The Complete Guide to SBA Loans: What You Need to Know Before You Apply

If you’re looking to become your own boss through acquisition entrepreneurship or expand your existing business, an SBA loan should be top of mind as you plan your financial future. 

SBA loans generally offer financing at lower interest rates than banks and usually have more generous repayment terms. 

Let’s take a look at SBA loan to buy a business and how they differ from traditional bank loans.

What is an SBA loan?

The Small Business Administration is a federal agency that offers counseling, contracting, and capital to small businesses in the U.S.

One of the key components of its operation is SBA loans, connecting businesses with lenders so they can grow and expand their operations. 

The SBA doesn’t actually loan money, it guarantees a portion of the loan so that if the business defaults it is responsible for that portion of the loan. This opens up financing to many potential entrepreneurs who might not otherwise qualify. 

There are several programs you can apply for to suit your needs. 

One of the most common is the 7(a) loan that provides up to $5 million in financing and can be used to repair existing capital, refinance debt, or purchase an entirely new business. 

There are also smaller SBA loans like the MicroLoan program which can be used to start or expand a business but is capped at $50,000.

There are lots and lots of lenders who offer SBA loans, including traditional banks and several online-only institutions. It’s best to check with your local SBA office. 

What’s the difference between an SBA loan and a conventional bank loan?

SBA loans are provided by lending intuitions but are backed by the government. In general, they offer more favorable interest rates and repayment terms. 

Let’s take a look at some of the advantages of SBA loans 

• Longer terms

One of the main advantages of an SBA loan is a longer repayment schedule. 

If you’re purchasing shorter-term assets like equipment or supplies, SBA loans usually have a 10-year term, instead of three to five years. 

For real estate purchases, SBA loans usually run 25 years instead of 10. 

• Lower interest rates

The maximum interest rate for a 7(a) loan over $50,000 is base rate(LIBOR, prime, or optional prime rate) plus 2.75%, which is much lower than you would get from a standard bank loan. 

As of October 2022, the LIBOR rate was.17% so you could get an SBA 7(a) loan for 5.92%.

• Easier to qualify

Because the government is assuming some of the risks, the qualifications necessary to obtain loans are lower when using the SBA. 

How much cash do you need in order to qualify for an SBA loan?

It depends on what loan you’re applying for but the SBA generally asks for a down payment for the following programs:

• 7(a)
• 504/CDC
• Community Advantage loans

Let’s say you want to buy an HVAC company and you’re going to use the 7(a) program, a very popular choice for savvy acquisition entrepreneurs. 

The SBA generally asks for 10% down so if you’re buying a $1.5 million home services business, you need $150,000.

You can also work with third-party outside investors to raise the down payment, although some conditions apply. You can pair the two sources of financing to buy a much larger business than you probably think you can. 

The SBA will also increase that down payment to 15% for startups as well as mergers and acquisitions. 

How quickly can I get approved for an SBA loan?

This ultimately depends on what sort of loan you are applying for. 

SBA Express loans can take up to 36 hours for approval, however, you also need to receive approval from the lender, which can take much longer. These loans cap out at $350,000 and are good for purchasing a smaller business or simply as a line of credit. 

However, applying for an SBA loan is generally a much more time-consuming process than going through a traditional lender. 

For most other loans, the SBA usually approves within seven to 10 days, however, the lender will likely take several weeks to make a decision. This is due in large part to the extensive financial documentation that is necessary to receive an SBA loan, including up to three years of personal and business tax records, a business and loan history, and a credit report. 

Who can apply for an SBA loan?

This, again, depends on what sort of SBA loan you want to apply for. In general, SBA loans are available to any number of businesses.

There are some general criteria. 

The SBA defines a small business as on that has under 500 employees and under $7.5 million in total sales. Your business must also be based in America.

There are several businesses that are automatically ineligible, including:

• One that earns most of its money from lending
• A business mainly engaged in politics or lobbying
• Life insurance companies
• A business that earns most of its revenue through gambling
• Speculative business like medical research or real estate investment

Although the SBA is designed to secure loans for businesses that might not otherwise qualify, they are not looking to invest in a failing business. So you need to be in reasonably good financial shape. 

Conclusion

SBA loans provide much-needed financing for small business owners looking to expand their operations, as well as a viable path for acquisition entrepreneurs aiming to become their own bosses by purchasing existing businesses. 

In general, SBA loans are more favorable than financing from conventional lending institutions because of the longer terms and lower interest rates. 

It is not a simple or quick process, however, so you should make sure you have all of your financial affairs in order — including tax returns, business history, and a business plan – before applying.