SBA Loans are a tried-and-true method of franchise financing. They’re created to help entrepreneurs by offering low-interest rates and no balloon payments with a guarantee from the SBA.
What is an SBA Loan?
An SBA loan is a small-business loan offered by banks and online lenders which are partly guaranteed by the government. Here’s how it works. You apply for an Small Business Association (SBA) loan through a lending institution like a bank or credit union. The lender applies to the SBA for a loan guarantee. If you default on your SBA loan, the government pays the lender the guaranteed amount. In turn, the Small Business Association requires your unconditional, personal guarantee that the loan will be paid. In fact, SBA loans usually require unlimited personal guarantees from anyone who owns more than 20% of the business. Keep in mind, any personal guarantee you make may be partially or fully collateralized.
A common misconception is that the Small Business Association makes direct loans to entrepreneurs to kickstart their business(es). This is not the case. Instead, the SBA makes a guarantee to banks and lenders for the money they lend to small businesses.
SBA loans can alleviate the risk associated with lending money to business owners and entrepreneurs who may not qualify for traditional loans. They tend to have longer repayment terms than traditional bank loans. Other benefits of SBA loans for borrowers are many and include:
- Low-interest rates
- Low repayment terms
- The ability to be combined with other financing
What do I need to qualify for an SBA loan?
- A credit score of 640 or above
- Access to collateral
- A 30% equity injection, 20% for an existing franchise
- Solid income
- Three years of applicable work experience
Types of SBA Loans
The financing amounts range anywhere from $25k to $5 million, and there are several options, including the following:
- The 7(a) Loan Program: Can be used for a wide range of purposes such as working capital, revolving funds, equipment purchasing, and more.
- Export Assistance Loans: Includes Export Express, which can be used for any purpose that increases a company’s ability to export, such as marketing, travel, short-term lines of credit, and capital expenditures.
- SBA Express Program: A part of the 7(a) loan program, and for businesses with financing needs up to $350k. This program can be used for a variety of business activities, and no collateral is required for loans up to $25k.
- SBA Microloans: These are loans that are given in smaller increments, providing up to $50K in small business funding. You do not receive these loans directly from the SBA, but rather, from a local lender, which is typically a nonprofit organization. Uses for this loan include working capital, inventory, and equipment, however, you cannot use a microloan to pay existing debts or purchase real estate. Also, collateral may be required.
- SBA CAPLines: Designed to meet the short-term working capital needs of a business. This type of financing is best for small businesses that sell their goods and/or services on credit. The loan amount is based on need, and the maximum amount given is $5M. For eligibility, applicants must qualify under the standard 7(a) requirements and must be able to produce collateral.
- SBA 504 Program: Offers small businesses long-term, fixed-rate financing to acquire fixed assets for expansion or modernization. They are made available through Certified Development Companies (CDCs), which are the SBA’s community-based partners. The maximum loan amount provided is $5M, and the best part is; these loans have longer repayment periods than most.
Compared to personal loans, many SBA loans are a breeze. The turnaround time for a personal loan is within the same range as the SBA loans listed above. However, unlike most SBA loans, collateral is usually required for personal loans.
The average time to be approved for an SBA loan is anywhere from 45 to 90 days. However, in some cases, it can exceed that.
Before applying for an SBA loan, make sure you have the following documents available and ready to present:
- SBA Form 413, Personal Finance Statement
- SBA Form 1919, Borrower Information
- SBA Form 912, Statement of Personal History
- Three years of federal personal tax returns
- Management Resume
- Personal ID
- Business plan
- Financial projections
- Information on affiliated businesses
For an existing business, you will need to also provide the following in addition to the above:
- Three years of federal business tax returns
- Profit and loss balance sheet
- Letter of intent or purchase agreement
Looking for expert advice on applying for an SBA Loan? Our trusted financing partner’s team of experts can connect you to approved lenders in their network who are the most likely to fund your loan.
Fast Financing Options: Portfolio Loans and Low-Doc SBA Loans