The Small Business Administration has several low cost loan programs that can help female and minority owned businesses or startups. The federal government organization is a major source of funds as well as free counseling for small businesses, startups, and people thinking of starting a business. Find out what the SBA offers businesses, how to apply for their loans, and learn about the services they offer below.
Small businesses drive the U.S. economy, with the majority of female, Black, veteran and minority companies being either small or even sole proprietors. Smaller companies account for over 40% of this country’s economic activity. Creation and expansion of small businesses help communities to grow by providing needed services and vital local employment opportunities, and this is where SBA loans as well as counseling programs can assist.
How do Small Business Administration Loans Work?
The Small Business Administration (SBA) was created by Congress in 1953 to aid, counsel and assist small businesses as well as startup companies, including minority and women owned companies. Today, the SBA remains the only cabinet-level agency totally dedicated to helping meet the needs of small businesses through providing training, counseling, education, as well as access to federal contracts. They also have a focus on helping the disadvantaged, including veterans, Black or woman owned businesses, Latinos, and others. Perhaps most importantly, the Small Business Administration helps by guaranteeing loans to help launch and grow small businesses.
The SBA does not directly make loans to businesses or individuals. Entrepreneurs must still obtain loans from banks, community development organizations, online fintech companies and microloan lenders. Many of those lenders also support minorities and women. However, when a borrower meets specific guidelines, the SBA guarantees to repay 75-90% of the funds if the borrower defaults – this means the federal government SBA organization is a “backstop” or insurer.
By reducing the risk of financial loss, the SBA allows lenders to make loans at lower interest rates and for longer terms than with other conventional sources of funds. Many entrepreneurs who cannot qualify for traditional sources of funds are given greater access to capital needed to open or expand a business. SBA loans range from $500 to $5 million and are provided through a variety of programs, several of which are primarily targeted toward women, minorities and veterans.
Minority and women business owners have historically experienced greater difficulty in getting access to capital, and in particular black and Latino companies struggle to get funds; They often struggle with obtaining conventional bank loans. Loan requests are more frequently denied, and, when approved, the amount authorized are often for less than requested, for shorter terms and at higher interest rates. Veterans returning from active service and who have little business experience often encounter similar difficulty.
Turning to the SBA for financing is usually the last resort which makes its programs especially attractive for entrepreneurs with little or no collateral or experience or poor credit scores. SBA is also a great option for the disadvantaged, namely veterans, women, and minority owned companies or startups. The SBA will not necessarily reject a loan application from someone who does not have collateral, but when collateral exists, the SBA will want to use it to secure a loan. Persons with a stake of at least 20% in the business will usually be asked to provide financial information and sign personal guarantees for the loan.
SBA loans have an added benefit of providing greater flexibility to females owned businesses or minorities if/when borrowers run into hardships. The SBA’s mission is to encourage small businesses, including from Black, Latino, Asian and women companies, not to foreclose on them. Borrowers are often able to defer payments, refinance the balance or make interest-only payments when facing an unexpected financial emergency.
Most SBA loan funds can be used for virtually any business-related activity from buying or renting real estate and equipment to paying employees, purchasing inventory, marketing expenses and refinancing debt. Several programs restrict uses of the funds, and potential borrowers should make sure that the funds being sought can be used for their business’s planned purpose.
General SBA Loan Programs
A significant goal of the SBA’s mission is to serve and promote businesses operated by women, low-income, minority and veteran owners. The SBA strives to achieve that goal with its most popular loan programs as well as others more directly targeted at underserved communities.
SBA’s 7(a) loan program is one of its most popular and has the highest lending limit of $5.5 million. Maximum interest rates currently run around 6%. Repayment terms range from 10 to 25 years. This creates lower monthly payments which can be particularly important to a new business owner.
This program is attractive for women and minority entrepreneurs. Women run 40% of American businesses and employ more than nine million people. More than 11 million minority-owned businesses in the U.S. employ over six million workers. The major benefit to women and minority business owners of 7(a) loan is the lower interest rate compared to a traditional bank loan.
7(a) funds can be used for virtually any business expense including inventory, website development, real estate, furniture, equipment and working capital. While no minimum credit score is required, lenders often look for a score of at least 620 assuming there is no history of bankruptcy or foreclosure.
SBA’s 504 loan program is also popular for businesses that want to buy real estate or expand buildings. This gives priority to minorities, veterans, black businesses and women among others. Funds can also be used for purchasing or upgrading machinery and equipment. Local lenders provide these loans in partnership with a Certified Development Company (CDC). For example, a 504 loan might involve 40% CDC financing with a bank providing up to 50% and the borrower contributing 10-20% of the project cost.
