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SBA Loans: When and How to Use the Funding for Your Small Business

BankUnited Dec 12, 2023

Learn the SBA's eligibility criteria and acceptable uses of an SBA loan.

What do well-known businesses from Shopify and Apple to Chobani and Ben & Jerry’s have in common? These now-billion-dollar companies all took advantage of SBA financing in the early stages of their business journey to fund growth and fuel success.

Launched in 1953, the federal Small Business Administration offers guidance and support, including loans, to small businesses, startups, real estate investors, family-owned businesses, and other types of businesses.¹Last year alone, the SBA delivered a record $44.8 billion in small business loans to 84,400 U.S. entrepreneurs.²

SBA loans are designed to help fledgling businesses grow and expand via flexible terms and conditions. As with any loan product, it’s essential to do your homework before diving in. Read on to learn more about the SBA’s eligibility criteria for financing and how an SBA loan could help your business thrive.

What is an SBA loan?

An SBA loan refers to multiple loan products backed by the SBA and created specifically for small businesses. They offer competitive rates and fees that are often lower than what a new business can access. Depending on the loan type, it may also include continued business support and counseling, as well as favorable terms such as low down payments, flexible overhead, and no collateral required. The three most common types of SBA loans are:

7(a) loans: Delivered by SBA lenders, these loans offer long-term financing for a variety of purposes.

504 loans: These are long-term, fixed-rate loans available through mission-oriented, community-based SBA Certified Development Companies.

Microloans: Offered by intermediary lenders, these loans of $50,000 or less are aimed at helping small businesses and nonprofit childcare centers.

Who is eligible for an SBA loan?

While each lender and loan product has specific eligibility requirements, there are broad qualifications for applying for an SBA loan. First, the loans are aimed at small businesses. The SBA uses a combination of factors to determine what that means; you can assess your business to see if it qualifies here. In addition, your company also needs to be:

A for-profit company

Located in the United States or its territories

Have tried to obtain alternate sources of financing, other than an SBA loan

Creditworthy and demonstrate a reasonable ability to repay the loan

What can you use an SBA loan for?

The SBA offers a variety of loan options to help businesses grow and develop. Qualified loan purposes may include real estate purchases, construction, business acquisitions, partner buyouts, inventory, equipment purchases, and working capital. Here’s a breakdown of SBA loan uses and examples of how businesses have put SBA financing to work:

Real estate. SBA loans are available to entrepreneurs who are looking to buy, construct, or improve commercial real estate or purchase heavy equipment. For example, Chobani founder, Hamdi Ulukaya, financed his first yogurt-making facility with an SBA 504 Commercial Real Estate loan.³

Partner buyouts. Buying out a business partner can require a significant cash outlay. Once all partners have agreed on the business’s value, you can utilize an SBA 7(a) loan for a lump-sum buyout. The rules state that the borrower does not need to put down any equity, provided that the business has a debt-to-net-worth ratio of 9:1 or less. If the ratio exceeds this, the borrower will need to put 10% down to qualify for the loan.

Business acquisitions. Similar to a partner buyout, small business owners can use SBA loans to purchase an existing business, which the SBA refers to as a “change of ownership.” This is permissible when:

A small business purchases 100% of the ownership interest in another business.

An individual who isn’t already an owner purchases 100% of the ownership interest in the business.

A small business acquires another small business through an asset purchase.

An Employee Stock Ownership Plan (ESOP) or equivalent trust purchases a controlling interest (51% or more) in the small business.

Equipment purchases. Both 7(a) and 504 loans can be used to purchase or lease business equipment. The types of equipment can include vehicles, machinery, computers, servers, restaurant equipment, and more.

Working capital. Includes any outlay you make to cover day-to-day expenses, such as salaries and consultancy fees, utilities, training and development, business travel, buying an existing franchise, etc.

Inventory needs. This refers to raw materials, semi-finished stock, merchandise, supplies, and finished wholesale purchases (for resale).

How do you get an SBA loan?

The SBA sets the guidelines for its loan programs, and qualified lenders then evaluate and disperse the loans to small businesses. As an SBA Preferred Lender, BankUnited can help you determine whether an SBA loan makes sense for your business and which type of loan you should pursue. We offer SBA 504 and SBA Express Line of Credit & Term Loans to help you get your ideas off the ground, with up to 100% financing available.

SBA loans are a powerful tool for business owners to start and grow their companies. You can leverage the loans for a variety of purposes, from buying equipment to expanding working capital to purchasing another business. For a full breakdown of SBA terms, conditions, eligibility, and interest rates, visit the SBA website.

To learn more about how an SBA loan might work with your business, connect with a BankUnited business banker today.

Sources

Not a commitment to lend. SBA loan products are subject to credit approval, eligibility requirements, and applicable SBA program guidelines

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