If you’re an entrepreneur or small business owner, Small Business Administration (SBA) loans are a great way to help grow your company. After all, SBA loans offer competitive terms with support, and all with flexible overheads and no collateral.
These loans can vary in amount, from as little as $500, right up to $5.5 million. This makes them an ideal boost to your business’ cash flow, and perfect to meet your needs. In this blog, we’ll cover everything you need to know about SBA loans, from eligibility requirements to the right option for your company.
What Are SBA Loans?
These loans are administered by the Small Business Administration. They can be used for a wide range of business expenses. One of the unique features of these loans is that the SBA accepts a degree of risk by guaranteeing a portion of the loan amount. This means you get more flexible payment terms and lower interest rates than traditional loans.
There are also several different types of loans to choose from, which we’ll discuss below.
7(a) loans
These are the most common of the SBA’s offerings. They can provide you with between $30,000 and $5 million. The funds can be used for a range of purposes, from funding a startup, or purchasing land, to repairing assets, buying a new business or refinancing your debt.
The interest rates vary depending on value, but usually fall between 7.5% and 10%. If your business secures this loan for working capital, you have 10 years to repay it. On the other hand, if you use it for commercial real estate, the repayment period is 25 years.
To qualify for 7(a) loans, you’ll need a credit score of at least 680, with no recent bankruptcies or liens. In most cases, you’ll also need to put up collateral.
CDC/504 loans
If your business needs a long-term loan for buying fixed assets like property or equipment, building or renovating, or refinancing debt, this is your best option. 504 loans are funded by the SBA and Certified Development Companies (CDCs), with a value of up to $5 million. However, you must be able to guarantee at least 20 percent of the loan. As for repayments, these loans have fixed interest rates, over terms of 10 years, 20 years, or 25 years.
To qualify, you must have a for-profit business worth no more than $15 million. Your company should also be able to prove that it creates or retains a job for every $65,000 in financing received. Also note that the participating CDC may have additional criteria, in the form of community-development and public-policy goals.
CAPLines
These are best suited for businesses that need to solve short-term cash flow problems or meet seasonal financing obligations as they are lines of credit with a maximum maturity of 10 years. They can range up to $5 million, at an interest rate of between 7.25% and 9.75%. However, you only have to pay interest on the money you spend—not the entire credit line.
There are four categories of CAPLine funding:
- Working Capital funds, for short-term capital needs. These funds cannot be used for paying your taxes.
- Contract CAPLine funds, mainly used to finance specific contracts, for general and administrative expenses. These funds can’t be used to buy assets, pay taxes, finance debt, or as working capital.
- Seasonal CAPLine funds, to pay for inventory or offset high receivables during your industry’s peak season.
- Builder’s CAPLine funds, for construction and renovation projects. This includes labor, supplies, equipment, direct fees, and landscaping.
8(a) Business Development loans
As the name suggests, these SBA loans are designed to help with business development. They fund up to $4 million for goods and services, and $6.5 million for manufacturing.
To qualify, your company must be at least 51% owned by a US citizen entrepreneur who is socially or economically disadvantaged, and successfully manages the day-to-day operations.
Also, owners must have less than $4 million in assets and a personal net worth of $250,000 or less.
Disaster loans
If your business has been affected by a natural disaster, which was officially declared as such by the president, you may qualify for these loans. They fund up to $2 million and can be used to replace or repair damaged property, equipment and inventory, and offset economic losses.
The interest rates for these loans range between 4% if your business doesn’t have credit elsewhere, and 8% if it does. You have up to 30 years to repay them.
Export loans
These are perfect for businesses that need working capital advances on export orders, receivables or letters of credit. Even better, you can apply before finalizing an export sale. If you receive funding, it can cover supplies, inventory, or production of goods. However, to secure funding, you’ll need to provide a personal guarantee of at least 20%.
Export loans fund up to $5 million and mature over a year or less, through one of three programs:
- The Export Working Capital Program of up to $5 million. Here, the SBA offers a 90% guarantee for short-term loans for export working capital.
- The Export Express Loans Program of up to $500,000 in short-term loans and lines of credit for export purposes.
- The International Trade Loan Program of up to $5 million in long-term loans for facilities, equipment, and permanent working capital that will enhance export ability.
