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SBA Loan Down Payment: Is One Required?

sba loan down payment

Small business owners know that a lack of money can actually cost them money. In fact, 15 percent of new businesses and 7 percent of established ones say insufficient financing has hurt their profits, according to the U.S. Small Business Administration.

The government agency, which approved more than $30 billion in loans in 2017, supports and advocates for new and existing small businesses in the United States. SBA loans are known for having low interest rates and long terms.

“SBA loans are an excellent option for those small business owners who cannot access loans on reasonable terms,” said William Manger, associate administrator for the SBA’s Office of Capital Access. “With the strong economy we are experiencing in the United States, now is the time to start or grow a small business.”

For businesses looking toward the future, an SBA-backed loan can get them there. Keep reading for a detailed guide to the SBA loan process — and what kind of SBA loan down payment you might need.

How SBA loans work

The SBA doesn’t directly lend money to small businesses — an SBA-approved lender does and the SBA partially backs the loan. If the company fails, the SBA repays the lender the guaranteed portion of the loan. This way, lenders reduce their risk of losing money if the borrower defaults, and the SBA eases access to capital for small businesses. That means that if you were turned down for a loan by a traditional bank because, say, you haven’t been in business long enough, the SBA might be able to help.

To be eligible for an SBA loan, your business must be for-profit and located in the U.S. In addition, you must have invested time and/or money in the business and you must be unable to get a loan elsewhere. The lender and the specific loan program you choose will have additional eligibility requirements, including the size of the business. Different lenders will have different requirements, so being turned down by one doesn’t necessarily mean you’ll be turned down by another.

Do you need a SBA loan down payment?

Many SBA loans, including the most popular ones, do require a down payment, often 10 percent to 15 percent. The down payment helps show the lender and the SBA you are a worthy risk for their investments. SBA loan down payments, however, are often lower than traditional lenders’. The specific down payment depends on the type of loan you get and the lender. Because of factors such as repayment periods and interest rates, whether or not you have to make a down payment shouldn’t be your only consideration when you’re looking at SBA loans.

Which SBA loans require a down payment?

These SBA loans have a down payment requirement:

  • 7(a) Loans
  • SBA Express Loans
  • 504 Loans
  • 504 Loan Refinancing Program
  • Community Advantage Loans
  • Veterans Loans

These loans do not require a down payment:

  • Microloans
  • International Trade Loans
  • Export Working Capital Loans
  • Export Express
  • SBA Disaster Loans

More about each of these loans

7(a) Loans:

Under the SBA’s most popular loan program, business owners looking to grow or start a business can borrow up to $5 million for a term of five to 25 years, depending on the purpose of the loan. Many lenders will require a 10 percent down payment for established businesses and 15 percent for startups or for those who want to buy a new business.

You can use a 7(a) Loan for expansion, renovation, new construction, working capital or inventory. You can also use it to refinance debt, start a business or buy land, buildings or equipment. Benefits include long-term financing with a fixed maturity loan. There is a prepayment penalty for loans with maturities of 15 years or more if you prepay during first three years.

You might also encounter guarantee fees. The SBA will guarantee a maximum of 85 percent of loans up to $150,000 — 75 percent for loans more than $150,000 — for a maximum guarantee of $3.75 million. You’ll pay fees only on the SBA-guaranteed portion of the loan. There is no guarantee fee for a loan of $125,000 or less. For loans in the amount of $125,001 to $150,000 the guarantee fee is 2 percent, for loans in the amount of $150,001 to $700,000 the fee is 3 percent and for loans in the amount of $700,001 to $1 million the fee is 3.5 percent. If the guaranteed portion exceeds $1 million the fee is 3.75 percent. You will also pay an annual servicing fee of 0.55 percent.

The SBA offers a video with some basics about 7(a) Loans here.

