30 Questions and Answers About SBA Loans
The Small Business Administration (SBA) is a governmental agency that was created in 1953. They award grants, provide investment capital, disaster assistance, security bonds, and loans to small businesses. Through these efforts, they help achieve the goal of maintaining a strong economy while aiding the success of small businesses in the U.S.
The process of getting your hands on an SBA loan can seem daunting at first glance. This article will help assist you through thirty frequently asked questions about the SBA’s Loan Program.
How Do SBA Loan’s Work?
The SBA serves as a liaison between lending partners and small businesses. The SBA does not directly give out loans, instead, they partner with lending partners in order to create guidelines that will make loan accessibility easier for small business owners.
How Is the SBA Loan Calculated?
The SBA loan is calculated on a number of factors such as your business’s financial history, payroll costs, seasonality of the business, number of employees (full-time & part-time), liabilities, ownership, management, previous contracts, location, etc. The SBA also has a specific size standard that must be met in order to qualify. Check out their website to see a full table of size requirements. The SBA calculates these size requirements based on the economic characteristics of the specific industry, competition in the industry, technical changes, and more.
Is the SBA Loan Worth Apply For?
The answer to this question is subjective. Depending on the reason you are seeking the loan, the benefits of obtaining a loan will differ from business to business. For example, a business that desperately needs capital may want to pursue an SBA loan along with other business loans however be prepared that a SBA loan can take a very long time (4-8 months) to be approved.
Why Use SBA Loans?
The SBA puts itself in the position to accept some of the risks in case of loan default which allows the lender to potentially approve business loan that normally might be turned down. SBA Loan programs such as the PPP (Paycheck Protection Program) work under the Cares Act, which ensures secure financing opportunities for small business owners. The SBA makes it easier to get loans for debt refinancing, daily operations, order advances, and more. One out of six SBA loans from 2006-2015 were failed to be paid back. Even with these statistics, the SBA continues to work with small businesses in need.
SBA Loans are options for sole proprietors, independent contractors, or even a nonprofit organizations that have been impacted by COVID-19. For those operating a small business during the pandemic, the SBA offers payment deferrals to make these times easier on businesses.
Which SBA Loan to Apply for?
The SBA has many different loan programs outlined on their website. Some of these include 7(a), SBA Express, SBA Veterans Advantage, CapLines, Community Advantage, International Trade, Export Working Capital Program, Export Express, 504 Loans, 504 Loan Refinancing, Non-7(a) MicroLoans, PPP Program, and EIDL (Economic Injury Disaster Loan) Program. Each program has different criteria for loan amounts, percent guaranty, use of proceeds, maturity, interest rates, guaranty fees, who qualifies, and benefits for borrowers. Research each program to determine which one you are most qualified for. For example, a business recognized as a small business concern may be eligible for the Paycheck Protection Program Loan if all requirements are met.
Will an SBA Loan Affect My Credit Score?
Unlike most business loans that only look at your business’s credit score, the SBA works a little differently. The application consists of a personal financial statement and a business financial statement. Therefore, in order to qualify for a SBA loan, credit from both your personal and business will be assessed. In order to ensure approval, maintain a good track record of all personal and business payments prior to applying.
Who Should I Contact About SBA Loans?
If you have any questions about the SBA Loan Programs, you can find their contact information on the SBA’s website. For general inquires, you can e-mail [email protected] or call 800-827-5722 Monday through Friday, between 9 am and 6 pm EST. The SBA headquarters is located in Washington, however you can also contact them at the local level. Their offices are separated by categories of advocacy, laws & regulations, contracting, counseling & training, disaster assistance, financial assistance, international trade, and management.
Will an SBA Loan Affect Mortgage Approval?
Mortgage lenders will always look at your credit when deciding to approve a person. As discussed above, the SBA inquires both your personal and business credit. Applying for both an SBA Loan and a mortgage at the same time will not only affect your credit score but could also jeopardize your chance for being approved.
Will an SBA Loan Show on Credit Report?
