The Basics Of The SBA Loan System

SBA loans are one of the basic tools that small businesses often use to start accelerating their initial growth. You might wonder, though, what the process of obtaining a loan from the SBA is going to entail. Let's look at some of the basic things prospective borrowers ought to know.

What Counts as a Small Business

The majority of manufacturing businesses that employ 500 or fewer people count as small businesses. Likewise, there's a good chance that nearly all non-manufacturing businesses that collect less than $7.5 million in receipts each year will count. However, it's wise to use the SBA's size tool to get a better idea about whether your business might qualify.

To determine your employee total for application purposes, use the average number of employees you've had for the last 12 months. If your company hasn't been around that long, base it on the average number of employees per pay periods you've had to date.

Beyond the number of employees and your revenue, you'll also have to show that you're running a for-profit enterprise. It must be located in the U.S. or able to provide substantial economic benefits directly to the American economy. Also, it has to be independently owned and operated, and it can't already stand as a dominant force in its industry at the national level.

Types of SBA Loans

One of the most common loans from the SBA is the 504 loan, the so-called grow loan. It is used by companies to acquire fixed assets or real estate so they can expand their operations.

There is also the 7(a) loan. This is one of the most commonly awarded loans, and it allows borrowers to seek up to $5 million. However, the amount will be based on the size and nature of your operation.

Additionally, the SBA offers loans to handle export work, disaster recovery efforts, and certain types of microbusinesses. The government will also occasionally use the SBA as the primary vehicle for distributing loans during national emergencies, as it did during the 2020 pandemic.

Costs Associated with SBA Loans

SBA loan rates are based on the prime interest rate. The prime interest rate is essentially the cost of money for financial institutions, and they then take a percentage above that amount when they loan to others. SBA loan rates range from prime + 2.25% to prime + 6.5%. If the prime rate is currently at 2%, for example, the cheapest rate would be 4.25% and the most expensive would be 8.5%. You may want to check the current prime rate before applying.