SBA loans, not to be confused with conventional small business loans, are government-backed small business loans that are funded by private lenders. These loans are guaranteed by the federal government, who promise to repay 85% of the loan to the private lenders in the case that a business defaults and cannot meet the required loan payments.
Because SBA loans are government guaranteed, it allows private lenders to offer lower interest rates. This is because the amount of risk is significantly reduced due to the federal guarantee. Some banks and private lenders also purposely work with the SBA if they wish to grant a small business a loan, but feel that it is too risky for a conventional small business loan, which comes with no government guarantee of repayment.
SBA loans can provide sums anywhere from $50,000 to $5 million, and their interest rates vary between 6% and 13%. Their repayment terms vary between 5 and 25 years, and their turnaround time is between 30 days and 6 months.
The SBA loan program is designed to boost the US economy and job market by offering relatively low-risk loans to startup businesses and existing small businesses that are looking to expand in terms of business size and location. Many private lenders will simply refuse to lend money to small business owners without SBA federal guarantees, as it reduces the risk for both parties involved. Unsurprisingly, SBA loans are the most common type of small business loan.
The government implemented the SBA program in 1953 in order to drive job growth and economic growth in deprived and underserved communities, as well as in more rural areas. The SBA program allows budding small business owners to start businesses in underserved areas with much less risk, often leading to the flourishing of previously struggling areas. SBA loans also make it much easier for women, minorities, and veterans to start businesses, as these groups of people tend to find it harder to secure conventional small business loans from banks. Thus, SBA loans are also useful for increasing diversity in the business world, and give less-privileged people to chance to flourish as an entrepreneur.
To be eligible for an SBA loan, businesses must operate for profit, and small business owners must put some of their own money or assets into the business. This is known as an “owner’s equity injection” and demonstrates that the small business owners have faith in their business’s success. The owner’s business must also be operating within the United States or its territories, and although the credit requirements are not as strict as they are for traditional bank loans, there are some minimums. Your business will require an SBSS (small business scoring service) FICO score of at least 140 in order to qualify, though a higher score would be largely preferable.