In accordance with the Debt Collection Improvement Act, SBA lenders are required to report information to credit agencies. Throughout the life of your loan, lenders will report information regarding liquidation, charge-off activities, servicing, etc. Information regarding your SBA loan will be reported to commercial agencies, not personal. Therefore, your personal credit report will not be affected. Your SBA loan will require a personal guarantee, but will not show on your credit reports.
What Can an SBA Loan Can Be Used For
An SBA Loan can be used in many ways to help your business. Proceeds may be used to help start a business, refinancing, payroll, inventory, rehires, and equipment purchases. However, there are some restrictions on what an SBA loan can be used for. Keep in mind that each program is a little different in terms of what you can or can’t use the proceeds for. In general, an SBA loan can not be used for real-estate that will be leased to another business or to repay money owed to the Government.
Can an SBA Loan Be Forgiven?
If you fail to make payments for SBA loan, you can ask the lender for deferment on interest and principal for up to six months. Additionally, the SBA will forgive these payments for interest and principal equal to what the business spent in eight weeks from the beginning of your loan. This is called the covered period. The eight-week covered period begins on the date the lender makes the first disbursement. For example, the SBA would forgive payroll costs, rent on a lease agreement, interest in a mortgage, and utility payments for the first eight weeks of a loan.
Paycheck Protection Loans are forgivable loans unlike Disaster Loans, which require the business to shut down and dissolve. PPP loans typically have an outlined plan for loan forgiveness, while Disaster Loan do not.
Is an SBA Loan a Grant?
No, an SBA Loan is not a grant. Grants are seen as “free money,” while SBA loans need to be paid back in an outlined amount of time.
What Are SBA Loan Rates?
To get an accurate idea of SBA Loan interest rates, check out their detailed chart. 7(a) Typical rates are between 5%-8% depending on the amount and length of the loan agreement. The SBA and lenders work with small-businesses to find rates that work for both parties. When working with a lender, they will calculate a good faith estimate, which will outline the loan amount and payments expected from the business. Having this estimate will allow you to compares rates between different lenders and make the choice best for you.
There are other costs often associated with an SBA loan including application fees and points.
When Do SBA Loans Expire?
Depending on the loan that you choose, your repayment time may differ. For example, if you are interested in CDC/504 Loans, plans are available in 10-20 years. For 7(a) Loans, it all depends on your ability to repay. In general, working capital, machinery, and equipment loans will not exceed the repayment of 5-10 years. For real estate, repayment can be up to 25 years. The SBA Loan chart outlines the maturity of all different loans offered.
When to Apply for an SBA Loan?
Before applying for an SBA Loan, make sure you check your eligibility. You want to make sure you qualify to ensure your chances of getting turned away are reduced. The top reasons for getting turned away are poor credit, criminal past, student loan defaults, and having too many assets. When you are ready to move to the next step, you can choose which program you would like to apply for and get all your paperwork ready. While waiting to hear back from the SBA, you can start looking for lenders on your own, using the Lender Match Tool. Currently, the SBA is accepting new applications for the COVID-19 Economic Injury Disaster Loans.
When to Apply for SBA Loan Forgiveness?
The SBA started accepting applications for loan forgiveness on August 10, 2020. For the PPP Loan Program, loans will be forgiven if all employee retention criteria are met, and the PPP funds are used for eligible expenses. PPP Loan forgiveness mandates that at least 60% of the forgiveness amount must be used for payroll. You can find the forgiveness PPP application here. You can also find the specific PPP affiliation rules set fourth by the SBA’s Interim Final Rule here.
Where to Check an SBA Loan Status?
To check the status of your SBA Loan application, you can log into your account online. Additionally, make sure you actively check your email for updates.
Where to Apply for an SBA Loan?
To get started, you will need to fill out an SBA application form. You will be asked to prepare all of your paperwork including your personal background, personal finance, business finance, profits and loss statement, projected financial statements, business certificates, etc.
If you are looking specifically for the Economic Injury Disaster Loan application (EIDL), you can visit this link. If you are looking to apply for the Paycheck Protection Program, click here. Just remember you can apply for both EIDL and PPP, but can not use the loan proceeds for the same expenses.
How Long Does the SBA Approval Take?