SBA Express Loans:

These loans are similar to 7(a) Loans but offer smaller amounts of money and streamlined processing. The maximum loan amount $350,000, and business owners receive a response to their application within 36 hours. Aside from the fast turnaround, another benefit of this loan is that you can use it for revolving lines of credit instead of a term loan. You can use SBA Express Loans to finance a variety of business activities and you won’t need collateral for loans of up to $25,000.

The SBA will guarantee up to 50 percent of this loan and you’ll pay fees only on the portion of the loan that is SBA guaranteed. There is no guarantee fee for a loan of $125,000 or less. For loan amounts from $125,001 to $150,000 the guarantee fee is 2.0 percent, for amounts from $150,001 to $700,000 fee is 3 percent, and for amounts from $700,001 to $1 million the fee is 3.5 percent. If the guaranteed portion exceeds $1 million, the fee is 3.75 percent, and you’ll also pay an annual servicing fee of 0.55 percent.

504 Loans:

Like 7(a) Loans, these are also popular, but they are more limited in how you can spend the money. The down payment for this loan is typically 10 percent for an established business and 15 percent for a startup or special-use facility. If your business is both a startup and special-use company, the down payment is 20 percent. You can borrow the down payment, as long as the money does not come from an SBA loan.

Certified Development Companies, nonprofit corporations that promote economic development within their communities and are also regulated by the SBA, provide these loans. Businesses can borrow up to $5 million or $5.5 million, depending on the business type, to acquire fixed assets for expansion or modernization. This includes buying buildings and land, making improvements to buildings and land, building new facilities, renovating existing buildings and buying long-term machinery. You cannot use this loan for working capital, to buy inventory, or to refinance, consolidate or repay debt. The loans terms typically range from 10 years to 20 years and they come with fixed interest rates.

To qualify, a business must have a tangible net worth of $15 million or less and an average net income of $5 million or less after federal income taxes — for two years before the application. Servicing and guarantee fees also apply.

The CDC will contribute 40 percent of the total loan — compared with a traditional bank, which generally funds 50 percent — and the owner contributes at least 10 percent via the down payment.

There is a participation fee of .5 percent on lender share, plus the CDC might charge up to 1.5 percent on its share. The CDC also charges a monthly servicing fee of anywhere from 0.625 percent to 2 percent on the unpaid balance. The ongoing guarantee fee is 0.642 percent of the outstanding principal amount.

504 Loan Refinancing Program:

This is a long-term, fixed-rate loan similar to the 504 Loan, but you must have originally used at least 85 percent of the loan’s proceeds for eligible fixed assets. This loan has a down payment requirement. The guarantee fee is the same as for 504 Loans, except the ongoing guarantee fee is slightly higher — 0.682 percent of the outstanding principal.

Community Advantage Loans:

For underserved markets, these loans offer up to $250,000, and you must make a SBA loan down payment. You can use this loan for expansion, renovation and new construction — or to purchase land, buildings, equipment or fixtures. You can also use it for leasehold improvements or working capital, to refinance debt for compelling reasons, for a seasonal line of credit, for inventory or to start a business.

The maturity level of the loan depends on the business owner’s ability to repay, but generally, for working capital, machinery and equipment, the loan term is five to 10 years, not to exceed the life of the equipment. For real estate, the loan term is typically 25 years. Note: Unless this program is extended, it will expire in April 2020.

The SBA will guarantee a maximum of 85 percent of the loan up to $150,000 and 75 percent of the loan for amounts more than $150,000, up to a maximum guarantee of $3.75 million. You pay fees only the SBA-guaranteed portion of the loan. There is no guarantee fee for a loan of $125,000 or less. For amounts from $125,001 to $150,000, the guarantee fee is 2 percent. For amounts from $150,001 to $700,000, the fee is 3 percent, and for amounts from $700,001 to $1 million, the fee is 3.5 percent. If the guaranteed portion exceeds $1 million, the fee is 3.75 percent. You’ll also pay an annual servicing fee of 0.55 percent.

