The overwhelming majority of businesses are small businesses, according to the U.S. Small Business Administration. There are 28 million small businesses in the United States, which make up 99.7 percent of all businesses. The Small Business Administration was established in 1953 to nurture small businesses and help them grow. The SBA counsels those who are starting new businesses and helps connect them with appropriate resources. If you’re considering starting a new business, the SBA can help you get your business off the ground.
Why Are Small Businesses Important to the Economy?
Small businesses make up the majority of U.S. companies, and they also play a large role in job creation. According to Fundera, from 2009-to-2013, 60 percent of all jobs created were from small businesses. There is risk involved in starting a new business, of course. Most businesses that fail do so because of issues with cash flow. The SBA can help connect businesses with lenders so they can stay in business through those first challenging years.
What Is the Purpose of the Small Business Administration?
The SBA is an independent agency of the federal government. It was created with the purpose of strengthening the U.S. economy through helping small businesses and protecting their interests. The SBA has local offices throughout the U.S. including Puerto Rico, the U.S. Virgin Islands and Guam.
One way the SBA assists small business is by backing loans. It also helps small businesses obtain government contracts. Since its founding, the SBA has been deliberate about expanding programs to help applicants who live below the poverty level, women, minorities and veterans. They also provide special assistance to those who live in an area impacted by a natural disaster, such as a hurricane.
What Is the SBA Definition of a Small Business?
When you think of a small business, you may think of a small storefront or a mom-and-pop business. Both of these meet the definition of a small business under the SBA, but many larger businesses do as well. The exact definition of a small business varies by industry. Depending on the industry, a small business can have as many as 1,500 employees or up to $38.5 million in revenue.
For example, most agricultural businesses can have up to $750,000 in revenue and still be considered a small business. A crude petroleum and natural gas extraction company can have up to 1,250 employees, but a limestone mining operation can only have up to 750 employees. A distillery can have up to 1,000 employees, but a soft drink manufacturing company can have up to 1,250 employees. Catering companies and full-service restaurants can make up to $7.5 million.
What Are Small Business Administration Loans?
Small business administration loans are loans that you can use to start your business or to keep your business up and running. The SBA doesn’t offer loans directly. It guarantees loans by other lenders, ensuring that if you default, most of the loan will be paid back to the lender. This lowers the amount of risk to the lender, making the lender more likely to grant loans in the first place.
The SBA will guarantee up to 75 percent of loans that are more than $150,000 and up to 85 percent of loans of $150,000 or less. The maximum SBA loan guarantee amount is $3.75 million. Although SBA loans can be more challenging to get, their terms are typically better than other types of loans. The SBA limits the amount of interest that can be charged on an SBA loan. For example, for a loan over $50,000 with a term of seven years or more, the maximum interest rate that can be charged is the prime rate plus 2.75 percent.
You also have longer repayment terms with an SBA loan. The repayment term varies depending on how you plan to use the loan. If you’re using the loan to purchase real estate, you may be eligible for a term of up to 25 years. If the loan is to purchase new equipment, you may have a payment term of up to 10 years. SBA loans can be used for new funding or to refinance current loans with less-than-ideal terms.
SBA loans also often require a personal guarantee from every company owner with at least a 20 percent stake in the company. This is typically the case if your company doesn’t have enough assets to secure the loan. The reason a personal guarantee is needed is that the SBA doesn’t cover the entire loan amount. If you took an SBA loan for $5 million, for example, the SBA will only cover up to $3.75 million. You and other company owners would need to guarantee the other $1.25 million.
Understanding the Types of Small Business Administration Loans
The SBA offers several types of small business loans. The most common type of loan is a 7(a) loan. These loans can offer you up to $5 million and can be used for business equipment, real estate, refinancing or working capital. The interest rates are up to 9.75 percent, and they have liberal repayment terms. This type of loan is extremely flexible.
The CDC/504 loan allows you to purchase real estate or equipment. Since the loan program draws from two agencies (the SBA and the community development corporation), you can obtain a loan for up to $14 million. These loans have a repayment term of 10 or 20 years. If you’re purchasing real estate, your business must occupy up to 51 percent of the commercial space. The interest rates are also low and are typically less than 6 percent.
The SBA Microloan program works a bit differently. With this program, loans are limited to less than $50,000. They can be made to small businesses and nonprofit child care centers. The SBA does not guarantee these loans, and the loan terms can be up to six years, and the average loan is about $14,000. The interest rate for a microloan is from 8 percent to 13 percent, and the loan repayment terms are up to six years.
