Whether you’re a new business starting up or an established one looking to grow exponentially, there’s a good possibility that you’ll need some help, at least on a financial level. Having access to capital to start or grow can easily be the difference between success and failure. Knowing the ins and outs of small business loans, what they entail and the players involved is necessary in order to obtain one. Doing your homework on what’s available, the eligibility requirements and how they work is the first step in applying for a small business loan. Getting approved means being familiar with the U.S. Small Business Association (SBA), a government agency that helps small businesses procure government-backed business loans.
What Is the SBA?
Created in 1953 under the Dwight D. Eisenhower administration, the SBA is a federal agency that provides support to small businesses and entrepreneurs. Its mission is “to maintain and strengthen the nation's economy by enabling the establishment and viability of small businesses and by assisting in the economic recovery of communities after disasters.” The SBA has a physical presence in all 50 states and has a large number of counseling partners nationwide. In addition to loans, the SBA provides other services, including counseling, its small business development centers (many connected with a university or college) and is affiliated with SCORE, a mentorship program of volunteer business professionals.
What Is a Small Business Loan?
A small business loan is a government-backed loan intended to help a new business get started or a more established business expand. One popular misconception is that a small business loan is provided by the government. The government itself doesn’t make loans — these loans are issued through established banks, credit unions and other lenders who have a relationship to the SBA. There are multiple types of SBA loans, from amounts that range from $50,000 to over $5 million, and different flavors of loans are used for different purposes. For example, an SBA 7(a) loan — used for working capital, expansion and equipment purchases has different requirements than an SBA Disaster Loan — one that is used to recover from physical damage due to a declared disaster, such as a flood, earthquake or wildfire. There are often changing criteria for the categories of loans; for example, the COVID pandemic added some new qualifiers.
What Qualifies As a Small Business?
According to the SBA, a business defined as having less than $35.5 million in annual sales and under 1,500 employees is considered a small business, though there are variations of these numbers. Some industries are classified due to the number of employees, such as manufacturing (between 500 and 1,500, depending on the subsector), while others are labeled as small businesses due to the number of annual receipts, such as retail (no more than $7.5 million to $38.5 million, depending on the subsector). The SBA publishes a table of standards (and codes) for loan purposes.
SBA Eligibility Requirements for a Small Business Loan
These include several requirements, including being an officially registered, legally operating for-profit business (the SBA doesn’t back loans for not-for-profit organizations) as well as being physically located in the United States (or its territories, which includes Puerto Rico, Guam, American Samoa, the U.S. Virgin Islands and the Northern Mariana Islands). In addition, the business must have had invested equity (time and/or money) and have exhausted all other avenues for financing. In addition to loans described above, the SBA offers separate loan programs for veteran-owned, woman-owned and minority-owned businesses as well as small business grants for many types of businesses.
The Pros and Cons of Small Business Loans
The benefits of a small business loan over a conventional loan are numerous. They include:
- Competitive rates/lower fees.
- Longer, more flexible terms.
- Less financial risk for you/your company.
Of course, there are cons to getting a small business loan. They include:
- More paperwork required.
- Longer approval time.
- Government red tape can be frustrating.
Applying for (and getting approved for) a small business loan can be an arduous process, but it can also be a game changer for your business. If you’re qualified, willing to do your homework and wanting to expand your business, there is no reason not to go this route.
Chris Capelle is a technology expert, writer and instructor. For over 25 years, he has worked in the publishing, advertising and consumer products industries.
SCORE - Homepage
Business Week Daily - How to Know if You Really Classify as a Small Business
NerdWallet - SBA Loans: What They Are and How to Qualify