How SBA Loans Work

how sba loans work

Estimated reading time: 4 minutes

Every small business owner needs funding at one time or another. To begin with, many startups rely on the personal savings of their founders. However, once a small business gets off the ground, the need for funding does not stop. The cost of equipment, inventory, office rent, materials, payroll, and countless other expenses can all add up quickly. That is why nearly half of all small business owners apply for loans yearly.

If you have ever needed a loan for your business, you have probably encountered the term “SBA loan” when researching various options. If you are wondering how SBA loans work, please read on. This blog article from Balboa Capital has all of the information you need.

History of the SBA.

The history of SBA loans is outlined on the Small Business Administration website. It dates back to July 1953, when the Small Business Act, which included the creation of the Small Business Administration (SBA) by Congress, was signed into law by President Dwight D. Eisenhower. The SBA is an independent agency of the federal government that, as outlined in its long-lasting mission statement, functions to “aid, counsel, assist and protect the interests of small businesses, to preserve free enterprise and to maintain and strengthen the economy.”

The SBA has offices throughout the United States. Small business owners can visit an SBA office in person or access the SBA website for assistance with just about everything about running a business. This includes writing business and marketing plans, budgeting strategies, and helping with small business loans.

SBA loan programs.

SBA loan programs of up to $5 million are available. The funds can be used to increase working capital, buy business equipment, hire new employees, and pay for expansion initiatives. In addition, SBA loans typically have attractive interest rates and extended repayment terms, which is why they are so popular among business owners.

Many business owners think the SBA provides the funding for loans. However, this is not the case, with the exception of disaster relief loans. Instead, the SBA works with approved banks, credit unions, and lenders that issue the loans. The SBA offers several different loan programs for startups and existing businesses. These include SBA microloans, SBA 7(a) loans, SBA express loans, and SBA CDC/504 loans.

SBA loans are partially guaranteed by the SBA, which helps protect lenders from suffering significant losses if loans are not repaid. The agency’s guarantee for loans up to $150,000 is 85%, and 75% for loans that exceed $150,000. Therefore, if you default on your loan, the SBA will pay your lending company up to 85%, depending on your borrowed amount.

How to get an SBA loan.

Suppose you are thinking about applying for an SBA loan. In that case, it is a good idea to visit the SBA website and become familiar with the various available loan programs and their general eligibility requirements. This will help you select the best loan option for your needs. Of course, you will also need to meet the borrowing requirements of the bank, credit union, or lender that you choose.

Once you have selected an SBA lender, ensure you have all the required information and documents for your loan application. Bank statements, profit and loss statements, business tax returns, personal tax returns, credit reports, and a business plan are some of the many documents you will need.

SBA loan example.

Here is an example of how SBA loans work: Let us say that you own a restaurant that needs a $300,000 loan, and you decide to apply for an SBA loan. First, you would contact your bank, credit union, or lender and ask them if they offer SBA loans. If they do, you submit your loan application, and your lending company evaluates your information and attempts to get a loan guarantee from the SBA. Once your loan is approved, your lending company will provide the funds, and you will repay them over a set term.

Balboa Capital, a Division of Ameris Bank, is not affiliated with nor endorses the Small Business Administration. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.