Are you a small business owner looking for financing? Maybe you are already operating a business and you want to expand your venture. Or perhaps you have lost your job during the pandemic and you are thinking of starting a small business. If you don’t have enough funds to finance your business expenses, the logical step is to apply for a business loan.
There are different types of business loans. You can go to your bank or find a private lender where you can borrow money. This is usually not an issue if you have an excellent credit history and meet all the requirements.
If you are running a small business, you can also get an SBA (Small Business Administration) loan, which is one of the best sources of financing that you can apply for. For business owners who are having a hard time getting traditional financing elsewhere, an SBA loan is a great route to get a private lender to lend you money.
There are, however, many questions that business owners ask regarding SBA loans. Who can apply for an SBA loan? Do all SBA loans require a down payment? How much down payment do you need to shell out on an SBA loan?
In this post, we will give you a rundown of the different SBA loans and the down payment required when taking out these loans.
What are SBA loans?
The U.S. Small Business Administration (SBA) is the government agency that helps small businesses get loans. The loans that are routed through the SBA are called SBA loans. When you get an SBA loan, the government is not directly lending you the money. Instead, the SBA partners with lenders by setting loan guidelines and guaranteeing a major part of the borrowed amount. When a borrower is approved by the SBA, this lowers the risks for lenders. It then makes it easier for small business owners to get loan approval.
There are several advantages associated with getting an SBA loan. Compared to traditional business loans, SBA loan interest rates are typically lower and have lower monthly repayment fees, and more flexible repayment terms. These benefits can significantly impact how you grow your business.
But how do SBA loans work? Can you use SBA loans for any purpose or business expense? The answer is: It depends on the type of SBA loan that you’re applying for. In the next section, we will discuss the down payment that may be required when you apply for an SBA loan. We will also touch on the basic SBA loan requirements for business owners.
Down Payment Required on Different Types of SBA Loans
One of the top questions regarding SBA loans is whether you need to shell out money as a down payment when you apply for one. Depending on the type of loan you are applying for, you may need to provide a down payment.
If you are applying for the SBA 7(a) Loan 0r SBA 504 loan, then YES you need to put a down payment. But here’s the good news: the down payment required by the SBA is much lower than traditional banks or lenders. Traditional banks or lenders usually require a 20% to 30% down payment or a personal collateral before they lend you the money you need. With an SBA loan, the down payment can be as low as 10% of the loan amount. If you are applying for an SBA Microloan or SBA Disaster loan, you may not even need to shell out any money for a down payment.
Go to the SBA loan website to find out the various types of loans available. To better understand how SBA loans work, here is an overview of the most common types of SBA loans.
1. SBA 7(a) Loan Down Payment
Down Payment Required:
10% to 20% of the loan amount
Overview:
The SBA 7(a) loan program is one of SBA’s most popular because it has low interest rates and long repayment terms. It is often referred to as a “general purpose loan” because it allows you to use your funds in several ways. This makes it a great SBA loan option if what you need isn't spelled out by another type of SBA program.
With most SBA 7(a) loans, you repay the money you borrowed in monthly installments. Your monthly payments will remain the same if you have a fixed-rate loan. While for a variable rate loan, the monthly payment will vary depending on the current interest rate.
If your loan is below $150,000, SBA can guarantee up to 85% of the loan. For loans above $150,000, SBA can only guarantee a maximum of 75% of the loan amount.
Funding Amount:
With an SBA 7(a) loan, you can borrow up to $5 million. You can borrow as low as $5,000 but it is usually used for loans $30,000 and above.
Basic Requirements:
- Your business must operate for profit.
- You must own a small business as defined by the SBA guidelines.
- You are proposing to do business or engage in a business in the United States or its possessions/territories.
- You have a reasonable invested equity in the business.
- You must be able to demonstrate your need for a loan.
- Before seeking financial assistance, you already use alternative financial resources that include personal assets.
- You are not delinquent on any existing debt obligations to the U.S. government.
You Can Use It For:
- Short term or long-term working capital
- To purchase real estate including buildings and land
- To construct a new building or to renovate an existing building
- To purchase equipment, supplies, materials, machinery, fixtures, or furniture
- Revolving funds that will be based on the value of the existing inventory and receivables of your business.
