A lot entrepreneurs starting out in the business world do not have a lot of initial startup capital, and may not even qualify for loans from popular lenders. This is why a lot of them resort to using SBA loans. SBA loans are loans made out to small businesses and guaranteed by the SBA.

What is an SBA Loan?

An SBA loan is issued by a participating lender approved by the U.S. Small Business Administration — and not by the SBA itself. The SBA just insures the loan. So if you want to apply for an SBA loan, you have to find an SBA-approved lender.

The SBA works with intermediaries to provide low-interest loans with competitive terms to small businesses and startups. These intermediaries could be traditional banks, private lenders, credit unions, or even nonprofit organizations. In fact, many banks, from large chains to neighborhood banks, are SBA-approved lenders.

One of the lures of SBA loans is that they usually require a smaller down payment. Since the loan is guaranteed by the SBA, the financial institution will more readily award the loan. The payback term for a working capital loan can be up to 10 years. If you’re purchasing real estate, the term can be up to 25 years. Interest rates are reasonable. Longer terms translate into smaller payments and you are allowed to write off money paid on interest.

The SBA has created a set of standards to keep loans affordable for small businesses, and these standards are adhered to strictly by their intermediaries. This way, borrowers can expand and build their businesses without facing high interest rates, daily draws, or other drawbacks they might encounter with more expensive forms of credit.

The SBA backs large percentages of the loans given through its programs — anywhere from 50-85% — lowering the risk involved and making lenders more apt to lend to small businesses. The SBA offers several programs of interest for small business owners. Let’s explore the different types of SBA loans to determine which best fits the needs of your small business or startup.

7 Types of SBA Loans and Their Pros & Cons

1. The SBA 7(a) Loan Program

The 7a Term Loan is the most common type of loan that is backed by the SBA. They are typically issued with restrictions to its use, such as for working capital or to refinance debt. The SBA secures between 75% and 85% of the loan for the lender, which results in an interest rate that is just slightly above the prime rate due to its government backing.

You can apply for principals up to $2 million on a 7a loan, with terms ranging from 7 to 25 years. SBA 7(a) loans are extremely popular because of the great terms and flexibility they provide. However, there are several types to consider, each of which comes with different maximum loan amounts, interest rates, and terms.

Pros and Cons of SBA 7(a) loans

Pros 

  • Easier to Secure Than Traditional Loans: Because there’s less risk involved, SBA lenders are more likely to approve your application for this type of small business loan.

When you apply for an SBA loan, you’ll apply through a traditional bank, not the government. However, the government guarantees 75 to 85 percent of the loan, thereby reducing risk for SBA lenders. As a result, many banks will approve SBA 7(a) loan applications that they would’ve ordinarily rejected for traditional financing options.

  • Lower Interest Rates: The SBA sets a reasonable maximum interest rate, ensuring that loans are affordable to small business owners.

The SBA stipulates maximum interest rates for their loan programs because they want small business owners to be able to afford their options. Currently, the maximum interest rates for this SBA loan product ranges between 7 and 9.5 percent, depending on the loan amount and terms. For a business loan, these interest rates are quite affordable.

  • Lenient Down Payment Requirements: SBA 7(a) loans require a down payment of just 10 percent. Often, lenders want to see you put some of your own money towards your investment. This gives you a financial stake in your project and ties your interests directly to your business’ success.

As such, many lenders require a 20 percent down payment. However, lenders will often accept down payments of just 10 percent with SBA 7(a) loans. This allows you to preserve your personal cash while reducing the burden a down payment can put on your business’s cash flow.

Others are;

  • Highly competitive
  • Long loan terms, up to 25 years
  • Fixed and variable-rate options are available
  • A variety of businesses are eligible
  • Variety of loan options, including SBA 7(a) express loans, SBA 7(a) CAPLines
  • Most SBA loans, including 7(a) loans are fully amortizing, meaning borrowers don’t have to worry about balloon payments

Cons of SBA 7(a) Loan

Lenders Have a Lot of Discretion in Setting Loan Terms: While the SBA does set some rules, approved lenders still have a lot of leeway in both approving and structuring loans. Many of the benefits outlined above are subject to the discretion of the lender.