Microloans
This program awards qualified businesses with smaller loans of between $500 and $50,000. It’s intended to help entrepreneurs from traditionally underrepresented groups secure funding when they can’t do so elsewhere.
The interest rates usually range between 8% and 13%, with a maximum repayment term of six years.
To qualify, you’ll need to sign a personal guarantee and possibly put up collateral. You’ll also need a credit score of at least 640.
SBA Community Advantage loans
These SBA loans were first introduced in 2011, for companies operating in underserved communities. They offer up to $250,000 for startups and smaller companies wanting to expand. Generally, the funds are quite flexible and can be used for a number of purposes, including working capital costs, or purchasing inventory and assets.
You have between seven and 10 years to repay these loans, at interest rates of between 7% and 9%.
How SBA Loans Work
While the SBA administers loans, the body itself doesn’t actually lend you the money. Instead, they guarantee funds from a lender, like a bank.
Applying for SBA loans is relatively straight-forward. You can do so via the SBA website, which lists potential lenders. Once you’ve selected a lender, you’re ready to start the application process. Make sure to provide the following documents and information:
- Your personal identification
- A business plan
- Certificate or license for the business
- Proof of business ownership
- Financial statements
- 2 years of business tax returns
- 2 years of personal tax returns
- History of any past loan applications and decisions
Then, these lenders assess whether you qualify based on five categories:
- If you can repay the loan
- Your business experience
- Equity you’ve invested in your company
- How much debt you have and if you can repay it
- If you need to put up collateral
Remember that the application process can be slow – you may need to wait several weeks before the lender reaches a decision.
Thereafter, you’ll need to consider the tax and accounting implications.
Key Tax Considerations for SBA Loans
SBA loans are not considered taxable income. Instead, they’re a debt obligation or liability. Also, the interest you pay on these loans can affect your taxes. Interest payments are tax-deductible if your business uses the funds for legitimate business purposes. But if you use part of the funds for personal use, only the business-use portion of the interest is deductible in the year it is paid.
At the same time, SBA loans could help lower your tax implications for other business expenses. For instance, if you use the funds to purchase equipment, you can deduct the interest as a business expense, and make use of depreciation deductions for the equipment itself.
Also keep in mind that if you use SBA loans for renewable energy installations, your business may qualify for tax credits.
In order to make the most of the tax benefits of SBA loans, you’ll need to ensure your company keeps detailed records of both your financial statements and tax filings. And that means accurate accounting practices.
Accounting Considerations for SBA Loans
As mentioned above, these loans are considered a liability. That means they should be recorded as such on your balance sheet. Whether they’re listed as current or long-term liabilities depends on how long you have to repay them. Current liabilities must be repaid within a year, while long-term ones are repaid over a longer period.
And speaking of reporting – remember that loan repayments lower the principal liability on your balance sheet, but don’t affect your profit and loss statement. Only interest payments should be recorded as an expense on your income statement.
Other factors to consider are your cash flow and budget. You need to integrate repayments into your forecasts to ensure that you can meet these obligations without jeopardizing operational liquidity.
Just like with your taxes, accurate accounting for loans relies on clean and detailed records as proof of all transactions – for both compliance, and transparency.
Common Pitfalls and Best Practices
Despite the many benefits and uses of SBA loans, some businesses accidentally jeopardize their own chances of approval through simple errors. Don’t let that happen to you.
When applying for loans, make sure you are prepared. This means applying for the right type of loan, and ensuring you have the right documentation for it. At the same time, make sure you correctly follow all loan guidelines, like collateral requirements, or the necessary credit score.
And finally, when in doubt, it’s always best to call in a professional. Financial experts like the team at Fusion CPA can help you navigate the tax and accounting implications of SBA loans, to ensure you get the most bang for your buck.
If you need assistance with your finances, schedule a Discovery Call with one of our CPAs.
The information presented in this blog article is provided for informational purposes only. The information does not constitute legal, accounting, tax advice, or other professional services. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability of the information contained herein. Use the information at your own risk. We disclaim all liability for any actions taken or not taken based on the contents of this blog. The use or interpretation of this information is solely at your discretion. For full guidance, consult with qualified professionals in the relevant fields.