Veterans Loans:

The SBA offers 7(a) Loans — with a special benefit — to veterans: a reduced guarantee fee. The guarantee fee for non-SBA Express loans from $125,001 to $350,000 is 50 percent of what 7(a) Loans require and the guarantee fee for non-SBA Express loans in other amounts is also the same. Both loans carry an annual servicing fee of 0.55 percent.

The SBA Express features no guarantee fee at all for veterans. To qualify, a business must be owned and controlled by:

  • Veteran or service-disabled veteran
  • Active duty military member participating in the Transition Assistance Program
  • Reservist
  • National Guard member
  • Current or widowed spouse of a service member who died during service or from a service-connected disability

Learn more about VA business loan options here.

CAPLines of Credit:

These offer up to $5 million, and the lines of credit might be revolving. There are four types of lines of credit available through the SBA:

  • Working capital. Frequently used by businesses that offer credit to other businesses, this revolving line of credit provides money for cyclical growth, recurring or short-term needs. The maximum maturity on the line of credit is 10 years.
  • Contract. This line of credit can be either revolving or nonrevolving, and businesses that perform contracts use it to pay for labor and materials. The maximum maturity on the line of credit is 10 years.
  • Seasonal. This line of credit can also be either revolving or nonrevolving, and you use it to pay for seasonal increases in accounts receivable and inventory. The maximum maturity on the line of credit is 10 years.
  • Builders. This is another line of credit that be either revolving or nonrevolving, and builders use it to pay for labor and material costs. The maximum maturity on the line of credit is five years.

The SBA will guarantee a maximum of 85 percent of this loan for amounts of up to $150,000 and 75 percent for amounts more than $150,000, up to a maximum guarantee of $3.75 million. You’ll pay fees only the SBA-guaranteed portion of the loan. There is no guarantee fee for a loan of $125,000 or less. For loan amounts from$125,001 to $150,000, the guarantee fee is 2 percent, for amounts from $150,001 to $700,000 the fee is 3 percent, and for amounts from $700,001 to $1 million the fee is 3.5 percent. If the guaranteed portion exceeding $1 million, the fee is 3.75 percent. You’ll also pay an annual servicing fee of 0.55 percent.

Microloans:

These fixed-rate loans of up to $50,000 with terms of up to six years require no down payment. You can use the money for working capital, supplies, machinery and equipment, fixtures and more. You can’t use the funds, however, for real estate. These loans come from nonprofit, intermediary lenders and they don’t carry a guarantee fee.

International Trade Loans:

Under this program, business owners can borrow up to $5 million for up to 25 years and use the funds for permanent working capital, equipment, facilities, land and buildings and debt refinancing related to international trade. You won’t have to make a down payment, but you will pay guarantee fees. To qualify, you must be engaged or preparing to engage in international trade — or be harmed by competition from imports.

The SBA guarantee is up to 90 percent of the loan amount, up to a maximum of $4.5 million — or $4 million for working capital. You pay fees only the SBA-guaranteed portion of the loan. You won’t pay a guarantee fee for a loan of $125,000 or less. For $125,001 to $150,000 the guarantee fee is 2 percent, for amounts from $150,001 to $700,000 the fee is 3 percent, and for loan amounts from $700,001 to $1 million the fee is 3.5 percent. If the guaranteed portion exceeds $1 million the fee is 3.75 percent, and you’ll pay an annual servicing fee of .55  percent.

Export Working Capital Loans:

Exporters can borrow up to $5 million through these short-term, working capital loans, which typically carry terms of a year or less. You won’t need a down payment, but you’ll pay guarantee fees. These loans enable business owners to access working capital to increase export sales without disrupting their domestic financing and business plans, according to the SBA.