Although there are maximum interest rates, some lenders might charge less, while others will charge the full rate. In addition, some lenders may ask for a higher down payment or will cover a smaller portion of the loan. Further, lenders often charge higher fees for SBA 7(a) loans than typically charged for private loans.

  • Personal Collateral May Be Required: You’ll likely have to use personal assets or valuable business assets as collateral, greatly increasing your risks. Putting liens on property is standard for the SBA. If you have valuable assets, your lenders may ask that you put those assets forward as collateral. For example, a lender may require that your house or business real estate be tied to the loan. If you default, the SBA could seize your property.
  • The Application Process Can Be Strenuous: When you receive this type of loan, you’re receiving loan directly from a lender. The government guarantees but doesn’t provide the loan. As such, you’re going to have to complete each lender’s application process, which may vary. In fact, SBA 7(a) loans take an average of 45 days to approve.

Plus, lenders will look at your credit history very closely when evaluating your application. While lenders have a lot of discretion and can set their own eligibility requirements, you’ll often need a score of 620 or higher. Therefore, if your personal or business credit aren’t high, this could affect your ability to get approved.

Others are;

  • Lengthy approval times (for standard SBA 7(a) loans)
  • Lots of documentation
  • Collateral is often required
  • Certain businesses, including real estate investing, lending, gambling, and speculation are prohibited
  • High credit scores are typically required (typically 680+)
  • May be restrictions on supplemental/additional financing

Types of Businesses They Cater for

  • This loan is ideal for any business that needs working capital but doesn’t mind waiting a little while for it.
  • Companies that need to refinance debt or another type of loan (bridge loans, hard money loans, etc.) from short-term, high interest to low interest, long-term loans.
  • The SBA 7(a) is available to both established businesses and new ones.
  • If the company (or founders of a new company) have superior credit ratings, significant experience, and demonstrable growth, it is sometimes possible to have the minimum down payment waived for a 100% TLV.

2. The SBA CDC/504 Loan Program

Certified Development Company Loans (CDC) are ideally used for purchases or improvements to fixed assets. The principal range on CDCs is from $1.5 million to $4 million. Unlike 7a loans, CDC’s are only 40% backed by the SBA, and an additional 10% comes from the borrower, in the form of collateral.

The interest rates on these types of loans are tied very closely to 5 and 10 year U.S. Treasury Rates, with only a slight premium. In addition, there’s a 3% fee attached to the loan, which most borrowers pay directly from the capital raised. The SBA’s CDC/504 loan program is a bit different because instead of working with one intermediary, a borrower works with two: a participating lender and a Certified Development Company.

With these loans, the SBA provides up to 40% of the total cost of a project through a Certified Development Company. A traditional lender, such as a bank or credit union, provides 50% of the total project cost. The borrower is responsible for the remaining 10% of the total project cost. The maximum SBA loan amount distributed through this program is $5 million.

Pros and Cons of SBA CDC/504 Loans

Pros

In the right situation, applying for an SBA loan can be a smart financial decision for a small business. These are some of the advantages of an SBA CDC/504 loan.

