SBA Small Loans

Just like standard SBA 7(a) loans, Small Loans can be used in many ways. The program’s flexibility is good for growing companies that may have many miscellaneous expenses or strategic projects that may be hard to find financing for under conventional loan programs.

The smaller loan amount typically comes with a streamlined loan application and funding process compared to 7(a) loans.

Standard 7(a) loan applications typically require a longer timeline and additional paperwork than conventional business loans. The extensive application is just one of the tradeoffs that make it possible to access the unique benefits of the 7(a) program. However, that process is expedited with Small Loans, making it possible to access SBA terms within a shorter timeline.

Your lender works with fewer assets, smaller numbers, and less documentation when they fund a Small Loan compared to standard 7(a) loans. Standard 7(a) loans take 60-90 days to fund depending on how you plan to use the proceeds. Small Loans used to secure working capital are typically funded within 30-35 days. Small Loans used to refinance debt may take a little to fund, averaging around 45 days.

Lenders are not required by the SBA to ask for collateral for Small Loans, unlike Standard 7(a) Loans.

The SBA requires 7(a) Loans over $350,000 must be fully collateralized. Meaning, the business owner must list assets that would equal or exceed the full loan amount if fully liquidated. This will sometimes include personal property if the business’s assets do not equal the amount of the loan.

Collateral can be a major roadblock that keeps business owners from securing a business loan, especially if the business is in its earlier stages. The Small Loan program allows lenders to set their own requirements for collateral, often leading to minimal collateral requirements for loans of less than $350,000.

Collateral requirements will vary from lender to lender for Small Loans. SBA Small Loans financed through Capital Bank are collateralized with a 1^st lien on business assets but no personal property. In the case you must default, the business assets would be liquidated but you would retain your personal residence.

Small Loans will require a smaller equity injection. The term ‘equity injection’ refers to money the business owner has invested into their business. It’s the SBA’s version of a down payment.

To calculate the size of how much equity you’ve ‘injected’ into the business, add up the costs of everything you’ve spent to get the business off the ground. Bought a truck for deliveries? Real estate or office space? Inventory? All of those expenses can be part of your equity injection.

Financing for startups (businesses in operation for 1 year or less) and business acquisitions require an equity injection that equals ~10% of the total project cost (your loan amount + equity injection). So, if you need to borrow $270,000 your equity injection would need to amount to $30,000, bringing the total project cost to $300,000.

Small Loans for startups and business acquisitions still require proof of equity injection, however, the amount will be substantially smaller compared to a standard 7(a) loan. This is especially helpful for new business owners that have not yet been able to invest a substantial amount back into their business.

Even though the loan application for Small Loans is less intense than traditional 7(a) loan applications, it’s still a lengthy process compared to conventional business loan applications.

We’ve found that the best way to expedite the SBA loan application process is to prepare before you apply. Learn about the required documents and the steps of the process so that you can keep your loan application moving as efficiently as possible. Our Tips for the SBA Application outline some key things to know before you start applying for a loan to get you started.

Your limiting factor with the Small Loan program is the loan amount. You may not be able to accomplish certain goals with $350,000 or less. In that case, prepare to apply for another financing program or a standard SBA 7(a) loan. You’ll have some additional requirements to meet to fund the standard 7(a) loan compared to a Small Loan, however, you’ll be able to access up to $5 million in financing if you qualify.

To be eligible for an SBA loan, business owners need to be considered a ‘small business’ by the SBA, operate for profit, do business in the US, use the funds for an eligible purpose,  and face barriers to securing a conventional loan.

In addition to meeting the basic eligibility requirements, you must not be on the list of ineligible businesses, which includes:

• Businesses that engage in gambling, investments or lending, loan packaging, multi-sales distribution, or illegal activities.
• Real estate investment firms
• Pyramid sales plans
• Charitable, religious, or other nonprofit organizations