SBA Funding, How Does it Work?

The Small Business Administration (SBA) is a government agency designed to assist small businesses in obtaining loans. By guaranteeing up to 85% of certain loans, the SBA makes lending less risky for lenders, which in turn encourages them to approve more loans for small businesses.

Among the various SBA loan programs, the 7(a) loan is the most widely used. However, there are other SBA loan options that might be more appropriate for specific types of businesses. While the SBA does not provide education loans, it offers a wealth of counseling and business advice to help guide entrepreneurs. To determine your eligibility for an SBA loan, MultiFundInc. provides the guidance necessary to help you quickly assess your qualifications.

The SBA has strict requirements for loan eligibility, and only certain types of businesses can qualify. The application process can be detailed and time-consuming, so it’s important to consider all of your financing options. By comparing SBA loans with other small business financing options, you can make an informed decision about which solution best meets your needs.

The SBA 7(a) loan program is designed specifically for small businesses that are operational but may have difficulty securing financing from traditional banks.

Although these loans are named after the Small Business Administration, they are not directly funded by the SBA. Instead, SBA 7(a) loans are agreements between businesses and banks, much like traditional loans. What makes them attractive, particularly to lenders, is the SBA's guarantee of up to 85% of the loan amount. This guarantee reduces the risk for lenders, as they are not fully exposed to the potential loss of the entire loan. As a result, the program encourages more lending to small businesses, which is its primary goal.

Due to this guarantee, the SBA typically requires businesses to have been operating for at least three years to qualify. Once your business reaches its third or fourth year, you are in a strong position to apply for the SBA 7(a) loan and take advantage of its benefits.

The SBA loan guarantee is designed to protect lenders, not borrowers. While the guarantee makes it easier for lenders to provide funding, it does not ensure that your business will automatically qualify for an SBA 7(a) loan. Just like with any traditional loan application, you’ll need to meet specific qualifications based on your company’s financial standing, including your credit profile, operating history, cash flow, and profitability.

In addition to meeting standard financial criteria, you must also fulfill the SBA’s minimum requirements for loan eligibility. These include having a valid business purpose, demonstrating the ability to repay the loan, and qualifying as a “small” business. Additional criteria may include having a personal investment in your business and proving that you are unable to obtain financing through other means.

According to SBA guidelines, businesses with annual revenues under $1 million and fewer than 100 employees generally qualify. However, in certain industries, businesses with up to $41.5 million in revenue and as many as 1,500 employees may still be considered "small." These specifics can vary depending on your industry, so it's important to check the guidelines applicable to your business.