  • Large Loan Amounts: By covering up to 90 percent of the total cost of a project, a 504 Loan allows small businesses to make substantial purchases that wouldn’t be possible otherwise. In most cases, a lender will cover 50 percent, the SBA will cover 40 percent, and the business will be responsible for the remaining 10 percent of the total cost.
  • Affordable Interest Rates: Fixed interest rates are a major benefit for borrowers when the repayment period spans 10 to 20 years. A fixed rate means that payments will be the same for the length of loan period, making it easier to budget for the payments each month.
  • Easy to Qualify For: While the 504 loan program does have a wide range of requirements, almost all small businesses in the US will qualify for the program. However, realize that in order to qualify, your business must be beyond the beginning planning stages. That is, you must be ready to purchase property, invest in a building, or start construction of a new building, for example.
  • 90% financing: The 504 loan program offers small business owners access to up to 90% financing for their project. This is more than most other options on the market. Even 7(a) loans from the SBA are only able to fund 85 – 90% of the project. Conventional loans fall below that mark (60 – 75% funding).
  • Longer amortization periods: SBA 504 loans offer longer amortization periods (10, 20, or 25-year terms depending on what is being financed), allowing you to spread your payments over a longer amount of time to reduce the amount paid per payment.
  • No balloon payments: 504 loans are not balloon loans. That is, you will pay on your loan without having to worry about making a very large payment at the end of the term. In this way, it more closely resembles a fixed-rate home mortgage.
  • Fixed-rate interest rates: While the interest rate on the loan will vary depending on the market at the time the loan is made, it will be made at a fixed-rate interest rate, below the current market, and will be fixed for the duration of the loan’s term (10, 20, or 25 years).
  • Cash savings: Conventional loans require that you pay around 1% of the loan’s value out of your own pocket in fees. Even 7(a) loans require that you pay between 2% and 3.75% of the loan amount out of pocket. The 504 loan requires that you pay a maximum of 2.65% of the loan’s value in fees, but those costs are included in the loan amount, meaning that you have only the down payment when it comes to out of pocket costs.
  • Low down payment: Speaking of down payments, the SBA 504 loan usually only requires 10% of the loan value down. A 7(a) loan will require between 10 and 15% down, and a conventional loan will require between 25 and 40% down. This makes the 504 loan the most affordable option available to most business owners. However, note that your down payment requirements will vary depending on your situation. We’ll discuss that in another section.

Cons of 504 Loans

While SBA loans are a great option for small businesses in need of extra cash to make big purchases, there are some negative factors to consider.

  • Must Be Used to Create Jobs: First, in addition to the general guidelines for qualifying for an SBA Loan listed above, the small business must also create one job, or retain an existing job, for every $65,000 they receive through the SBA 504 Loan. If that isn’t possible, a community development or public policy goal must be met by the business. Examples of these goals include developing rural areas and creating stability in your local economy.
  • Usage Restrictions: The restrictions of an SBA Loan are another potential disadvantage. Unlike SBA 7(a) Loans, 504 Loans cannot be used as working capital. The business financing can only be used for specific purchases, outlined by the SBA, including the following:
  • Purchasing existing buildings.
  • Purchasing and improving land.
  • Building new facilities or improving existing buildings.
  • Purchasing new equipment.
  • Paying off previous debt that occurred from these purchases.

Percentage of Loan is Covered by Loan Applicant: One of the advantages of the loan could also be a potential downside. While the loan will typically cover 90 percent of the project amount, that still leaves 10 percent to the borrower. That percentage is relatively low, but can be a large sum of money, depending on the total project cost.

  • Application Process: The 504 program is not the most streamlined in the world, largely due to the need to have three parties involved. It’s not just you working with a lender, as it would be with a conventional loan. Both the CDC and the lender must agree on terms, and ensure that they are in compliance with SBA requirements.
  • Underwriting: All SBA 504 loan underwriting goes through a single office. As you can imagine, that sometimes leads to bottlenecks. However, the underwriters are also exceptionally thorough and will question anything that seems out of the norm, or that needs further clarification. The more questions or concerns the underwriter has, the more involved the lender, CDC, and you must be in the process.
  • Time: It should be noted from the outset that SBA real estate loans are not fast. In contrast to a home mortgage loan, which might close in just 30 days, it often takes around 60 to 75 days to close on an SBA real estate loan and receive your funding.

Businesses CDC/SBA 504 loans cater for

  • The target businesses for this loan is pretty clear – it’s meant for small-but-ambitious companies that have an employee-first mindset.
  • A rapidly-growing company that doesn’t have enough liquid assets to put more than 10% down on new equipment or property would benefit from a CDC / SBA 504 loan.

3. The SBA Microloan Program

The SBA takes a different approach with microloans than it does with its other popular loans. With microloans, the SBA does not back a lender in case of default. Instead, the SBA provides money to non-profit organizations who lend to small businesses at their own discretion.

