How Much Money Can You Borrow With an SBA Loan?
So you‘re looking to get some financing for your small business, huh? Well, SBA loans are a great option to consider. These loans are backed by the Small Business Administration (SBA) and can provide some sweet terms compared to regular bank loans. But how much cash can you actually get from one of these bad boys? Let’s break it down.
What Exactly Is An SBA Loan?
First things first – what is an SBA loan anyway? Essentially it‘s a business loan that is partially guaranteed by the federal government (the SBA). This government guarantee makes it less risky for lenders to issue these loans, allowing them to provide more favorable rates and terms for small business owners compared to regular commercial loans.There are a few different types of SBA loan programs available, but the most popular by far is the 7(a) loan. This loan can be used for nearly any business purpose – working capital, equipment, inventory, business acquisition, refinance, etc. As long as it benefits the business, you can probably use a 7(a) loan for it.
-How Much You Can Borrow
Alright, let‘s get to the nitty gritty – how much cash money can you actually get with one of these SBA loans?Well, the maximum 7(a) loan amount is $5 million. Now don’t get too excited – very few borrowers actually get loans that large. But still, several hundred thousand dollars is quite common.The actual amount you can borrow is based on a few factors:
- Use of Proceeds – How you plan to use the money affects the allowed loan size. For example, if you’re buying real estate or constructing a new building, you may qualify for closer to the $5 million cap. But if it’s just for working capital, expect a smaller loan.
- Your Business Value – The size and financial history of your business also determines your allowed borrowing limit. An established business with lots of assets and solid revenue may get approved for more than a startup with limited sales.
- Your Credit Score – Your personal credit score plays a role too (typically a minimum of 680-700). If your score is on the lower side, you may need to accept a smaller loan until you build up your credit profile.
Many lenders break down SBA loan sizes into tiers, such as:
- Up to $350K
- $350K – $1 million
- Over $1 million
As you can see, loan size varies widely based on your specific situation. But the SBA guarantees loans up to $5 million for those who qualify.Now for the fees…
SBA Loan Fees
There are a few fees associated with getting an SBA 7(a) loan. The main ones are:
-SBA Guaranty Fee – This is an upfront fee charged by the SBA to provide the guaranty on your loan. It‘s based on the loan maturity and loan amount, but typically ranges from 2-3.75% of the total loan.
Lender Fees – The actual lender providing your SBA loan also charges certain fees for processing your application, closing the loan, etc. These vary by lender but often range from 1-3% of the total loan amount.
Out-of-pocket fees – As part of the application process, you‘ll have expenses for things like: your business plan, financial statements, appraisals, environmental studies, etc. Budget a few thousand dollars for these costs.As you can see, there are certainly some fees involved with SBA lending. But keep in mind these can often be financed as part of the total loan package. Just factor them in when determining how much you need to borrow.
What’s the Process for Getting an SBA Loan?
Alright, enough talk about loan sizes and fees. You’re probably wondering what it takes to actually GET one of these loans…The SBA loan process involves several key steps:
1. Find an SBA LenderFirst you need to find a qualified lender who offers SBA 7(a) loans. There are hundreds of lenders across the country that participate in this program. Places like banks, credit unions, and online lenders are all options.
-2. Submit Your ApplicationAfter choosing a lender, you submit a full credit application including personal/business financial statements, your business plan, info on collateral, and details on how you’ll use the loan proceeds.
3. Get Reviewed & ApprovedThe lender will review your entire application and analyze your business’s creditworthiness and viability. If approved, they send your loan request to the SBA themselves. As long as SBA sees you as a reasonably safe investment, they will provide a guaranty on a portion of your loan (typically 50-85%). This gives the lender confidence to move forward.
4. Close the Loan & Get FundingWith SBA guaranty in hand, you work with the lender to finalize loan documents, collateral, and terms. Then bam! You close on the loan and get the funding deposited into your business bank account shortly after.While the SBA has a thorough review and approval process, they really do try to help creditworthy small business owners get access to financing. As long as you put together a solid loan request (with help from your lender), your chances of getting approved are quite good.
-What Can You Use the Money For?
We’ve covered loan sizes and the process. Now what in the heck can you actually use SBA loan proceeds for in your business? Well just about anything legitimate that benefits your operations:
- Working Capital – Managing cash flow is critical for any small biz. SBA loans allow you to borrow money to cover operating expenses, payroll, new inventory, etc. This is the most common use of funds.
- Equipment Purchases – From machinery to vehicles to IT upgrades, equipment is expensive. Finance the major stuff you need with long repayment terms.
- Facility Improvements – Whether it’s remodeling your retail space, expanding your warehouse, or buying your own commercial building, SBA loans finance it all.
- Refinancing Debt – If you have existing business debt with unfavorable rates or terms, the SBA lets you roll that into a new loan to improve cash flow.
- Business Acquisition – Looking to buy an existing business? SBA loans help fund the purchase, providing money for assets, inventory, and even goodwill & intellectual property.
Really anything that takes your business to the next level is fair game. Just make sure to clearly explain in your application EXACTLY how the borrowed money will be put to use.
What’s the Downside to SBA Loans?
SBA loans have great rates/terms and are easier to qualify for than conventional small business loans. But there are still a few potential downsides to consider:
Collateral Requirements – For loans over $25K, the SBA expects you to secure the loan with business assets. Real estate, equipment, machinery, inventory and receivables are commonly used as collateral.
Personal Guarantees – Nearly every SBA loan requires owners with 20%+ ownership to provide a personal guaranty. This puts your personal assets at risk if the business can’t repay the loan.
Prepayment Penalties – While uncommon, some SBA loans include prepayment penalties for paying off the balance early. Make sure to review the loan terms closely.
Use of Funds Scrutiny – SBA lenders watch how you use borrowed money VERY closely during the first 12 months. Be prepared to document exactly how and where it’s being spent.
Ongoing Reporting – To keep tabs on things, SBA lenders require regular financial reporting like tax returns, profit & loss statements, balance sheets, etc. This is extra work for your management team.As you can see, increased access to financing comes with strings attached. Make sure you fully understand the requirements before committing to an SBA loan.
Ready to Apply for an SBA Loan?
And there you have it my friends! You should now have a solid grasp on SBA loans – from amounts you can borrow to exactly how the process works. Most importantly, you learned that with the right business model and determination, you CAN secure this kind of financing for your company.For a quick recap:
- SBA 7(a) loans provide up to $5 million for qualified business needs
- You’ll pay guarantee fees of 2-3.75% and lender fees of 1-3%
- Approval decisions depend on your revenue, assets, credit score and collateral
- An intensive application process examines your management capacity and business plan
If you think an SBA loan would benefit your business, the next step is connecting with lenders to explore your options. Check local banks, credit unions, and online lenders to see who offers the best rates/terms for your situation.With a sound business plan and persistence, securing an SBA loan is totally possible. These loans provide the working capital, equipment purchases, and facility expansions that small businesses desperately need. Now go crush it!