Business Insights

Types of SBA loans

Discover the most common SBA loan types – including 7(a), 504, and microloans. Learn which financing option may fit your business needs.

If you’re an entrepreneur, the search for capital is never ending.

Without it, it’s hard to keep your doors open. After all, there are employees to pay, cash flow to manage, capacity to expand, and sales to increase.

All that takes money.

If you’re a small business, how do you get the right business loan, one that delivers tangible advantages for your company’s bottom line?

Since 1953, the Small Business Administration (SBA) has worked with lending partners such as Regions Bank to create opportunities for countless entrepreneurs to establish, acquire, and grow their businesses.

“We work closely with the SBA to help all kinds of businesses secure the capital they need,” said Taylor Franco, SVP, SBA Large Dollar Originations Manager. “There are few things more rewarding to me than watching a business thrive because of the funding we provide.”

How do businesses use SBA loans?

With the SBA’s long track record of being a partner for success, small businesses call on SBA lending for a host of reasons. However, Franco offers that these are the most common reasons businesses apply for an SBA loan:

1. Working capital to fund day-to-day operations such as payroll, inventory, and marketing. Also, cash flow management for bridging expenses and payments received, especially for businesses with seasonal fluctuations or unexpected downturns
2. Commercial real estate for business operations or investment properties
3. Equipment for operations and inventory for resale
4. Business expansion and acquisition into new markets, new locations, or through the purchase of another business
5. Partner buyouts
6. Debt refinance to consolidate or refinance existing business debt, potentially lowering interest rates or extending repayment terms
7. Startup costs of forming a new business
8. Addressing collateral shortfalls for those businesses that may not qualify for a traditional loan
9. Emergency and disaster relief for businesses affected by an event
10. Credit improvement through timely payments on an SBA loan, making it easier to secure future financing
11. Business opportunities, whether in new markets or strategic acquisitions

However, as Franco cautioned, “Just as there are a host of needs when it comes to lending, there are also a wide array of SBA lending options and products. Each type of loan is often uniquely suited for a business need or situation. That’s why it’s so important to work with an SBA lender who really understands the eligibility and features of each type of loan structure.”

What are the different SBA loan types?

While you should rely on an SBA lender for an informed recommendation, here is a broad overview of each type of loan and where it could prove most useful.

SBA 7(a) loans

This is the SBA's primary business loan program, a workhorse program offering loans up to $5 million for a wide range of purposes. Potential uses of SBA 7(a) loans include:

• Working capital
• Equipment purchases
• Real estate acquisition or renovation
• Refinancing existing higher-interest debt
• Inventory

Franco likes to call the 7(a) loan the “Kitchen Sink Loan,” as it supports many needs from working capital to business acquisitions to fixed assets.

SBA Express loans

One subset of SBA 7(a) loans is an SBA Express loan. With a maximum loan amount of $500,000, SBA Express allows qualified lenders such as Regions to make loan decisions without formal SBA review.

SBA Express is an attractive option for many. Depending on the type of transaction and the lender’s credit policy, SBA Express sometimes requires less documentation, as well as loan underwriting that’s not purely driven by credit score.

And, in some cases, borrowers are not required to provide collateral for loan amounts below $50,000. Further, SBA Express allows attractive loan terms.

SBA 504 loans

The 504 loan is designed to provide long-term, fixed-rate financing for highly specific purposes, including:

• Existing buildings or land
• New facilities
• Improvement and modernization of existing facilities, land, streets, utilities, parking lots and landscaping
• Purchase of machinery and equipment that has a useful remaining life of at least 10 years
• Consolidation of debt under certain conditions and repaying or refinancing debt defined as "qualified debt" by the SBA

“What we see most often as the use for 504 loans is fixed assets, real estate and equipment,” Franco said. But, regardless of the 504 loan’s intended use, she also offered that a key factor for funding success is to start the process early.

