Small businesses come to fruition through a range of inspiration sources. Maybe it’s a passion project you can monetize or identifying a need in your local community. Whatever the case, many entrepreneurs need financial support to turn their dream into reality.
The most obvious method of funding is a business loan, but what if you are unable to qualify for a traditional private loan? You may be eligible for the small business capital you seek through a government loan program. Read on to discover all you need to know about loan programs.
What Is a Loan Program?
The U.S. government developed loan programs to provide aid to prospective borrowers who may not qualify for a loan from a private lender. There are a variety of loan programs, each aimed at supporting a different group (individuals, businesses, communities).
Loan programs are designed to minimize the gap between those who can afford private loans and those who cannot. These funds, typically available at lower interest rates than those from private financial institutions, help expand access to credit, boost the national economy and encourage innovation.
What is a Home Loan Program?
A home loan program, or mortgage, is a capital loan for individuals to help buy a house. Mortgages are available from a variety of sources, like banks, credit unions, alternative lenders, government entities like the Federal Housing Administration (FHA) and others.
What Loan Programs Can Help Homebuyers Finance a Home?
Though eligibility for these programs varies, potential homebuyers may pursue a number of financial programs and/or mortgage assistance to help finance a home, like federal or state-sponsored mortgage programs, first-time homebuyer credits, and others.
While these programs can help prospective homebuyers who may not have access to traditional mortgages, it’s important to consider all home-related costs. For example, mortgage insurance, is a required expense for homebuyers with a down payment of 20% or less of the cost of the home, or for those with USDA and FHA loans.
What Is an SBA Loan?
Small Business Administration (SBA) loans are funds provided to small business owners through government loan programs. These loans are not funded by the SBA directly, but through participating partners (usually banks). The SBA guarantees the funds. This guarantee translates to a much lower lending risk factor in the eyes of the lender, opening the door to unique and favorable benefits to borrowers who qualify.
SBA loans generally have interest rates and fees that are comparable, if not better than, non-guaranteed loans. Furthermore, SBA loans have lower down payments, flexible overhead requirements and don’t always require collateral.
What Can I Use an SBA Loan for?
The SBA loan program was established to help small, mid-sized and large business owners across industries. The loan may be used for a variety of essential business purposes, reflecting the full breadth of the community it’s designed to support. Ranging from $500 to $5.5 million, a guaranteed loan through the SBA can be used for things like:
- Seasonal financing
- Construction/remodeling costs
- Refinancing debt
It’s worthwhile to note that the terms of an SBA loan vary by your loan purpose. For example, working capital has a term length of seven years whereas real estate-based loans have terms of up to 25 years. Consult your SBA lender to see which loan type best supports your small business needs.
How Do I Get Approved for an SBA Loan?
Eligibility is the first step toward potential approval for the SBA loan program. The SBA has four key factors a business must meet to apply:
- Be officially registered and operating legally
- Be physically located and operate within the U.S. (or its territories)
- Have proof of inability to get funds from other lenders
- Have proof of invested equity (time or money) from the business owner
Loan programs and SBA lenders have their own list of eligibility requirements (e.g. business size). They are generally based on several factors including but not limited to:
- How a business makes money
- Business plans/purpose
- Character of ownership
- Ability to repay
Can I Get an SBA Loan With Bad Credit?
First, it’s important to note that business credit — good or bad — differs from personal credit. Your personal credit score is connected to your social security number and any account established with it. Business credit is associated with your federal employer identification number (EIN) or company tax ID.
There are a few exceptions to this credit score division. If your business is newly established or functions as a one-person LLC or under a sole proprietorship (neither requires an EIN), any business funding eligibility would be determined by your personal credit score.
The SBA loan program wants to help those with limited access to credit, so even small business owners with bad credit — personal or business — may be eligible for startup funding. Consult your lender to understand your options.
What’s the Difference Between 7(a) and 504 SBA Loans?
While both are part of the government loan program to encourage growth and healthy competition, the 7(a) and 504 loans serve different purposes.
The SBA 7(a) loan is for small business owners seeking to acquire existing businesses, expand their working capital, purchase equipment and/or furniture or other general business purposes. Here are some key features to the SBA 7(a) loan:
- Loan size: $50,000 – $5,000,000
- Interest rates: Variable, some fixed-rate options
- Fees: Based on guaranteed dollar amount and maturity of the loan (can be rolled into overall loan)
- Down payment: 10% minimum, typically more
- Terms: Up to 25 years for real estate, up to 10 years for business acquisition or equipment, five to seven for working capital, weighted average for mixed-use requests
The SBA 504 loan is intended for the purchase of land or existing buildings, remodeling of existing facilities, equipment purchases, or purchase of “ground-up construction” commercial real estate. Here are some key features to the SBA 504 loan:
- Loan size: $125,000 – $20,000,000+
- Interest rates: Fixed, typically higher than U.S. Treasury market rate for five- and 10-year loans
- Fees: Based on 3% of the debenture (can be rolled into overall loan)
- Down payment: 10%
- Terms: 20 or 25 years for real estate, 10 years for equipment
What Is a PPP Loan?
The Payment Protection Program (PPP) was a part of an SBA loan program designed to help small business owners with payroll difficulties caused by the coronavirus. The SBA stopped accepting applications for PPP loans August 8, 2020. At the time of this article’s publication, there are no plans to revitalize the program. For the most current coronavirus relief options, please visit the .
Is an SBA Loan Right for Me?
If you are just starting out, you may want to wait to build up your business credit or be able to demonstrate your ability to execute on your business plan before going through the lengthy application process.
If you’re more established and able to demonstrate the lack of access to alternative funds (among the other requirements listed above), an SBA loan might be just what you need to accomplish your business goals.
The information in this article is provided for educational and informational purposes only, without any express or implied warranty of any kind, including warranties of accuracy, completeness or fitness for any particular purpose. The information in this article is not intended to be and does not constitute financial, legal or any other advice. The information in this article is general in nature and is not specific to you the user or anyone else.