Small Business Administration (SBA) loans are government-backed loans providing financial support to small businesses unable to secure financing on favorable terms through conventional lending channels.
The SBA itself does not lend the money to the business owner. As an SBA lender, Locality Bank processes and provides the funding to you, backed by a government guarantee for repayment.
Here’s a quick overview of what you need to know:
Benefits of SBA Loans
The main benefit is actually getting a loan. With the government guarantee to the bank, the risk is reduced for all parties. Other benefits can be:
- Lower down payments, conserving valuable working capital.
- Typically longer repayment terms, reducing monthly payments and improving cash flow management.
- Interest rates vary, but SBA loans often offer competitive rates compared to other financing options available to small businesses.
- Specific SBA loan programs, such as the Microloan program and loans for veterans, provide targeted support.
Eligibility
Lenders and loan programs have unique eligibility requirements. In general, eligibility is based on what a business does to receive its income, the character of its ownership, and where the business operates. Normally, businesses must meet SBA size standards, be able to repay, and have a sound business purpose.
Main criteria include:
- Be a for-profit business that is officially registered and operates legally.
- The business is physically located and operates in the United States or its territories.
- The business’s credit must be sound enough to assure loan repayment.
- The requested loan is unavailable on reasonable terms from non-government sources.
Types of SBA loan programs
Listed below are the four main SBA loans. Note: At Locality Bank, we support the 7(a) and 504 loan programs, helping local businesses access these valuable financing options. While we don’t offer Microloans or Disaster loans, we’re happy to help point you in the right direction if you need more information about those programs.
7(a) loan
This is the SBA’s primary business loan program, providing loan guarantees to lenders that allow them to provide financial help for small businesses with special requirements. For example, 7(a) loans can be used for:
- Acquiring, refinancing, or improving real estate and buildings,
- Short- and long-term working capital.
- Refinancing current business debt.
- Purchasing and installing machinery and equipment, including AI-related expenses.
- Purchasing furniture, fixtures, and supplies.
The maximum loan amount for a 7(a) loan is $5 million. Key eligibility factors are based on what the business does to receive its income, its credit history, and where the business operates. Your lender will help you figure out which type of loan is best suited for your needs.
504 loans
The SBA’s 504 loan program, also known as a Certified Development Company (CDC) loan provides long-term, fixed-rate financing for business owners to buy major fixed assets that enable business growth and job creation.
The maximum loan amount is $5.5 million and can be used to:
- Purchase or construct real estate, land, and new facilities.
- Buy long-term machinery and equipment.
- Make improvements to utilities, parking lots and landscaping.
- Upgrade or renovate facilities, land, streets, and parking lots.
To get the 504 loan you’ll have to operate your business for a profit with a realistic business plan and relevant management experience. Before applying for your loan you’ll need to have tried to use other financial resources.
Other conditions your business will need to meet include having:
- A tangible net worth of less than $15 million.
- An average net income of under $5 million after taxes (over the last two years).
You’ll also have to show you can repay the loan on time from your business’s projected operating cash flow.
Microloans
With an average loan of around $13,000 and a maximum amount of $50,000, a microloan helps small businesses, and some not-for-profit childcare centers cover the costs of starting up and expanding. Microloans can be used for a variety of purposes, including providing working capital, buying inventory and supplies, repairing premises, or enhancing small business processes.
The maximum repayment term is six years. This type of loan works well for online or home-based businesses. Freelancers might also find it helpful for expanding their business.
Each lender will have its own credit requirements and lending criteria, which may include some form of collateral. They will also set their own interest and repayment terms.
Disaster loans
A disaster loan is a low-interest, long-term loan that can be used to either replace or repair certain business assets that were destroyed or damaged in an SBA-declared disaster area.
Your damaged or lost assets could include inventory, machinery, equipment, furniture, fixtures, and your premises. You may even be able to apply for further funds to refinance your existing mortgage or to protect against future damage.
There are three different kinds of SBA disaster loans offered to businesses:
- Business physical disaster loan to replace or repair property, stock, supplies, equipment or other assets that were damaged in a disaster.
- Economic injury disaster loan (EIDL) if you have a small business that’s struggling to meet its financial obligations because of a disaster.
- Mitigation assistance to help protect against future disasters.
Additionally, Military reservist loans help eligible small businesses that have an essential employee called to active duty cover their operating expenses.
Next steps
- Be prepared. Check your credit rating, use a cash flow forecast template to demonstrate repayment ability and create a business plan.
- Reach out to us about our SBA loan program.
Disclaimer: The information provided in this content is for general educational purposes only and does not constitute professional advice. Locality Bank makes no warranty, express or implied, nor assumes any legal liability or any responsibility for the accuracy, correctness, completeness, or any actions taken based on the information provided. Always consult a qualified professional for specific guidance related to your situation.