- To establish a new business
- To assist in the acquisition of a business
- To assist in the operation of an existing business
- To expand an existing business
- To refinance existing business debt, under given conditions
2. SBA 504 Loan Down Payment
Down Payment Required:
10% down payment
Overview:
The SBA 504 loan program is a long-term, fixed-rate loan that you can apply for if you are planning to purchase a major fixed asset for your business. You can borrow up to $5 million when you apply for an SBA 504 loan. The repayment terms will vary depending on several factors but the maturity terms are usually 10 years or 20 years.
This loan is also called the CDC/504 loan because loans are available through certified Development Companies or CDCs. CDCs are the community-based partners of the SBA that promote economic development in communities. To qualify for a CDC/504 loan from the SBA, you need to find a CDC in your area.
Funding Amount:
You can borrow up to $5 million.
Basic Requirements:
- You must operate as a for-profit company in the U.S. or its possessions/territories.
- Your tangible net worth must be less than $15 million.
- Your average net income must be less than $5 million after federal income taxes for two years before your application date.
You Can Use It For:
- To purchase or construct an existing building.
- To purchase or construct new facilities.
- To purchase or construct long-term equipment and machinery.
- To improve or modernize existing facilities, land, streets, parking lots, landscaping, or utilities.
You CANNOT Use It For:
- To refinance, pay, or consolidate existing debts.
- As working capital or inventory.
- Investment in rental real estate.
3. SBA Microloan Down Payment
Down Payment Required:
No down payment is required.
Overview:
The SBA Microloan program is ideal for solo entrepreneurs and small startups that do not need a huge amount of money to advance their business goals. Unlike 7(a) and 504 loans where you can potentially borrow millions of dollars, microloans only allow you to borrow up to $50,000.
SBA designates intermediary lenders to administer microloans. These intermediary lenders are usually community-based nonprofit organizations that provide technical and management assistance to borrowers.
Funding Amount:
You can borrow up to $50,000.
Basic Requirements:
There are no standard terms when it comes to SBA Microloans. The requirements vary depending on the SBA-approved lender. You can check the SBA District Office in your area to find out the requirements to apply for an SBA Microloan.
You Can Use It For:
- Inventory
- Working Capital
- To purchase supplies, machinery, equipment, furniture, and fixtures.
- Expenses to rebuild, repair, enhance, improve, or reopen your business.
You CANNOT Use It For:
- To purchase real estate
- To pay or refinance existing debts
4. SBA Disaster Loan Down Payment
Down Payment Required:
No down payment is required but you may need to provide collateral depending on the type and amount of disaster loan you are applying for.
Overview:
SBA Disaster Loans are low-interest loans designed to assist businesses and homeowners recover from declared disasters.
There are different types of SBA Disaster loans that you can apply for:
- Physical Damage Loans – you can use this loan to replace or repair damaged physical assets due to a declared disaster.
- Mitigation Assistance – you can use these funds to help protect your business from future disasters (flood mitigation, earthquake mitigation, wildfire mitigation, wind mitigations).
- Economic Injury Disaster Loans (EIDL) – these loans are for small businesses, small agricultural cooperatives, and most non-profit organizations that suffered a substantial economic injury in a declared disaster area. The Covid-19 EIDL is an example of an EIDL program for businesses that suffered due to the Covid-19 pandemic. If you are looking for SBA loans for landlords affected by the Covid-19 pandemic, you can apply for the Covid-19 EIDL.
- Military Reservist Loan – If you have an essential employee who has been called for active duty, you can apply for this loan to help meet normal operating expenses.
Funding Amount:
The amount you can borrow for an SBA Disaster Loan is up to $2 million, however, it was quietly reduced to $150,000 due to the Covid-19 pandemic in order to serve more borrowers. Starting April 6, 2021, the new maximum limit will be $500,000.
Basic Requirements:
- Your business must be within the area where the SBA issued a disaster declaration.
- You must be able to show that your business suffered damage or economic injury because of the disaster.
You Can Use It For:
- Working capital
- Normal operating expenses
Get an SBA Loan To Help Your Small Business
When your business is struggling due to tough economic conditions, closing it down is not your only option. If you are having a hard time getting a business loan from a traditional lender, you can turn to SBA loans to keep your business going.
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
