The Small Business Administration (SBA) is a great resource for small businesses that want to expand or for entrepreneurs looking to start a new business.  The SBA offers several loan programs, and the rates on SBA loans are typically more favorable than what you would get with a traditional business loan.  Important to note is that the SBA does not actually fund loans, but instead guarantees, or backs, loans disbursed by approved lenders.

504 and 7(a) Loan Programs

The most common SBA-backed loan programs are the 504 and 7(a) loans.  Both have a maximum loan amount of $5 million, generally require lenders to present a business plan that clearly outlines how the funds will impact projects, and require minimum down payments as low as 10% of total project costs.

504 loans are primarily for purchasing owner-occupied commercial real estate.  An SBA-approved lender provides 50% of the total project cost at market rates, and an SBA-approved community Certified Development Company provides 40% of the project cost at a lower, fixed-rate.  The borrower provides the remaining 10% of the project cost.  This means lower monthly payments to make the budget more manageable.  And because 504 loans are used to finance commercial real estate, terms are typically 25 years.

The permissible uses for 7(a) loans are much broader than 504 loans, but the terms are not quite as generous.  While the 7(a) loan will still be more competitive than market rates, borrowers may need to provide more than 10% down and the loans are generally financed over a shorter period.  One exception is where a 7(a) loan is used to finance commercial real estate, in addition to working capital, equipment purchases, etc.  As long as the majority of the loan goes towards the purchase of the owner-occupied commercial real estate, a 25-year term is possible.

EIDL Loan Program

An Economic Injury Disaster Loan (EIDL) is a type of working capital loan offered by the SBA that generally comes with very low interest rates.  EIDL assistance is intended to help businesses recover from different types of disasters, such as floods or even an economically-devastating pandemic.  EIDL assistance may also be used to repay bridge loans or interim financing obtained to maintain operations in the immediate aftermath of the disaster.  Private credit sources, including banks, must be used as much as possible to overcome the economic injury as EIDL assistance is available only to small businesses when the SBA determines they are unable to obtain credit elsewhere.

The SBA is a great resource for small businesses seeking capital, whether that business is an existing business or just starting out.  The 504 and 7(a) loan programs are the most well-known and popular, and the EIDL loan program is available to businesses suffering from some type of disaster.  There are other SBA loan programs available to small businesses, so business owners should research and stay abreast of the particular SBA loan programs that will most benefit their business.