According to the US Small Business Administration (SBA), 99.7 percent of all US companies with employees are small businesses. That’s 28 million companies out there creating jobs and fueling our economy. The good news is that there are financial loan programs out there to help these companies become a success.
If you’re a small business owner, the time is right to familiarize yourself with the many small business loan options that are available. Check out this helpful article to learn more about SBA loan requirements. Then you’ll know if an SBA loan is right for you.
What’s a Small Business?
Small businesses are independently owned companies that have limited number of employees and revenue, depending on their industry. Small business enterprises can include corporations or partnerships. You can check the U.S. Census Bureau industry Classification System to see if you qualify as a “small business” in your industry.
The SBA defines some businesses as “small business” if it has no more than 250 employees. These companies usually report a maximum of $750,000 in revenues.
Companies in other industries fit this definition if they have no more than 1,500 workers. These enterprises usually report a maximum of $38.5 million in annual revenues.
What is an SBA Loan?
An SBA Loan is a low interest, long-term, granted to small businesses through the Small Business Administration. The SBA is a federal government agency that works with pre-approved lenders to provide a loan to a small business.
The government doesn’t directly lend money to a small business. Instead, they set guidelines for banks and micro-lending institutions to offer loans to small companies. The SBA guarantees the loans will be repaid which reduces any risk to these lenders.
You can read more here on the various situations and circumstances small businesses can find themselves in when negotiating with the SBA.
History of the SBA
The US Congress created the SBA in 1953. Their mission is to help, advise and protect small business interests. This law also created requirements that guarantee that small businesses would receive a fair share of government contracts and surplus property.
By 1954, the SBA created new loan programs to help small businesses who were victims of natural disasters. In 1958, the Small Business Investment Company (SBIC) program was created to provide investment funds to small, venture capital investment companies. The SBIC program was also designed to help small investment firms with expertise and management assistance.
The SBA now offers a wide variety of programs tailored to promote small business enterprises. Some of these programs include loans specifically for women, veteran and minority-owned businesses. They also provide guidance to small businesses that work with international trade.
Types of SBA Loans
There are many types of loans that small companies can leverage to suit their individual needs. These loans include:
The 7(a) Loan Program
The 7(a) loan program can help with a number of business essentials. These needs might include buying equipment. 7(a) loans can also be used to creating revolving funds that a company can draw from regardless of fiscal year.
SBA 7(a) loans are granted for no more than $2 million per company. The SBA loan guarantee for a 7(a) loan is around 75 percent or no more than $1.5 million.
The CDC/504 Loan Program
This loan program offers small enterprises a long-term, fixed-rate for major purchases like real estate or machinery. Small companies can use 504 loans to buy or renovate buildings. These funds can’t be used as working capital.
SBA 504 loans are granted for no more than $5.5 million. The SBA loan guarantee for a 504 loan is around 40 percent, with the commercial lender and borrower funding the remaining balance. These loans have a 10-20 year maturity.
The Microloan program is designed for companies that need to borrow smaller, or “micro-level” amounts for business needs. Microloans are no higher than $350,000 per company.
Some non-profit organizations, like child care centers, can apply for microloans to help with start-up expenses. Average microloans are usually in the neighborhood of $13,000.
SBA Loan Requirements
SBA loan qualifications will vary based on which type of loan you apply for. SBA loan criteria will also vary between lenders. There are, however, some basic criteria that apply to all of them:
- Your business is officially recorded as a for-profit entity;
- Your business fits the SBA’s small business definition based on your industry;
- Your business is based in and operates within the US;
- You have contributed your own time and money to the company;
- You have been operating for a sufficient amount of time;
- You have good personal credit with a FICO score over 650;
- Your business is able to demonstrate strong revenues and profitability;
- You have an acceptable debt service coverage ration comparing your cash flow against your debts;
- You have a business plan that shows your three to five-year financial projections.
- You have collateral and other assets that you can use as security to qualify for a loan.
Are you ready to take your business to the next level? If so, it’s best to do your homework to see which SBA loan program is a perfect match for you.
How much of a loan will you need and what’s it for? That will dictate which loan will suit your company’s needs best.
Pull your records together to meet the minimum SBA loan requirements. Identify the collateral you have to match the loan. Obtain your credit scores to demonstrate you are a low credit risk.
For more helpful information on business loans, be sure to check out our website. We’re here to help you make sure your business is a success.