Comparing the Different Types of SBA Loans: Which One Fits Your Needs?

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Types of SBA Loans

If you’re an entrepreneur, then these uncertain times may have changed the way you see Small Business Administration (SBA) loans. Now, other than a way to get a business up and running, business loans can also help rework and rebuild a struggling company from the ground up.

Loans for Small Businesses: Fair Interest Rates and Terms

Before the 2020 pandemic even struck, SBA loans have been attractive for their low-interest rates and smaller down payments. You can enjoy longer terms for as much as 25 years if you use commercial real estate as collateral. You can also take advantage of smaller payments through longer repayment terms. If you’re a first-time business owner, then you know this matters. SBA loans can help you launch successfully or avoid a heartbreaking closure.

But how exactly do these loans work? SBA doesn’t provide the loans. Instead, they partner with banks and other lenders to create different loan programs. The SBA-approved lender then issues the loan and not the SBA themselves. For their part, the SBA guarantees a percentage of your loans to the bank. This guarantee is the reason why you get affordable terms and rates.

As favorable as the rates are, these loans come with stringent requirements. While the SBA is keen on helping small businesses around the country, it also makes sense for them not to grant loans to everyone.

Types of SBA Loans

There are different requirements for different types of SBA loans. It pays to know more about each of these before you begin looking for an SBA-approved lender with the loan application process.

SBA Disaster Loans

Natural calamities, hazards, and the current pandemic pose a threat to small businesses without a safety net to cushion themselves from disasters. This loan can cover operational expenses outside the scope of your insurance policy or the Federal Emergency Management Agency (FEMA). Disaster loans help keep your business afloat.

Given the pandemic’s severe economic impact, the SBA introduced the Economic Injury Disaster Loans (EIDL) for COVID-19 for businesses affected by this health crisis. These EIDLs should be enough to cover the following:

  • Fixed debts
  • Outstanding bills
  • Accounts payable

Small businesses can receive as much as $2 million (with collateral). It also comes with a low-interest rate of 2.75 to 3.5 percent, and you can request a 30-year term.

On the other hand, loans for other disasters come with an equally long term, though with different interest rates. The maximum interest rate can go as high as 8 percent if you have other sources for funds and 4 percent if there are none. Like EIDLs for COVID-19, there’s no increase in these interest rates in the long run.

To qualify for either loan programs, your business must meet all four qualifications:

  1. Proof that your business is within a disaster area
  2. Physical or economic damage
  3. Capability of repaying the loan
  4. Good credit score

Keep in mind that collateral may be involved, especially for loans that exceed $25,000.

SBA 7(a) Loans

Chances are, if someone talks about an SBA loan, they might be thinking of SBA 7(a) loans. There’s a reason why this program is popular among small business owners. It has low-interest rates, long terms for repayment, and flexible use of loans clause. No wonder it’s the go-to SBA loan that provides immediate necessary funding.

Even new entrepreneurs building their first startup business can qualify for an SBA 7(a) loan. You need to prove that you have:

  1. Previous experiences relevant to their field
  2. Good personal credit score
  3. Willingness to pay a higher down payment

You may even find your down payment waived if you show a wealth of relevant experience, an impressive credit score, and high growth potential.

How will this work for your small business? With an SBA 7(a) loan, you can take a loan amounting to as much as $5 million and get a repayment term between 10 and 25 years. All you need is to have a business around for two years, a good credit score and healthy cash flow, and a manageable debt-to-income ratio. 

SBA CDC/504 Loans

A quick look at the interest rates, maximum borrowing amount, and repayment terms might make you think that it’s the same as an SBA 7(a) loan, but that’s a common misconception. Here, you’re taking up two different loans: an SBA 504 loan and a CDC loan.

Here’s how it works: the SBA 504 loan, provided by a lending institution, only funds up to 50 percent of the total loan value. The second half, or at least 40 percent of the total loan value, will come from a Certified Developing Company or CDC. What’s left is the 10 percent that you will need to pay as a down payment. 

Despite having the same terms as an SBA 7(a) loan, these two loans actually have a stricter set of requirements, such as having a net worth of less than $15 million and showcasing exemplary management skills.

Yet, for small enterprises gaining traction and seeing a gradual expansion of their workforce, CDC/504 loans enable them to focus on caring for their employees.

Ready to start?

If your business fits in any of the criteria for these SBA loans, your next step is to begin comparing the SBA lenders around your area. Shop, compare, and connect with these lenders through loan comparison sites like LendingBuilder.

Not sure where to go for a business loan? Read these quick & helpful guides:
Check out our preferred marketplace lenders.

Lender Minimum Revenue Time in Business Minimum Credit Next Steps
$100K/year 1 year 600+ See if you qualify
$10,000/mo 3 mo. n/a See if you qualify
$10,000/mo 3 mo. n/a See if you qualify
$75,000/yr 24 mo. 620+ Request Intro
Varies Varies 560+ See if you qualify

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