You’ve probably heard by now that obtaining a loan through the U.S. Small Business Administration is one of the most affordable avenues available to fund your business. Because SBA loans are protected under maximum interest rates and risk guarantees, they are among the lowest cost loan products on the market.
But with terms like 7(a), Community Advantage, and others constantly thrown around, how do you sort through all the jargon to find the SBA-backed funding you need?
To help you navigate this new and complicated world, we’re taking a look at each one of the SBA’s loan programs one by one.
But first, let’s clear up one common misconception. Contrary to what the commonly used term “SBA loan” suggests, the U.S. Small Business Administration itself does not directly lend money to businesses. Instead, the SBA’s role is to “guaranty” a percentage of loans provided through SBA-approved intermediary lenders, reducing the lender’s risk and in turn incentivizing them to offer loans to small businesses. So while the SBA is certainly involved in the approval process for loans through its various programs, it’s these lenders who will ultimately conduct most of the underwriting process, provide the borrowed funds, and administer the loans.
With all that said, here’s our complete list of all programs currently available through the U.S. Small Business Administration.
The 7(a) Loan Program
The vast majority of small businesses that borrow money through the U.S. Small Business Administration do so through what’s called the 7(a) Loan Program. Through this very generalized term loan program, borrowers can obtain up to $5 million for nearly any business purpose. Loans for general working capital or the purchase of equipment, fixtures, or inventory are available for five- to 10-year terms, while loans for real estate or construction projects may be available for up to 25-year terms.
To qualify for a 7(a) loan through the SBA, you must be a for-profit business and be able to show good character, sound financial management, and a clear ability to repay the debt. Along with the benefits of improved cash flow and an up to 85 percent guaranty on the loan amount (75 percent for loans greater than $150,000), borrowers through the 7(a) loan program benefit from some of the best interest rates on the market. Under the administration’s preset limits, the absolute maximum cost of any loan through the 7(a) program is prime plus 4.75 percent—with even lower maximums for loans fitting certain conditions.
Under the larger umbrella of the 7(a) loan program, the Small Business Administration offers several related programs designed for more specialized circumstances. Before moving forward with a general SBA 7(a) loan application, consider whether your borrowing needs may be a better fit for one of these programs.
Historically, one of the major downsides of SBA loan programs, in general, has been the far longer than average turnaround time for approval. After all, for business owners who need immediate access to working capital, a weeks- or months-long underwriting process can be crippling.
The solution? SBAExpress—a streamlined 7(a) program alternative for loans up to $350,000. SBAExpress loans can be obtained as a revolving line of credit for a period of up to seven years maturity, or as a traditional term loan under the same conditions as the generalized 7(a) loan.
There are some downsides to SBAExpress: It offers only a 50 percent guaranty on the loan amount (compared with up to 85 percent on general 7(a) loans), and for loans under $50,000, the SBA’s preset maximum interest rate escalates to prime plus 6.5 percent. Yet, for business owners unwilling or unable to wait through a long underwriting process, the pros clearly outweigh the cons.
The SBA CapLines program is essentially the 7(a) program’s line of credit option. Through this program, lines of credit—including revolving lines in some cases—are available for up to $5 million for up to 10-year terms to help small businesses meet their short-term and cyclical working capital needs.
Terms for financing through the CapLines program are nearly identical to the 7(a) loan program, including the same percent of guaranty, maximum interest rate, and fees. But for borrowers who prefer the flexibility of a line of credit over a lump sum term loan, it’s an alternative worth considering.
Designed specifically for small business owners who have historically been underserved by traditional banks, SBA Community Advantage loans are a faction of the 7(a) loan program offered through over 100 local community advantage lenders around the country.
Available for loan amounts of $50,000-$250,000, these loans hold the same terms as traditional 7(a) loans with regard to maturity, percent of guaranty, and guaranty fees. However, because of the perceived higher financial risk of borrowers through the Community Advantage program, the SBA’s maximum interest rate for loans through this program is set to prime plus 6 percent—a slight increase as compared with other 7(a) loans.
Export Working Capital Program
When customers are thousands of miles away and operating on a foreign currency, maintaining strong company cash flow can prove particularly difficult. Even so, the exporting of goods is critical to the U.S. economy, meaning the SBA has special incentive to help exporters finance their businesses.
