How SBA loans help businesses thrive

The US Small Business Administration, or SBA, loans are a versatile option if you're looking to grow your business. As a small business owner, you may wonder how the SBA can help you finance your business expansion or access working capital. The SBA loan program is designed to address specific challenges and foster growth for businesses at any stage.

SBA loans cater to a variety of needs, which can help maintain capital and cash flow for your business. While a variety of SBA loans provide financial flexibility, the SBA defines specific acceptable uses, and adhering to these guidelines is crucial for compliance.

The benefits of SBA loans

If you meet the eligibility criteria, SBA loans offer significant benefits, all adding operational flexibility for your business. To participate in the SBA benefit program and qualify for loan assistance, businesses must meet certain criteria, including size standards, industry type and creditworthiness.

Key benefits

• Bypassing strict loan-to-value ratio requirements
• Extending amortization periods to facilitate cash flow management
• Lowering down-payment requirements, which can free up funds for other business needs

Eligibility guidelines

• Be a for-profit business in an eligible industry physically located and operating in the US
• Be actively involved in the business
• Have acceptable creditworthiness and business character without delinquent government debt
• Demonstrate a need for funds
• Fit the SBA's definition of a small business and meet SBA size standards

Types of SBA loan programs

The SBA backs various loans, but the most common ones include the 7(a) and 504 loan programs. Here's an outline of the types of SBA term loans with acceptable uses of funding and unique benefits that help small business owners make informed financing decisions.

SBA 7(a) loan program

The SBA 7(a) loan program offers financial assistance for a wide range of business purposes. Whether you're looking to acquire a business, purchase commercial real estate or need working capital, the 7(a) loan program can provide the funding you need.

Key benefits

• Funding from $500,000 to $5 million
• Up to 100% financing available
• Longer repayment terms for improved cash flow
• Competitive interest rates

SBA 504 loan program

The SBA 504 loan program is specifically designed to help businesses acquire funds for expansion and modernization. This includes purchasing land or buildings, constructing new facilities or upgrading existing equipment.

Key benefits

• Funding up to $13.5 million
• Down payments as low as 10%
• Longer repayment terms—up to 25 years
• Below-market, fixed interest rates for long-term stability

How SBA funds work

Consider your business plans and financing needs to determine the best loan program for your project. It's also important to review SBA loan eligibility terms and guidelines before applying and deploying funds. Each SBA term loan has specific requirements for various acceptable uses, which are outlined below.

SBA 7(a) loan program

The SBA 7(a) loan program is the most flexible and covers many business needs, including:

• Acquiring a business: Access funding and flexible terms to acquire a new business.
• Purchasing commercial real estate: Buy existing commercial buildings or land for new construction projects.
• Funding construction and renovation: Access capital for large-scale construction or renovation projects to modernize or expand facilities.
• Accessing working capital: Cover daily operational costs or needed capital injections.
• Procuring equipment and inventory: Purchase equipment or cover inventory restocking needs.
• Refinancing debt: Consolidate multiple loans into one loan and lower your monthly payments.
• Buying a partner in or out: Provide funding for changes in business ownership.
• Improving leased properties: Renovate or make improvements to leased properties.

SBA 504 loan program

This loan program typically helps support business expansion and job creation.

• Purchasing commercial real estate: Buy existing commercial buildings or land for new construction projects.
• Funding construction and renovation: Access capital for large-scale construction or renovation projects to modernize or expand facilities.
• Refinance for expansion or debt consolidation: Refinance existing commercial loan debt to lower monthly payments and consolidate debt.

Because each SBA loan program has its unique features and requirements, the best loan for your business depends on the amount of funds and loan terms for your project. If you're considering one of these SBA loan programs, understanding how to get your first small business loan—including the application and eligibility requirements—is crucial.

Understanding spending limits

Of course, knowing what you can use SBA loans for is important, but you also want to be aware of unacceptable funding uses. This can help keep track of compliance and avoid any potential legal and financing issues later. Here's a breakdown of specific unacceptable uses for SBA 7(a) and SBA 504 loans.

SBA 7(a) loans

While SBA 7(a) loans offer versatile funding options, note that the following uses are strictly prohibited.

• Speculative real estate investments: These are investments in property purchased with the sole intent of reselling it for a profit.
• Refinancing existing debt under already favorable terms: If your current debt has favorable terms, using an SBA 7(a) loan to refinance isn't allowed.
• Personal debts or distributions to associates of the business: This includes covering personal debts, distributions to owners, affiliates or other associates of the business or paying other non-business expenses.
• Investments in other businesses or the stock market: The loan can't be used to invest in stocks, bonds or other businesses.

SBA 504 loans

SBA 504 loans are a valuable resource for eligible businesses, but they have specific restrictions on fund usage.

• Working capital or inventory: These loans are for fixed assets, not expenses like payroll, rent or inventory purchases.
• Refinancing existing debt with favorable terms: SBA 504 loans can't be used to refinance existing debt unless it's for favorable terms, expansion or debt consolidation.
• Non-business-related purchases: These loans can't be used for personal expenses, investments unrelated to the business or other non-eligible activities.

There are a handful of unacceptable fund uses that apply to all SBA loans.

• Payment of delinquent taxes
• A purpose that doesn't benefit the small business
• Political contributions or similar activities
• Illegal activities at the federal level or operations related to gambling

Alternative funding options for SBA loans

While SBA loans are an option for many business owners, they may not be the perfect fit for your needs. There are alternatives if you need faster access to funding, don't meet all the eligibility requirements or prefer a different approach.

• Find angel investors or venture capital firms for funds for early-stage businesses with growth potential.
• Explore microloan options from organizations that provide small loans to entrepreneurs.
• Lease or finance essential equipment through specialized lenders.
• Consider using business credit cards strategically for short-term needs.
• Apply to local, state and federal grants specific to your industry.

Need help finding the right funding?

SBA loans offer an array of flexible funding options tailored to meet business owners' needs that can help set them up for long-term success. However, understanding the restrictions associated with SBA loans is crucial. Following the loan terms can help avoid legal or financial complications.