How to Use an SBA Loan to Grow Your Business

First Service Credit Union
8/1/2018 12:00:00 AM - 5 min. read

How to Use an SBA Loan to Grow Your Business

Running a small business has its challenges, and nearly all business owners would agree that managing cash flow is one of the biggest. Fortunately, there are several ways for small business owners to access capital for their businesses. Below we will discuss various programs offered by the U.S. Small Business Administration, or SBA for short, explain how SBA loans can be used to grow a business, and even offer tips on applying for an SBA loan.


What Is an SBA Loan?

SBA loans are special commercial loans offered by private lenders and guaranteed by the U.S. government. In 1853, the Small Business Act was passed, which established the SBA. This agency instituted government programs – including SBA loans – to help citizens start and grow businesses. To this day, SBA loans provide cash to business owners who need additional capital to move their business forward.


Common Uses for SBA Loans

By design SBA loans are intended to provide business owners with working capital, so they can use them for a myriad of purposes. The loan should cover most typical business expenses, though the specifics can depend on the type of SBA loan the borrower receives. These are some of the most common uses for SBA loans:

  • Buying a building
  • Consolidation of short-term debts
  • Equipment and fixtures
  • Expansion
  • Furniture and equipment
  • Inventory
  • Land
  • Machinery or equipment purchase/lease
  • Refinancing debt
  • Renovation
  • Seasonal financing/working capital
  • Seasonal line of credit
  • Start-up costs
  • Vacant land
  • Working capital

It is important to note that SBA loans explicitly do not cover some costs, including paying off creditors for inadequately secured debt and expenses in the speculation, lending, investment, rental real estate, gambling, or nonprofit industries.

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Pro-Tip: Rates are near record lows, which means you may have a unique opportunity to consolidate high-interest business debt with an SBA loan. Speak with one of our Commercial Lending professionals to find out what your options are.


Different Types of SBA Loans

Every business faces its own unique challenges. To meet a variety of needs, the SBA has created several loan types designed to help with different business situations. These are the most common SBA loan types:

SBA Standard 7(a)

The Standard 7(a) loan is a popular option, and approval for this loan can happen in as little as five days. Lenders don’t need collateral for loans up to $25,000, and the SBA guarantees 85% of the loan amount up to $150,000. They guarantee 75% for loans greater than $150,000.

  • Max Loan Amount: $5 million
  • SBA Turnaround Time: 5-10 business days
  • Forms Required: SBA Form 1919 and SBA Form 1920
  • Collateral Required: No collateral needed for loans up to $25,000. For more than $350,000, the lender must fully secure the loan. The lender may use fixed assets of the business and available equity in the principals' personal real estate.

* Please note: At First Service, we offer SBA 7(a) loans from $150,000 - $5 million.

Apply for an SBA 7(a) Loan with First Service

SBA 7(a) Small Loan

The 7(a) Small Loan is similar to the standard 7(a), but can only loan up to $350,000. There are also different collateral requirements, including the lender's obligation to take a first lien on assets financed with the loan. As you might imagine, this loan is more suitable for businesses with credit profiles that are not as well established.

  • Max Loan Amount: $350,000
  • SBA Turnaround Time: 5-10 business days
  • Forms Required: SBA Form 1919 and SBA Form 1920
  • Collateral Required: No collateral needed for loans up to $25,000. Beyond that amount, lenders must follow collateral policies similar to other non-SBA-guaranteed loans, including a first lien on assets financed with loan proceeds.

SBA 504 Loan

SBA 504 Loans allow small businesses to take out long-term, fixed-rate loans to acquire fixed assets for expansion or modernization. These 504 loans are only available through SBA partners called Certified Development Companies (CDCs).

  • Max Loan Amount: $5 million
  • SBA Turnaround Time: 5-10 business days
  • Forms Required: U.S. Small Business Administration Application for Section 504 Loans
  • Collateral Required: Usually, the only collateral required will be the assets financed with the loan. However, personal guarantees from the business owners may also be required.

SBA Express

Some businesses are not able to wait for a loan. To help expedite the process, the SBA created the SBA Express loan, with applications reviewed and approved within 36 hours. Unlike SBA 7(a) loans, the SBA only guarantees up to 50% of the loan amount for these types of loans.

  • Max Loan Amount: $350,000
  • SBA Turnaround Time: 36 hours
  • Forms Required: SBA Form 1919 and other lender required forms
  • Collateral Required: No collateral needed for loans up to $25,000. Lenders must use their existing policies on the loans given over $25,000 and up to $350,000.

