What is the SBA and how does it help small business owners? Learn about the government agency and the programs it offers to entrepreneurs across the U.S.
The Small Business Administration (SBA) is a US government agency operating with the mission of helping entrepreneurs grow and develop their small businesses. It was created on July 30, 1953 by President Eisenhower with the signing of the Small Business Act.
The SBA’s primary objective is “To maintain and strengthen the Nation’s economy by enabling the establishment and viability of small businesses, and by assisting in economic recovery of communities after disasters.”
How does the SBA fulfill its mission? It specializes in research, advocacy, counseling, and educational programs across the nation. With regional and district offices, the SBA provides small business owners with the opportunity to gain valuable knowledge.
In addition, the SBA’s Office of Government Contracting works with federal agencies to ensure that at least 23 percent of all prime government contracts are awarded to small businesses, including small disadvantaged businesses, women-owned small businesses, service-disabled veteran-owned small businesses, and small businesses that are located in historically underutilized business zones.
The most prominent assistance program that the SBA offers is a guarantee on loans made through banks, credit unions, and other lenders who partner with the Agency. By securing a portion of the loan in the case of the borrower defaulting, the lenders are presented with less risk so they are more likely to offer a more affordable product. Since 2009, the SBA has backed over $150 billion through its various programs.
SBA Guaranteed Loans
One of the main goals of the SBA is to give small businesses easier access to the capital they can use to grow. They achieve this by guaranteeing a large enough percentage of the loan amount that lenders see more benefit in making smaller loans to fairly new businesses. Here’s how the different programs break down.
For loan amounts in the $5000 to $5 million range, the SBA’s “flagship” product is the 7(a) loan. With thousands of partnered lenders, the total loan volume surpassed $25 billion in the 2017 fiscal year.
This division of the 7(a) program is designed for smaller loan amounts (up to $50,000) with a lower SBA guarantee, in exchange for less documentation requirements and a faster application process.
These loans are typically made through regional Certified Development Companies (CDCs) for purchases of commercial real estate or large business equipment. A financial institution provides 50%, the CDC finances 40%, and the business owner is responsible for 10% of the loan amount.
CAPLines of Credit
In addition to loans, the SBA also offers lines of credit that are intended to help small businesses meet short-term and seasonal operating needs.
Disaster Loan Program
Through this assistance program, the SBA helps small businesses rebuild or repair damaged property to pre-disaster conditions with long-term, low-cost loans. This is the only funding option financed entirely by the federal government.
SBA 7(a) Loans
Let’s explore SBA 7(a) loans in some more detail: how they work, what they cost, and where you can obtain them.
The SBA guarantees up to 85% of loans for $150,000 or less and up to 75% for loans over $150,000. The maximum loan repayment terms are 10 years for equipment purchases, working capital, and debt refinancing, and 25 years for commercial real estate purchases.
Maximum interest rates are determined by the SBA. They’re based on the Prime Rate, which is set by the Federal Reserve on a quarterly basis, plus an additional spread that lenders can charge. For loans over $50,000, the maximum markup above the Prime Rate is 2.75%. Between $25,000 and $50,000, it’s Prime Rate + 3.75%.
Because the SBA guarantees a significant percentage of the loan, they charge a fee paid directly to the SBA that the borrower is responsible for. For 7(a) loans of $150,000 or less, the SBA fee is 2% of the guaranteed portion of the loan OR 1.7% of the loan balance.* Above that, the fee amounts to 3% of the guaranteed portion (75%) of the loan OR 2.25% of loan balance. At $700,001 the fees rises to 3.5% of the guaranteed portion of the loan up to $1,000,000, plus 3.75% of the guaranteed portion over $1,000,000.
Eligibility and Restrictions
The SBA sets certain basic eligibility requirements on its 7(a) loan program from the outset. In order to be considered for the loan, the applicant must:
- Own an operating business generating non-passive revenue
- Be organized for profit
- Be located in the United States
- Be considered small according to the SBA’s Size Standards
- Demonstrate a need for the desired credit that is not available elsewhere on reasonable terms
Otherwise, there are specific criteria that would make the applicant ineligible. For example, some of the excluded industries are:
- Life insurance
- Religious teaching
- Primarily political and lobbying activities
- Oil wildcatting
- Mortgage servicing
- Real estate development
- Bail bond
- Pawn or private clubs
In terms of the uses of proceeds, they must be for a business purpose only, whether that be refinancing debt, investing in commercial real estate, purchasing equipment, or boosting working capital. Beyond this, lenders have their own specific requirements.
At SmartBiz, our proprietary technology takes into account all of these requirements, both from the SBA and from our bank partners. We match your specific application with the lender who’s most likely to be the best fit for your business needs. Learn more about SmartBiz eligibility requirements by visiting our Frequently Asked Questions. You’ll find information about minimum credit scores, time in business, public records, and more.
In addition, you can find out whether you’re SBA loan ready by signing up for SmartBiz Advisor. This online educational tool will act as your Intelligent CFO – no cost involved. Learn more about SmartBiz Advisor here.
* The information provided through SmartBiz Advisor, including the Loan Ready Score, is for educational purposes and is not the same as scores used by lenders for credit decisions. 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.