As a result, the requirements for these loans vary greatly. The only overall restriction on microloans is a maximum principal of $35,000 with a term of 6 years. Rates are generally observed between 8% and 13% and an average loan size of $13,000.

Pros and Cons of SBA Microloans

Pros

  • SBA Microloans are Usually Distributed Quickly: The application process for many SBA loan programs can take months to complete. However, SBA Microloans can be distributed in about 1 month. In some situations, funds can be distributed even faster than that.
  • SBA Microloans Can Be Used to Offset a Wide Variety of Business Costs: SBA Microloans can be used to pay for inventory and supplies. In addition, you can buy machinery, furnishings, equipment, and as working capital.

Cons of SBA Microloans

  • SBA Microloans Come with Spending Restrictions: SBA loans come with stipulations on what you can and can’t purchase. These stipulations can vary from program to program. With a SBA Microloan, you can’t purchase real estate or pay off existing debt.
  • It Can Take Several Weeks for an SBA Microloan to be Approved and Disbursed: The microloan process will still take longer than many alternative loan programs. Holdups can emerge on either the lender or the government’s end. This can be a challenge for companies facing an immediate cash crunch.
  • You’ll Have to Deal with Both the Government and a Traditional Bank: While the SBA and its partner institutions have streamlined the application process, you’ll still have to work with two different organizations. You’ll have to complete the loan application process established by the lender and will also have to meet the requirements and manage the relationship with the SBA.
  • Lenders Will Each Have Their Own Eligibility Requirements: Each lender sets their own eligibility requirements. For example, some lenders will require higher credit scores and will examine your business’s balance sheet more closely than others. While the SBA sets parameters for loans, it doesn’t approve or reject them
  • Lenders Can Charge Fees, Which Will Vary: Lenders can charge fees. While the fees are capped by the SBA, they can vary from lender to lender. Fees include: Application fee between $25 and $100. Loan processing fee between $100 and $135. Search fees for titles and liens. Closing costs between 2 to 5 percent of the loan
  • SBA Microloans Can Still Be Difficult to Qualify For: While the SBA makes it easier for small businesses to qualify, there are still many requirements. Restrictions include: No bankruptcies or foreclosures within at least two years. The organization must be for-profit.

Businesses SBA Microloan Program caters for

  • SBA Microloans are the perfect option for the self-employed, one-man-shows. Since sole proprietorships have only personal credit to loan against (which may or may not be great), the microloan is a good fit.
  • Startups that have their sights set on smaller goals will find the SBA Microloans useful.
  • SBA Microloans are also specifically earmarked for use in nonprofit child care centers.

4. CAPLines

SBA CapLines loans are lines of credit. These types of loans are mainly used by a business that needs some working capital for a specific time of year. The SBA has four kinds of CAPLiines loans: Seasonal, Contract, Builders and Working Capital.

The Seasonal loan is primarily used by a business that needs to bolster accounts receivable and inventory during a specific time of the year. An example could be a small ski lodge which needs to upgrade rental equipment and pay for snowmaking before the ski season begins.

The Contract loan, just as it sounds, is a loan typically used by a business that has been awarded a contract, but will need to pay for labor and material during the life of the contract. The business needs some funds to pay employees and buy materials until the business is paid.

A Contract CAPLines loan could be used by a road paving company, which has been awarded a contract by a town or county. The road paving company won’t be paid for the work until it is completed, and needs a loan. The Builders loan is another one that is aptly named.

The loan is tailored for the independent general contractor or builder who needs to pay employees and buy material upfront. Think of a house builder who needs to buy drywall and pay drywall finishers as part of a house project. The Working Capital loan is tied to the assets of the business. The business needs a loan until assets are converted into cash. The business repays the loan by selling those assets. An example could be an artisan who creates a product, such as paintings or artwork.