“As soon as you begin to think about expanding or moving out of a leased space, or buying a building, it’s important to engage a trusted banking partner who fully understands the intricacies of a 504 loan—often up to a year in advance of any potential purchase. That allows you to ensure that your financials are sound enough to support that loan and all other associated costs.”

The other crucial aspect to the process? Make the case that your intended purchase will provide a strong return on investment (ROI). That’s when the expertise of a business banker comes in handy.

“As one example,” Franco added, “If you’re purchasing equipment, will it help you create more product or streamline operations? How will this purchase have a positive impact on your bottom line over time?”

The maximum loan amount for the SBA’s portion of a 504 loan is either $5,000,000 or $5,500,000 depending on your company’s industry. But, when combined with other sources of lending, the overall project size is technically unlimited.

SBA microloans

As the name implies, this program offers loans up to $50,000, primarily for small businesses and non-profit childcare centers. Microloans, available through specialized intermediary lenders, can prove highly useful for startups and businesses in their early stages of operation, as well as certain non-profit childcare centers.

In addition, SBA microloans can help those businesses who might otherwise face barriers to traditional lending, including women-owned and minority-owned businesses, businesses in low-income communities, and those business owners with limited or no credit history.

Disaster loans

When you must face the unexpected, the Economic Injury Disaster Loan (EIDL) can provide a source of support and funding. If your business has been affected by a natural disaster and your region is designated a disaster area by the federal government, you may be eligible for lending directly from the SBA. At the same time, it’s important to know that Regions can offer support and assistance to affected businesses.

Export assistance

Your products are going places. Yet, if you are looking to export, there’s a lot more to successful transactions than simply arranging shipping. SBA international trade loans and SBA export working capital can prove instrumental in doing business overseas, meeting financing needs that traditional lending guidelines may view as risky.

“Regions performs a lot of SBA export lending through international trade,” Franco added, “We partner with our global trade groups to help a lot of businesses enjoy success in what can be seen as a tricky enterprise. We can provide flexible terms and options for US-based exporters.”

Some of the eligible uses for SBA export loans include inventory acquisition and managing foreign accounts receivable. At the same time, Franco pointed out, there are still special SBA requirements for export lending to be considered.

“With SBA export loans, you can expect a certain level of oversight of your foreign customers. There are specific guidelines such as credit insurance based on the type of customers you serve. There will be nuances to any type of export lending. And to have a solid global trade partnership, there are plenty of factors that come into play, which is why it’s important to work with a partner with experience in export lending and global trade.”

Short-term financing

Not all lending is for the long haul. Sometimes you need capital to get you through a defined period. In that sense, CAPlines is a revolving asset-based line of credit with a maximum term of ten years. Some of the potential uses of CAPlines include:

• Revolving line of credit for working capital needs
• Shrinking the gap between payables and receivables
• Advances on eligible accounts receivable and inventory

“We work with our customers to offer the working CAPline program,” Franco offered, “a revolving facility of up to $5,000,000. The customers who use this typically have heavy working capital needs or longer cash conversion cycles, such as contractors or seasonal businesses. Another potential customer is one who might be currently heavy in inventory or have considerable revenue out there in receivables.”

Which SBA loan is right for my business?

Given how many different possible business scenarios you might face, there’s no single answer. The best solution, then, is to talk to an expert when it comes to SBA Lending.

“SBA lending really can fit a versatile set of needs. And sometimes the right lending solution requires fully understanding your business and your goals, the kind that begins with conversations.

“For example, are you looking for permanent working capital, growing, and need to hire and expand? Your first step is understanding your pain points and then working with a banker and a team to develop a plan. That’s the first step.”

The other aspect to SBA lending? Preparation matters. That means not just having a clear understanding of how the SBA loan is to be used. Instead, as Franco pointed out, it also means crunching the numbers to have a clear financial picture.

“To keep the process as short as possible, financial quality is critical and a confidence builder for the lender. The best experiences come from customers who provide sound and accurate financials to us on a regular basis. Treating your lender like a collaborator gives us the ability to understand your business, help with the planning, and knowing what kind of debt you can take on.”