SBA Export Express

The SBA’s Export Express loan is another option designed to give borrowers quick access to their funds. Businesses can borrow up to $500,000 and receive an approval within 24 hours. These loans are guaranteed up to 90% at $350,000 or less and 75% for loans between $350,000 and $500,000.

  • Max Loan Amount: $500,000
  • SBA Turnaround Time: 24 hours
  • Forms Required: SBA Form 1919 and other lender required forms
  • Collateral Required: Lenders must follow all the same policies they would normally observe for non-SBA-guaranteed loans.

SBA Export Working Capital

The SBA created the Export Working Capital loan for businesses that can generate export sales but need additional working capital to fulfill orders. Lenders submit these requests to the U.S. Export Assistance Center location servicing the exporter's region. These loans are guaranteed for up to 90% of the loan amount.

  • Max Loan Amount: $5 million
  • SBA Turnaround Time: 5-10 business days
  • Forms Required: SBA-EIB 84-1 and other forms may be required
  • Collateral: A personal guarantee of owners with 20% or more ownership is required.


SBA Loan Rates and Terms

To keep its loans affordable, the SBA sets interest rate guidelines for lenders. Interest rates for SBA loans are determined by the daily prime rate, which changes based on the Federal Reserve.

The spread, or additional fees and interest, must be negotiated between the borrower and lender. However, the SBA does place limits on the spread based on the size and type of the loan. The terms for your SBA loan will depend on the lender, loan type, loan amount, and what the loan will be used to purchase. Most loans will need to be repaid within 7-10 years, but real estate and machinery may be repaid over more extended periods of time, usually up to 25 years.

Guarantee Fees

Before you apply for an SBA Loan, it’s important to note that the SBA does require a fee to guarantee a portion of the loan. The fee, typically paid by the lender though sometimes by the borrower, varies based on the amount borrowed.. These fees are a percentage of the loan and are structured as follows:

  • 3% fee for $150,000 - $700,000
  • 3.5% fee for $701,000 - $1 million
  • 3.75% fee for more than $1 million
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Pro-Tip: Because we want to help support small business owners, First Service Credit Union, pays these fees for our SBA borrowers.


5 Ways to Grow Your Business with an SBA Loan

5 Uses for an SBA Loan

The intention behind SBA loans is to help businesses grow. If you are trying to decide if access to working capital might be what your business needs, check out these common ways businesses use SBA loans.

1. Pay Off High-Interest Debt

If paying back creditors is hurting your cash flow each month, consider applying for an SBA loan. Many businesses take on debt, and many of them end up falling behind because of it. Consolidating business debt with a low-rate loan can help free up your finances so you have the ability to advance in other areas of your business.

2. Expand or Update Your Equipment

Many businesses rely on equipment or machinery to operate. Manufacturers, for example, will have a difficult time maximizing their potential output with outdated equipment. Regardless of your industry or what type of business you may have, ensuring that you are using the right tools for the job is paramount to your business’ success. Investing in updated equipment or even adding to what you already have can scale your business by increasing production.

3. Modernize Your Technology

Integrating modern technology into your business can help it reach the next level. From increasing production to improving customer experience, technology can help small businesses realize a wealth of new capabilities.

4. Build Your Inventory

Businesses with the capacity for holding more inventory can realize economies of scale more quickly than their counterparts who cannot keep as much on hand. Whether you’re purchasing raw materials or manufactured goods to resell, it’s always cheaper to buy in bulk. Additionally, being able to keep more on hand will increase your sales potential, especially during busy seasons. Every retail business owner knows that empty shelf space is lost revenue, so it’s important to have enough product in stock to keep up with consumer demand.

5. Improve Your Products or Services

The marketplace thrives on competition. The best way to keep your customers coming back is to offer something better than they can get from your competitors. This doesn’t only mean physical goods. It could mean hiring additional employees to expand your business’ hours, improving packaging and shipping, or even upgrading your point of sale (POS) system to improve your customers' experience. Remember, there’s no better marketing than a glowing review from an overjoyed customer.


Applying for an SBA Loan with First Service

Applying for an SBA loan can be easier than you think – especially when working with the right lender. At First Service, we want to help you get the funds you need to make your business successful. Let us walk with you through each step of the process and help you file your application successfully.