working capital (includes operational expenses, marketing, hiring, etc. SBA loans can be used to fund new equipment purchases as well)
SBA Commercial Real Estate loans from $500,000 – $5 million from banks in the SmartBiz network can be used for the purchase or refinance of commercial real estate that is 51% owner-occupied.
How it works
Here’s the application process for SBA 7(a) loans from banks in the SmartBiz network”
We get to know you and your business
- Complete one online loan application through our advanced technology platform.
- No faxing or printing required.
- Discover if you’re pre-qualified in about 5 minutes with no impact on your credit score.*
We help you understand your options
- Once you pre-qualify, you are assigned to a team of dedicated professionals who help you every step of the way.
- Your team helps answer your questions and walks you through the loan application process.
- Receive recommendations for the best financing options based on your unique business credit and financial profile.
We match you with the best lender
- Using our sophisticated technology platform and experience, we match you with the banks or non-bank lenders most likely to approve your loan application.
- Your dedicated SmartBiz team helps you stay on track throughout the financing process.
- About 90% of the applications referred to our trusted network are approved.
We stay with you
- We’re here to help you finance your business today and tomorrow.
- SmartBiz Advisor*, our free online tool, helps you make sure your business is well positioned to apply for future financing when you need it.
- Use SmartBiz Advisor to monitor the overall financial health of your business and get a Loan Ready Score with actionable insights to help improve your standing when needed.
Who SBA 7(a) loans are for
SBA loans are good for established small business owners wanting to shore up finances or expand with new inventory, additional products, or another location.
7(a) loan requirements
Following are requirement from banks in the SmartBiz network. Note that a business plan is not required.
- 2+ years in business
- Business owners must be U.S. citizens or legal permanent residents
- Business owners’ personal credit score above 650 (675 for SBA 7(a) commercial real estate loans)
- Business and personal cash flow to service all debt payments demonstrated by tax returns and interim financial data
- No bankruptcies or foreclosures in the last 3 years
- No outstanding tax liens
- No delinquencies and/or default on government loans
- Real estate must be majority owner-occupied
SBA Loans: The Bottom Line
From keeping up with your seasonal payroll increase to getting money to grow your business, there are a lot of good reasons to get financing. Small businesses serve as the backbone of the U.S. economy and SBA loans provide the low cost funds that hard working entrepreneurs deserve.
*We conduct a soft credit pull that will not affect your credit score. However, in processing your loan application, the lenders with whom we work will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and happens after your application is in the funding process and matched with a lender who is likely to fund your loan.
** The information provided through SmartBiz Advisor, including the Loan Ready Score, is for educational purposes only. SmartBiz Advisor is not a financial or legal advisor as defined under federal or state law. Use of this information is not a replacement for personal, professional advice or assistance regarding your finances or credit history.