SBA disaster loans are designed to help businesses recover from natural or economic disasters. You must be able to provide proof of economic or physical damage. You may also qualify if a significant employee has been called away for active duty. You can use the loan to repair damaged property or to purchase a replacement property. You can also use the loan for working capital or to operate your business. The interest rates are typically 8 percent or lower. You may be able to obtain repayment terms of up to 30 years.
SBA export loans can help you expand your business into international markets. The loans can be up to $5 million with a repayment term of up to seven years. You can use the loan for working capital.
What Are the Requirements for an SBA Loan?
The basic requirements for an SBA loan are that your business qualifies as “small,” the business is based in the U.S. and that the business is operated for profit. You also need to have good to excellent personal credit. There are more specific requirements for each type of loan. For example, startups will need to show a solid business plan and that the company owners have extensive management and business experience.
For a 7(a) loan, you typically need a credit score of 680 or higher with no recent significant financial issues. If the loan is more than $25,000, you will also need to provide collateral. If you’re purchasing a business, real estate or equipment, you will also need to provide a down payment of at least 10 percent.
For a CDC/SBA 504 loan, you will need a credit score of at least 660. You will also need to put down at least 10 percent of the project costs and have a net worth of less than $15 million. You need to show that you will be able to repay the loan from the cash flow of the business.
For an SBA export loan, you will need a credit score of at least 660. You will also need to show that you have no recent bankruptcies, tax liens or foreclosures and you will need to provide a personal guarantee. You may also need to show that you can develop relationships with foreign markets.
If you’re applying for an SBA Microloan, you will need to have a credit score of about 640 or higher, and you will need to provide a personal guarantee. The loan intermediary will have specific requirements for the specific loan for which you are applying. An SBA disaster loan has similar requirements.
How to Apply for an SBA Loan
If you think you meet the requirements for an SBA loan, you will need to find an SBA lender. Look for an SBA preferred lender, as they have extensive experience in processing SBA loans. Once you have a lender, the lender will let you know the exact documents you need to provide. These will typically include your business financials, your personal and business tax returns, your resume and your business licenses.
You will also need to complete the loan application. This typically includes a summary, a profile of your business, information on the business owners, a breakdown of how the loan will be used and information on how your loan will be repaid. There are several SBA forms you will need to provide, including a borrower information form, a statement of personal history and a personal financial statement.
It typically takes at least a few weeks to complete the SBA loan process. It typically takes at least a few days to complete the application and at least one week for the lender to get back to you with a letter of intent. Once you have the letter of intent, you may need to provide a deposit before they begin underwriting. The underwriting process typically takes two or three weeks. If you’re approved, you will receive a commitment letter. You may need to put down a larger deposit to move forward to closing. Closing on the loan typically takes anywhere from a few days to a few weeks.
Other Ways the SBA Can Help You
Loans are just one aspect of the Small Business Administration. They offer extensive educational resources, including guidance on how to write a business plan, how to do market research and how to calculate your startup costs. They can also help you complete the steps of structuring and registering your business and obtaining the appropriate licenses and permits.
If your business is already running, the SBA can help you learn how to improve your financial management and how to hire and manage employees. They can provide advice on marketing and sales and help you prepare for emergencies. They can also help you grow your business by adding new locations or acquiring new businesses.
- U.S. Small Business Administration: Mission
- U.S. Small Business Administration: History
- Investopedia: Small Business Administration - SBA
- Nerdwallet: SBA Loans: What You Need to Know
- U.S. Small Business Administration Office of Advocacy: What's New with Small Business?
- Fundera: 17 Statistics Every Business Owner Needs to Be Well Aware Of
- Entrepreneur: 10 Critical Cash Flow Rules
- Fundera: What Is the SBA’s Definition of Small Business (And Why)?
- U.S. Small Business Administration: Table of Small Business Size Standards
- Fundera: Do SBA Loans Require a Personal Guarantee?
- FitSmallBusiness.com: SBA Loans: Types, Rates & Requirements
- FitSmallBusiness.com: How to Apply for an SBA Loan in 4 Easy Steps
Melinda Hill Sineriz is a freelance writer with over a decade of experience. She specializes in business, personal finance, and career content. She has worked in sales and has managed her own business for more than a decade. She has also written content for businesses in various industries, including restaurants, law firms, dental offices, and e-commerce companies. Learn more about her and her work at thatmelinda.com.