Pros and Cons of SBA CAPLines

Pros 

  • Flexible Financing: As we previously mentioned, there are four types of SBA CAPLines. The main differences between the four types of SBA CAPLines have to do with eligibility requirements and the allowed uses of funds. This makes SBA CAPLines a flexible program that can work well for seasonal businesses, builders, contractors, and subcontractors.

In addition, there’s a more standard line of credit available for any business with short-term working capital needs. Ultimately, regardless of your business’s industry, there’s a good chance that there’s an SBA CAPLine that’s right for you.

  • Relatively Low Interest Rates: According to the SBA, the maximum interest rate for this financing option is the same as it is for a regular 7(a) loan. While your rates may vary depending on the term and small business loan amount, the current rates for 7(a) loans fall between 6.75 and 9.25 percent.
  • High Credit Limits: As far as lines of credit are concerned, this SBA financing product has a high borrowing limit of $5 million. This can give you greater flexibility to obtain the working capital you need to grow your business. However, keep in mind that the SBA will only guarantee your loan up to $3.75 million. That means, if you have a loan amount of $5 million, you’d be responsible for $1.25 million of that if you were to default.

Cons of SBA CAPLines

  • They Can Be Difficult to Get Approved For: Even if you have strong credit score and a proven track record of business success, getting approved for an SBA CAPLine is going to be time-consuming and difficult. The eligibility requirements are the same for SBA CAPLines as they are for a standard 7(a) loan. However, each CAPLine has different eligibility requirements.

For example, the Builders Line “requires that you have a strong history of successful building projects.” The other lines have similar, business-specific requirements. Either way, even for a successful business, just the standard 7(a) requirements may be difficult to meet.

  • Strict Spending Restrictions: Except for the Working Capital Line of Credit, SBA CAPLines have fairly strict spending restrictions. Of course, there are four options, but once you’re tied to one, you can’t use the cash for anything other than the designated use of funds.

For example, the SBA states that proceeds from the Seasonal Line of Credit “must be used solely to finance the seasonal increases of accounts receivable and inventory.” Therefore, a Seasonal CAPLine may be the right product for you if you have seasonal business changes.

  • Only Good for Short-Term Needs: The maximum term for SBA CAPLines falls between five and ten years, regardless of the product you choose. For this reason, this program will only be the right fit for you if you’re looking for a short-term loan. These lines of credit wouldn’t be appropriate for purchasing real estate or other equipment that you’ll need for an extended period.

Businesses that SBA CAPlines Cater For

If your business needs are short-term or seasonal, SBA CAPLines may have a solution for you. The CAPLine program offers small businesses revolving or fixed credit lines up to $5 million, with a five-year repayment schedule. As we mentioned, there are five types of credit lines:

  • Seasonal lines of credit are for businesses that need help with cyclical annual increases in business expenditures, such as labor costs, inventory replenishment, and accounts receivable.
  • Contract lines of credit are for businesses that need help with labor and materials attached to assignable contracts and sub-contracts.
  • Builder’s lines of credit are for businesses that need help with the construction or renovation of commercial properties, labor costs, materials, equipment, permits, and real estate.
  • Standard asset-based lines of credit are for businesses that need help with the conversion of short-term assets to cash ($5 million credit line).
  • Small asset-based lines of credit are for businesses that need help with the conversion of short-term assets to cash ($200,000 credit line).

5. SBA Export Loans

This loan program aims to help small businesses in America take their products and services abroad. It’s designed to expand export activities and facilitate international transactions to that the recipient can penetrate foreign markets. There are several types of SBA Export loans, including Express, Working Capital, and International Trade Loans. Each has slightly different terms.

Pros and Cons of SBA Export Loans

Pros 

  • There Are Different Options for Various Business Needs: The SBA offers three export loan programs that provide varying amounts of funding, and target different industries. In addition, SBA loans can be established as a term loan or a line of credit, providing flexibility.
  • Affordable Interest Rates: This loan provides favorable interest rates, because the SBA will guarantee up to 90 percent of these loans. In exchange, the SBA requires participating lenders to offer affordable interest rates, which is certainly beneficial for small businesses.
  • Likely to Be Approved by the Lender: The SBA’s guarantee comes with another benefit. Quite simply, lenders are much more likely to provide this product because the risks are lowered substantially. Many traditional financiers would hesitate to provide financing for export transactions, contributing to the high-risks. The 90 percent guarantee, however, allows lenders to fund high-risk ventures.