That’s exactly the purpose of the Export Working Capital Program, which offers a 90 percent guaranty on short-term working capital loans of up to $5 million for exporters. These loans carry the same guaranty fees and qualification standards as 7(a) loans but generally have a maturity of one year or less. While this is the only SBA loan program with no maximum interest rate cap, the SBA does monitor for unreasonable rates.
Think of ExportExpress as the SBAExpress version of the Export Working Capital Program. ExportExpress serves the same purpose and market as the Export Working Capital program, but also offers the same streamlined process and fast turnaround times enjoyed by SBAExpress applicants.
You can obtain an ExportExpress loan for up to $500,000 with all the same maturity terms, interest rates, and fees as you would find through the SBAExpress program. But as an added incentive, ExportExpress includes a 90 percent guaranty for loans of $350,000 or less and a 75 percent guaranty for loans greater than $350,000. This reduction of risk is a benefit to lenders and borrowers alike!
Mirroring the goals and certain terms of the Export Working Capital Program, the International Trade loan program offers term loans of up to $5 million and 25 years’ maturity for borrowers who are preparing to engage in international trade or who are adversely affected by competition from imports.
International trade loans come with a 90 percent guaranty, along with the same interest rates and guarantee fees as general loans from the 7(a) program. This long-term, low cost, and highly guaranteed form of financing is ideal for businesses looking to compete more effectively in the international marketplace.
SBA Veterans Advantage
Having already honed the skills on the battlefield that they need to succeed as business owners, active service, reserve, or National Guard; and veterans of our military have historically been some of our nation’s most successful entrepreneurs. In recent years, though, access to funding has too often held these servicemen and women back from achieving their business goals.
To solve this problem, the SBA recently added the Veterans Advantage loan to its lineup of 7(a) loan programs. This program follows all the same terms as traditional 7(a) loans, but is available only to small businesses owned and at least 51 percent controlled by veterans, active duty military in TAP, reservist, or National Guard members, or the spouses of any of these groups—or to widowed spouses of a service members or veterans who died during service.
The CDC/504 loan program
One of the most complicated financing products on the market, loans provided through the SBA’s CDC/504 program are typically used to finance the purchase major fixed assets like equipment and commercial real estate. Funding may be available for up to $5.5 million for terms of up to 20 years, but exact terms of these loans vary widely by project.
The most notable feature of CDC/504 loans is that they’re actually funded by two different entities—one being the lender; the other being an SBA-licensed Certified Development Company (CDC). Because of this complex structure, borrowers often won’t know the exact interest rate on their loan until up to 45 days after the project has funded. Given these complications, it’s easy to see why CDC/504 is the least commonly used of the SBA’s loan programs.
The Microloan program
For some entrepreneurs, just a small amount of capital has the potential to go a long way towards a business’s growth goals. Yet, from a traditional lender’s perspective, business loans for under $50,000 aren’t worth the risk or effort to fund. It’s precisely for this reason that the SBA Microloan program was created.
Under the Microloan program, borrowers seeking between $500 and $50,000 for working capital, supplies, machinery and equipment, fixtures, or similar business needs work with nonprofit intermediary lenders to obtain fixed-rate financing. Along with the funding, these nonprofit intermediaries frequently offer business mentoring or technical assistance to help borrowers achieve their business goals. Interest rates and terms are negotiable with the intermediary lender, but they typically cap at 8.5 percent APR and a maximum of six years maturity.
Clearly, the Small Business Administration has taken care to offer borrowing options for a wide variety of small business owners. While applying for a loan through one of the SBA’s can be more time consuming through other lenders, the low cost and other benefits of these tailored programs make them well worth your consideration.
Meredith Wood is the editor-in-chief at Fundera, an online marketplace for small business loans that matches business owners with the best funding providers for their business. Prior to Fundera, Meredith was the CCO at Funding Gates. She is a resident Finance Advisor on American Express OPEN Forum and an avid business writer. Her advice consistently appears on such sites as Yahoo!, Fox Business, Amex OPEN, AllBusiness, and many more.