The SBA guarantees up to 90 percent of the loan up to a maximum of $4.5 million. You pay fees only the SBA-guaranteed portion of the loan. You won’t pay guarantee fee for a loan of $125,000 or less. For amounts from $125,001 to $150,000, the guarantee fee is 2 percent. For amounts from $150,001 to $700,000 the fee is 3 percent, and for amounts from $700,001 to $1 million the fee is 3.5 percent. If the guaranteed portion exceeds $1 million the fee is 3.75 percent, and you’ll also pay an annual servicing fee of 0.55 percent.

Export Express:

These loans are similar to Export Working Capital Loans but offer only up to $500,000 in funds and feature a streamlined process and fast turnaround. To qualify, you must demonstrate that the loan will allow you to enter a new export market or expand in an existing one. You must be in business for at least a year, although not necessarily in exporting.

The SBA will guarantee up to 90 percent of loans of $350,000 or less and up to 75 percent for loans greater than $350,000. You pay fees only the SBA-guaranteed portion of the loan and you won’t pay a guarantee fee for a loan of $125,000 or less. For amounts from $125,001 to $150,000 the guarantee fee is 2 percent. For amounts from $150,001 to $700,000 the fee is 3 percent and for amounts from $700,001 to $1 million the fee is 3.5 percent. If the guaranteed portion exceeds $1 million, the fee is 3.75 percent, and you’ll also pay an annual servicing fee of 0.55 percent.

Disaster Loans:

Business owners can get long-term, low-interest SBA loans to repair or replace real estate, personal property, machinery and equipment, and inventory and business assets that were damaged or destroyed in a natural disaster. You must be in an SBA-declared disaster area to be eligible for SBA disaster assistance and you won’t need a down payment.

The interest rate will not exceed 4 percent if you are unable to get credit elsewhere, or 8 percent if you are able. You might be able to get up to 30 years to pay off the loan, depending on your business’ ability to repay. You can apply online. There are different types of disaster loans:

  • Physical Disaster Loans: You can use these loans of up to $2 million to repair or replace damaged real estate, equipment, inventory and fixtures. You can also use them to protect your property against similar, future disasters. The loans cover uninsured or underinsured losses.
  • Economic Injury Disaster Loans: These loans offer funds of up to $2 million, which you can use to meet expenses your business would have been able to pay if the disaster had not occurred. Even if your business’s property didn’t suffer any damage in the disaster, you might be eligible. In addition, you can qualify for both a Physical Disaster Loan and an Economic Injury Disaster Loan, as long as the total amount you’re borrowing doesn’t exceed $2 million.

How to choose the right SBA loan

A local SBA district office can explain the differences among the SBA’s loan programs and let you know if you’re eligible for any.

To begin the process of getting an SBA-backed loan, the agency advises first preparing a business case. You’ll want a brief summary of how much you’re seeking to borrow and what plans you have for the money. Good reasons to borrow money can include opening a new location, purchasing new machinery, launching a new product or getting through a slow cycle that you expect to end. You should also include bios for you and your management team so the lender can see you have the experience and knowledge to successfully grow the business.

You should also prepare your financial statements, according to the SBA. These will detail revenue, expenses and profits over your recent history. All this information shows lenders that your business is on solid financial ground and has a history of responsible management and decision-making. Find out how much your business is worth, either on your own or by hiring a qualified business appraiser.

Next, create a business forecast that shows your projected revenue and expenses — and the assumptions behind those projections. Finally, if you need help getting your finances in order, a local SBA office might be able to assist.

To start the process of applying for an SBA loan, visit the SBA website to find an SBA-approved lender. You can also answer a few questions about your business on website and receive contact information for SBA-approved lenders who are interested in working with you on a loan. The lender, rather than the SBA, will be the one you deal with during the entire loan process. The SBA has information on what you’ll need to provide the lender here.

The bottom line

SBA loans are wonderful for most businesses, but knowing your available options is key to choosing the best small business loan for your company. If you’ve been turned down for a loan by a traditional lender and want a chance at getting lower interest rates from an online lender, an SBA loan could be a great choice for you. Just be prepared to provide a lot of documentation and for the approval process to take some time.

 

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