Cons of SBA Export Loan

While SBA Export Loans are a great option, there are also some negative aspects to consider. Before applying for an SBA Export Loan, or any loan product for that matter, it’s important to understand these downsides.

  • Eligibility Requirements Are Strict: Borrowers must meet specific eligibility requirements to secure funding. First, the borrower will have to prove that the funding will be used to support export activity.

Second, the SBA generally loans businesses money that have been operational for at least 12 months. However, the SBA may waive this requirement for EWCP and Express Loans if you can demonstrate expertise and previous successful business experience.

  • You’ll Need Collateral: Collateral is often another eligibility requirement. The SBA usually requires borrowers to offer collateral to guarantee export loans. Collateral requirements depend on the specific type of SBA Export Loan that you’re applying for.
  • The Loan Application Process: Even if you qualify and have the necessary collateral, applying for SBA Export Loans can be a tedious process. If you’re in need of fast financing, you may benefit from applying for an Export Express Loan, as it’s dispersed faster than the other options. In fact, the SBA could approve your loan in as little as 24 hours.

In addition, when applying for export loans, you’ll have to apply to individual lenders. These lenders will have their own applications and requirements, which could take several weeks to complete. Most will ask for detailed income sheets, financial projections, and other information about your business. Compiling these materials can be time-consuming, so make sure you’re prepared when you’re ready to apply.

  • Fees Can Add Up: While SBA loans offer good interest rates and flexible repayment terms, there are also several fees to be aware of. For example, the SBA sets “guarantee fees” of 0.25 percent on the guaranteed portion for loans, with terms of 12 months or less, and 2.00 to 3.50 percent for longer-term loans. Other fees include: Late payment fees of up to 5 percent. Assumption fees of up to 1 percent. Early repayment fees between 1 and 5 percent.

Businesses that SBA Export Loans Cater For

  • The SBA Export Loan caters mainly to exportation based businesses. Manufacturers in America that want to bring products overseas but need working capital to navigate all the red tape can benefit from the SBA Export Loan.
  • Manufacturers that already export products but want to expand to other countries internationally are also a good candidate.

6. SBA Disaster Loans

As the name implies, the SBA Disaster Loan is only applicable in a very specific case. The business applying for this loan has to have evidence that it was physically or economically impacted by a disaster (as declared by the SBA). There are a few sub-varieties, and you can apply for more than one at the same time if it’s relevant.

Of particular note is that SBA Disaster loans include the Military Reservist Economic Injury Loans. If a critical employee in the reserve is called to active duty, a business qualifies for a loan of up to $2 million to meet normal operating expenses.

Pros and Cons of SBA Disaster Loans

Pros 

  • Affordable with Relatively Lenient Terms: Compared to other working capital options, SBA Disaster Loans will likely be among your most affordable financing options. In fact, if you meet the eligibility requirements, the interest on your SBA disaster loan won’t exceed four percent.
  • High Maximum Loan Amounts: Disasters can be extremely expensive. In addition to the cost of replacing destroyed property or equipment, you’ll need to make up for downtime caused by the disaster.

Without enough financing, you’ll be forced to allow any debts to accumulate interest. That’s why the fact that SBA loans have a maximum of $2,000,000 is a significant advantage for your business. You may not need the full amount, but having that flexibility ensures you’ll have what you need to get back on your feet quickly.

  • Flexible Usage of Funds: The SBA’s disaster loans can help you pay for just about anything you need to afford after a disaster. For example, the Business Physical Disaster Loan can be used for real estate, personal, property, machinery, equipment, fixtures, improvements, and leasehold improvements.

Also, with an Economic Injury Disaster Loan, you can use the funds to meet your financial obligations and pay for operating expenses that could’ve been met if the disaster hadn’t occurred.

