With 2023 already halfway over, small businesses are looking for help to grow to end the year on a strong note. As of July 2023, the Small Business Administration has approved more than 40,000 SBA loans worth more than $19 billion. As a local small business expert and owner of Phoenix FranNet, I’m here to discuss what impact these loans will have in the local market regarding loan requirements, how to apply and alternatives.
SBA 7(a) Loans
The most common type of loan the Small Business Administration grants is the 7(a) loan. SBA 7(a) loans can be used for various purposes, including short- and long-term working capital, refinancing existing business debts, purchasing new machinery and equipment, acquiring supplies or other purposes to improve business operations. While the requirements to qualify for it can be difficult to meet, the loan terms are typically favorable, making it a desirable way for small business owners to receive financial support.
SBA 7(a) loans offer a maximum lending amount of up to $5 million. Collaborating with lenders who are partnered with the SBA, businesses can apply for a loan tailored to terms that align optimally with their specific needs.
Loan Requirements
SBA loans have a relatively strict set of requirements that applicants must meet to qualify for a loan. According to the SBA, businesses that apply for SBA 7(a) loans must meet the following criteria:
- Operate for profit.
- Meet the SBA definition of a small business.
- Do business in the United States or its territories.
- Demonstrate a need for a loan.
- Demonstrate that the funds will support a sound business.
- Be up to date on any existing U.S. government debt obligations.
- Be creditworthy and reasonably assure repayment of the loan.
To qualify as creditworthy, the SBA generally demands a credit score of 690 or higher and prefers that owners who hold more than 20% of the business provide a personal guarantee.
How to Apply
Applying for an SBA loan requires finding an SBA lending partner, submitting an application and awaiting approval. The process involves several steps, including finding a lender and submitting necessary documents like SBA Form 1919 (Borrower Information Form), business financial statements, income tax returns and more.
Once submitted, the SBA’s turnaround time is five to 10 business days for 7(a) loans, with funding usually issued within 30 to 90 days.
Types of SBA Loans
The SBA offers several types of loans, each with different maximum loan amounts, guarantees, turnaround times and purposes. These include:
- 7(a) loan: $5 million, 85% for loans $150,000 or less, 75% for $150,000 or more; 5 to 10 business days; for working capital, equipment, supplies purchases, real estate, business expansion.
- Express loan: $500,000, 50%, 36 hours, for expedited funding.
- International Trade loan: $5 million, 90%, 5 to 10 business days, for long-term funding for export sales and competing with foreign competitors.
- CAPLines: $5 million, 85% for loans $150,000 or less, 75% for $150,000 or more, 5 to 10 business days, for short-term and seasonal needs.
Alternatives
If SBA loans don’t quite fit your business needs, if your business doesn’t qualify or if you are denied an SBA loan, you can consider alternatives such as SBA microloans, online lenders, business credit cards and grants.
Impact on Local Small Businesses and Markets
The new SBA loan rules are poised to have a significant impact on local small businesses and markets. Here’s how:
- Increased accessibility: With the introduction of various loan types and the expansion of eligibility criteria, more small businesses can access the capital they need. This can lead to increased growth and expansion within local markets.
- Favorable terms: The SBA’s 7(a) loans, in particular, offer favorable terms for qualified small businesses. This includes competitive interest rates and flexible repayment options, making it a more attractive option for small business owners.
- Support for diverse needs: The variety of SBA loans available, from working capital to equipment purchases, means that businesses can find a loan that fits their specific needs. This targeted support can lead to more efficient use of funds and greater success in achieving business goals.
- Stimulation of local economy: By providing financial support to small businesses, the new SBA loan rules can stimulate local economies. Small businesses often play a vital role in community development, and the increased financial support can lead to job creation and economic growth within the community.
- Adaptation to market needs: The introduction of expedited funding options like Express loans and specific loans for international trade reflects an adaptation to the diverse and evolving needs of the market. This responsiveness ensures that the SBA’s offerings remain relevant and supportive of modern business challenges.
Frequently Asked Questions
- How hard is it to qualify for an SBA 7(a) loan? SBA 7(a) loans have strict requirements, including ensuring good financial standing and no outstanding debt from other government-issued loans.
- Do you need collateral for an SBA 7(a) loan? Businesses seeking SBA 7(a) loans greater than $25,000 will have to provide collateral.
- Do you need a business plan for an SBA 7(a) loan? SBA 7(a) loans require a business to operate for at least two years in most cases, and applicants must provide a plan for how funds will be utilized if a loan is granted.
The Bottom Line
SBA 7(a) loans are a great option for small businesses that meet the SBA’s requirements, as they offer flexible loans that can be used for various purposes and have favorable interest rates for businesses. While alternatives are available for businesses that do not meet the SBA’s criteria, it’s a great financing option for businesses that qualify and are looking to grow.
In conclusion, the new SBA loan rules present both opportunities and challenges for small businesses. Understanding the requirements, application process and alternatives is essential for making informed decisions. Local businesses should explore these options and seek professional guidance to navigate the complex landscape of SBA loans.
Paige Ryan, owner of Phoenix FranNet, provides insights into the impact these loans will have in local markets, loan requirements, how to apply and alternatives.
