The Small Business Administration (SBA) supports American small business by providing increased access to affordable funding. The SBA encourages traditional lenders like banks and credit unions to provide loans with favorable rates and repayment terms through SBA lending programs.

With some emergency exceptions, the SBA doesn’t loan directly to small business owners. They support lenders by guaranteeing a portion of the loan, which removes some of the lender's risk. The SBA’s loan programs are meant to encourage people of all backgrounds to embark on the American Dream.

An SBA loan is traditional debt-based financing with advantages for small business owners. These loans provide up to $5 million in small business funding, which can be used for starting a new business or franchise, purchasing an existing business, expanding operations, buying equipment, purchasing commercial real estate, or acting as working capital. Though these loans are approved and funded through individual banks, the SBA guarantees 50 to 90 percent of the loan if it goes into default, which is why lenders are willing to offer favorable terms and conditions to small business owners.

There are a number of SBA loan programs, but Guidant specializes in three types.

SBA loan interest rates are based on the daily prime rate (set by the Federal Reserve) plus the lender’s spread. SBA loans normally have a variable rate, which means the interest rate can fluctuate over time. Some lenders might opt for a fixed rate, which means your interest rate won’t change over the lifetime of the loan. Some lenders may even do a fixed rate for a portion of the loan term — for example, a 10-year loan could have a fixed rate for three and a variable rate for seven years.

All SBA loan programs require you to make a down payment. Though the requirements range from about 10 to 30 percent of the principal, the inability to make a large enough down payment can disqualify you from being approved. Fortunately, you can use other forms of funding to cover some or all your SBA loan down payment — including 401(k) Business Financing, also known as Rollovers for Business Startups (ROBS).

A repayment schedule, also known as an amortization schedule, is included in your SBA loan terms. It’s possible to save money on interest payments if you can pay the loan back over a shorter period. However, your monthly payments could be more manageable over a longer time period. Most SBA loans are amortized over 10 years with no prepayment penalty for terms under 15 years.

Most SBA lenders require business owners to sign a personal guarantee to be approved for a loan — which is common with debt-based financing. This guarantee is an agreement to use personal assets to cover the loan if the business can’t pay it back. That means if your business fails while the loan is still being repaid, you and other owners become personally responsible for the remaining loan amount. Personal guarantees are binding regardless of your entity type.

Closing costs and fees for SBA loans vary depending on the type of SBA loan you use. With 7(a) loans, Guidant usually estimates about 5% of the project total as the closing cost. However, your costs could be higher or lower depending on your lender and the type of project.

The 5 C’s of SBA Loan Eligibility

There are five primary elements that lenders consider in SBA loan applications. These “five C’s” can help you understand if you’re a qualified candidate for an SBA loan.

1. Capital

   It’s key to be able to cover the down payment of an SBA Loan. When lenders don’t cover 100 percent of your project cost, they feel reassured knowing that you have a personal stake in the success of your business. The amount of down payment you’ll need depends on your business and the type of SBA loan you’re applying for.

   But if you can’t cover a down payment out-of-pocket, you aren’t out of luck. SBA loans can be combined with other forms of funding, like 401(k) business financing or unsecured loans.

2. Credit

   Your credit score and credit history play a role in your approval for SBA lending. Most lenders look at your personal and business FICO score. A 680+ personal score and 160 business score are typically the minimum requirements for SBA loan approval. Credit events, like a recent bankruptcy, can have a negative impact on your application.

3. Capacity

   Capacity means how your business will generate income (or cash flow) to repay your SBA loan. Your household income and the current/anticipated income from your business all play into the lender’s confidence in your ability to make your monthly payments. If you’re funding a new business, lenders put more weight on your outside income sources. If you’re purchasing an existing business, they’ll look at the business’s tax returns and recent financials.

4. Character

   Lenders look at your personal and business character when evaluating your strength as a borrower. Your business experience is a factor for lenders. While you don’t need experience in the industry of the business you’re funding, it helps. You’ll provide information about events in your personal history, like child support payments, criminal convictions, and recent arrests.

5. Collateral

   Your personal property may be used as collateral to secure your loan. For example, the bank may take a lien against your home to use as security if the loan goes into default. Unlike the other eligibility requirements, it’s possible you might not be denied a loan if you don’t have enough collateral to secure it — it can depend on how you met the other requirements.

You don’t have to rank perfectly for each of the five C’s to get approved for a loan. All five elements are indicators of your attractiveness to lenders. They’re not considered individually in a vacuum, so all five C’s play together when lenders are looking at you as a prospective borrower.