Cons of SBA Disaster Loans

  • Eligibility and Affordability Depend on Your Alternatives: If you can obtain financing elsewhere, you won’t be eligible for certain SBA Disaster loans. For the disaster loans you’re eligible for, you’ll likely be charged a higher interest rate of up to eight percent. You should also keep in mind that the SBA will determine whether you can obtain financing elsewhere.
  • Eligibility Depends on Location: The SBA provides disaster loans to businesses that have been affected by a disaster. To be eligible for an SBA Disaster Loan, your business must be located within an area that’s in a Presidential or SBA Agency Declared disaster area.
  • Difficult to Qualify For: Unlike typical business loans, SBA disaster loans are relatively difficult to qualify for. As mentioned, if you have alternatives or you aren’t located in a disaster area, you may not be eligible. Plus, the application process can be complicated and competitive. In addition to standard application documentation, you’ll need to file documents that authorize the IRS to release your tax information to the SBA.

Businesses that SBA Disaster Loans Cater For 

  • A company that has suffered as a result of a natural disaster (flood, earthquake, etc.) or an economic recession. Building or inventory damage from a wildfire (rather than an anthropologically-caused fire) would make a business eligible.
  • Funds from an SBA Disaster Loan can be used for repair, replacement, working capital, or operating expenses. That makes it a very flexible loan for a creative businessperson trying to get out from under a local economic depression.

7. SBA Express Loan

One of the SBA’s financing options is an Express Loan. The SBA understands that many business owners need financing quickly and can’t wait weeks (or even months) to find out their approval status. This is why they created this program. Once you submit your application, you could receive financing within 36 hours.

It’s important to note that Express Loans aren’t offered directly by the SBA. Instead, you’ll work with an approved lender and the SBA will guarantee a portion of the loan amount. The SBA guarantee amount is lower at 50%. The loan is a revolving line of credit which most commonly must be repaid in 7 years. Borrowers may be able to get an extension.

Should you default, the government will pay the lender the guaranteed amount. This lowers risks for lenders, allowing them to lend to higher risk borrowers. It’s important to note that lenders will use their own procedures and processes for evaluating and approving or denying loans.

Pros and Cons of SBA Express Loans

Pros

An SBA Express Loan will provide your business with additional working capital. This capital, in turn, can be used to buy equipment and materials, acquire a business, hire staff, invest in real estate, and grow your business.

Other SBA Express Loan Benefits:

  • Interest rates are relatively low for a business loan (between 9 and 11 percent).
  • The maximum loan amount is $350,000.
  • Long repayment terms are available.
  • Down payments are affordable.
  • Excellent for building business credit.
  • Quick approval, especially in comparison to other SBA loans.
  • The SBA will guarantee up to 50 percent of the SBA Express Loan. For lenders, this lowers risks substantially. Lenders can pass on these lower risks to borrowers, resulting in the above benefits.

Cons of an SBA Express Loan

While SBA Express Loans are a great resource for small businesses, there are some drawbacks. One disadvantage is the high credit score requirement. Further, if you should default on an SBA loan, you may be barred from accessing government resources, such as other SBA loans, in the future.

Other SBA Express Loan Cons include:

  • The Express Loan application process requires extensive paperwork.
  • Paperwork and application procedures will vary from bank to bank.
  • The wait time is still quite lengthy compared to other non-SBA lending options.
  • There are some restrictions on how the money is spent.
  • Depending on the lender, there may be applicable fees for applying, servicing, and late payments.

Businesses that SBA Express Loans Cater For

For a business to qualify for an SBA Express loan, it must fulfill these requirements;

  • Business must operate for profit
  • Must engage in operations within the USA
  • Should be in operation for at least 2 years
  • Must qualify as a small business according to SBA size standards
  • Must be able to prove/show a need for financing
  • Business owner must have already financed the business through alternative means
  • Must be able to show that funds will be used for sound business purposes
  • There can be no delinquencies on previous debts to the government
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