Generally the process can take anywhere from 60 to 180 days. SBA Loans are not for people who need money quickly, and the process does not happen overnight.
Can an SBA Loan Be Paid Off Early?
Yes, you can pay off an SBA Loan early. However, you may not want to. Lots of lenders will have early payoff fees. You will also lose out on an opportunity to build your credit if you are confident in making payments. Lastly, SBA Loans can be used for tax credits, and paying off your loan early would disqualify you from being able to do so.
Can SBA Loans Be Used for Payroll?
Yes, SBA loans can be used for payroll.
Can an SBA Loan Be Used to Pay Taxes?
It all depends on your program. For example, EIDL Loans allow you to use the proceeds to pay tax debt. Not all programs are like the EIDL. For example, the CapLines Program does not allow tax debt to be paid using the money. If you are looking to use your loan to pay taxes, make sure you look into the specifics of the program you are applying for.
Can an SBA Loan Be Used to Pay Off Debt?
For programs like the EIDL, you can not use your loan to pay off longterm debt. Alternatively, programs like the SBA 7(a) allows for debt refinancing. However, there are requirements in order to qualify for this such as having a 690+ credit score, being free of any bankruptcies, and more.
Are SBA Loan Payments Tax Deductible?
Typically SBA Loan payments can be used as deductions on tax returns. However, the IRS has qualifications that must be met in order to do so. The IRS requires individuals to be legally liable for the loan, have an agreement with the lender for repayment, and have a creditor-debtor relationship (or contract). However, payments are not always tax-deductible. If you are refinancing a business loan you can not deduct your payments. Also, you can not deduct capitalized interest or if the loan for commercial real estate.
Are SBA Loan Fees Tax Deductible?
Not always. Fees are not deductible on tax returns if you are refinancing your business, purchasing business property, nor on capitalized interest.
Are Existing SBA Loan Payments Suspended Due to COVID-19/Pandemic?
A: Yes. The SBA has been working to provide relief to loan holders during COVID-19. Economic Injury Disaster Loans were given an automatic deferral for 12 months. For Serviced Disaster (Home and Business) Loans, the SBA is providing deferments through December 31, 2020. For those with PPP Loans, payments have been deferred for six months. Neither Government nor lenders have charged small business fees.
Are SBA Loan Payments Taxable?
According to the IRS, SBA Loan payments should be considered taxable income on your federal taxes.
Are SBA Loan Payments Deferred?
A: Normally, loan payments are not deferred. However, due to COVID-19, payments have been deferred as temporary relief to help businesses re-establish cash flow. Additionally, payroll taxes have beed deferred in some cases.
Why Was My SBA Loan Denied?
There are a few different reasons why an application could have been denied. The most popular being:
- Low credit score
- Not enough collateral
- Not enough business revenue
- Seen as unable to repay the debt e.g. (Student Loans, etc.)
Why My SBA Loan Is Taking So Long?
The process can be lengthy and timely. There are multiple parts to an application, making the process long. Specifically, 504 applications can take longer than others because it is a dual-process approval, and can be a lengthy document. Furthermore, the Coronavirus has increased the number of applicants looking for loans. The most important thing to do is be patient, and keep checking your account for updates.
Through these FAQ’s, hopefully, your questions regarding SBA Loans are answered. Obtaining an SBA loan can be timely through the application process and all the paperwork. However, putting in the time and energy, is worth it to save and/or enhance your business. Visit sba.gov for additional information regarding their Loan Programs. Lastly, you can find all the SBA forms you need here, regarding any documentation lookup needed.
Financing Solutions Business Line of Credit Program
Financing Solutions, an A+ and 5 stars rated BBB company, provides a business line of credit to small businesses and nonprofits. Unlike an SBA loan that has many requirements, a Financing Solutions credit line requires that your business/nonprofit do at least $400,000 per year in revenue. There are no collateral requirements and no personal guarantees required. The unsecured business line of credit can be set up very quickly and there are no charges until you actually use the line. The line can be paid off at any time.
If you would like a no-obligation quote please fill out our simple 2-minute online application. There are no credit checks required for an offer letter.