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What to Know Before Getting an SBA Working Capital Loan

Published July 12th, 2022 by Cornerstone Capital Advisors

Are you a small business struggling to finance daily expenses?  

In the best of times, running a small business is difficult. When you add the economic damage caused by COVID-19, it's no wonder that so many are in need of some extra working capital. 

Luckily, there are quite a few small business loans out there that can help. In this article, we'll look at the SBA Working Capital Loan in particular.

SBA Working Capital Loan: What Is It?

The SBA Working Capital Loan has three components: SBA, working capital, and loan. 

The SBA in SBA Working Capital Loan stands for the U.S. Small Business Administration (SBA). This federal agency connects small businesses with lenders to provide funds for starting and expanding their businesses. 

Working capital means the liquidity available to pay for daily business expenses such as rent, utilities, expenses, debts, payroll, and more. A general rule of thumb for calculating this is to subtract business liabilities from business assets. 

A loan is a kind of credit that allows you to borrow money now and pay it back in the future with interest. 

Putting it all together, an SBA Working Capital Loan is credit you borrow from an SBA-backed lender to spend on daily expenditures that keep your business running. 

Does the SBA Provide an SBA Working Capital Loan?

The SBA doesn't provide SBA Working Capital Loans. Instead, they work with banks, credit unions, and online lenders to provide the loans. 

The SBA's role is to back the loan with a guarantee to pay a certain percentage if the borrower defaults on payments. To do this, the SBA asks the borrower (and anyone who has a 20% stake in the company) to offer up collateral that can be taken if the borrower defaults. 

In the past, small business loans were often risky for lenders. However, with the SBA-backed guarantee, more lenders are willing to take the risk.

Who Is Eligible for an SBA Working Capital Loan?

Eligibility for SBA Working Capital Loans involves a mix of personal and business requirements. 

The personal requirements include:

  • "good" FICO credit score (typically 690 or above)
  • at least three years free of bankruptcies
  • a 10% minimum down payment
  • no outstanding federal debt

 The business requirements include:

  • being a small, for-profit business
  • registered and based in the U.S.
  • equity invested in the business
  • other financing options exhausted

If you meet the above requirements, there's a good chance (though, not a guarantee) that you'll qualify for an SBA Working Capital Loan. 

What Are the Different Types of Loans?

There are quite a few different types of SBA loans. However, the most common is the 7(a) loan program and the 504 loan. Let's take a look at each.

7 (a) Loan

This loan program provides working capital for daily expenses. The loan amounts can go up to $5 million, the loan terms can reach 10 years, and the interest rates can go up to 7.75% for large loans and 9.75% for smaller ones.

The 7(a) loan is a broad loan program that includes different types of loans. Some common ones are:

Standard 7(a) Loan

An SBA loan is meant to pay for daily business expenses or business growth. The maximum loan amount is $5 million, it's typically guaranteed up to 85%, and it takes up to 10 business days.

7 (a) Small Loan

This SBA loan has the same uses as the Standard 7(a) loan but it's meant for smaller financial needs. The maximum amount is $350,000, it's guaranteed up to 85%, and it takes up to 10 business days. 

Express Loan

The express SBA loan is meant to be approved much faster than the other two. Its loan amount is up to $500,000, it's guaranteed up to 50%, and takes under 36 hours to approve.

CAPLines of Credit 

The CAPLines of Credit is meant to provide credit to short-term and seasonal businesses. The maximum amount is $5 million, it's guaranteed up to 85%, and it takes up to 10 business days. 

504 Loan

The 504 loan is an SBA loan meant for purchasing fixed assets such as large equipment or real estate (land, facilities, etc.) It's not meant to be used as short-term working capital.

Loan amounts go up to $5.5 million, the term length can extend to 25 years, and interest rates vary.

How to Get an SBA Working Capital Loan 

Before deciding on an SBA Working Capital Loan, it can be helpful to know a bit about the loan application process. This can generally be broken into five steps. 

Step 1: Clarify Your Financial Needs

As we saw from above, each SBA loan has its own specific uses. The standard 7 (a) loan is great if you need more than $350,000 to fund daily business expenses. Alternatively, if you're looking to expand your business with large equipment purchases, then a 504 loan is better. 

Whatever your financial and business needs are, it's important to clarify them before choosing a loan. 

Step 2: Determine Your Eligibility 

Alongside the eligibility requirements described above, certain lenders might have their own requirements as well. This helps them calculate the overall risk of giving out a loan. Generally, this involves looking at credit scores, annual revenue, business history, and some collateral. 

Step 3: Decide on an SBA Loan Provider

The SBA itself doesn't provide most SBA loans. Instead, they partner with online lenders and traditional banks who give out the actual loan. It's advisable to shop around a bit before deciding on the best provider for your SBA loan. 

Online lenders are a great option if your credit score isn't perfect or if you need financing quickly. Traditional banks are stricter on eligibility and take longer to process loans. 

Step 4: Fill Out and Submit Your Paperwork

Some of the paperwork required to apply for an SBA loan includes:

  • Balance sheets
  • Profit and loss statements
  • Projected financial statements
  • Articles of incorporation
  • Tax returns
  • Bank returns
  • Business license

This list isn't exhaustive, so it's best to contact your lender before applying.

Step 5: Wait for Your Results 

After the waiting period, the lender will inform you if your loan has been accepted or rejected. 

If rejected, you'll need to find other forms of financing. If accepted, you can sign the agreement and begin putting that much-needed finance to good use.  

Are You Ready for an SBA Working Capital Loan?

Before applying for an SBA Working Capital Loan, it's important to know a bit about what they are, how they work, and who they're for. If you've determined that an SBA loan is the right fit for your small business, then the next step is applying through a quality lender. 

Cornerstone Capital Advisors has 21-years of experience helping businesses small and large finance daily expenses and future expansions. Contact us today to see how we can help.


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