Loans are limited to about $5 million. Repayment periods run from 10-20 years so that, with low-interest rates, monthly payments can be quite reasonable for growing businesses.
The SBA microloan program offers up to $50,000 and is a favorite of entrepreneurs hoping to start a new business. Black owned startups, Latinos, and women of color have many microlenders that focus on their needs. Applicants must meet the 7(a) requirements noted above. Interest rates are currently running from 7.75% to 8.5%. The average loan has been about $14,000. Loans have an interest rate of 8-13% and must be repaid within 6 years. The SBA typically guarantees 50% of the loan amount.
Any entrepreneur can apply for a microloan, but the program was designed primarily to help new and early-stage businesses, with an emphasis on businesses operated by women, veteran, minority and low-income owners. Minority-owned businesses, even including immigrants, received almost half the microloans issued in recent years. Find SBA microloan lenders near you.
Economic Injury Disaster Loans (EIDL) are currently available to businesses that are experiencing reduced revenue as a result of the coronavirus pandemic. Funds can be used for typical operating expenses including rent, utilities, continuing health care benefits for employees and covering fixed debt payments. Eligible small businesses and private non-profit organizations can apply using the SBA website.
Other Programs of Interest for Women, Veteran and Minority Business Owners
The SBA Express Loan program often provides an attractive option for existing businesses. Loans are limited to $350,000 and targeted toward businesses that have operated for at least two years. Interest rates are often slightly higher than 7(a) loans, but approvals are made more quickly. Collateral is not required for minorities, the disadvantaged or women-owned businesses under both the 7(a) and Express Loan programs if the loan request is for less than $25,000.
SBA’s Community Advantage Program is intended to provide for the needs of small businesses in underserved markets, including inner cities. Many of those companies are minority run (immigrants, Black, Latinos and others). Loans, which are often offered by CDFIs (Community Development Financial Institutions) typically range from $50,000 to $250,000. Interest rates run between 7-10%. For minority-owned businesses, the SBA guarantees up to 85% of a $250,000 loan.
Community Advantage loans are made through community-based lenders that are required to make at least 60% of their loans in underserved markets. These include low to moderate-income communities, businesses in which more than half the employees are low-income and veteran-owned businesses. More details on Community Development Financial Institution Loans.
Small Business Administration Veteran loan programs are offered too. Veteran-owned businesses employ near six million people. A high percentage of veterans have historically chosen self-employment following their service. Many black and Hispanics also set up a small business after serving our country. The 7(a) and Express Loan programs are commonly used by veterans (or their families), but there are additional sources of funding such as a VA Small Business Loan.
The Veterans Administration (VA) does not fund the loan. The loans are provided by traditional lenders but partially guaranteed by the SBA. As with other SBA-backed loans, these loans for veterans often have lower fees and interest rates and more generous repayment terms.
The SBA operates an Office of Veteran Business Development (OVDP) as well as Outreach Centers (VBOC) that offers several loan programs designed specifically for veteran-owned businesses including the VA Small Business Loan Program. The mission of the OVDP is to promote veteran entrepreneurship by facilitating access to all SBA programs for veterans, service-disabled veterans, reservists and active-duty members as well as their dependents and survivors. More details on Veteran Business Outreach Centers.
The SBA 8(a) Business Development Program is designed specifically for disadvantaged small businesses. It can help drive sales to a business. While the program does not offer loans, minority and disadvantaged business owners who participate in the program have a better chance to qualify for SBA loans.
The federal government annually sets aside at least 5% of federal contracting dollars to be awarded to businesses participating in the 8(a) program. Many Black, Latino, female, LGBTQ, and Asian companies can get business from the government program. Businesses that participate receive access to federal contracts with limited competition.
To qualify, businesses must not have participated in the program previously. They must be at least 51% owned and controlled by economically and socially disadvantaged U.S. citizens, such as women of color, Latinos, or veterans. Business owners must demonstrate good character, have a net worth of $750,000 or less and be involved in day-to-day business operations.
Similar contracting programs exist for women-owned and veteran-owned small businesses. Before being allowed to participate in either program, businesses must complete a certification process that can be accessed via the SBA.gov website.
Qualification and Applications for SBA Loans
Borrowers seeking Small Business Administration loans must meet some basic criteria to be approved, but anyone can apply. Business must be located within the U.S., controlled by a U.S. citizen and they need to be a small business as defined by the industry, number of employees or annual receipts. Companies (whether in business now or startups) must be run for-profit in an eligible industry. Usually, all other options for financing must have been explored. Borrowers must often have some invested equity in the business.
Application for an SBA loan is usually made through a local or national bank or even an online lender. Many banks designate an employee to handle and be the specialist on SBA loans. This provides the benefit of working with someone who knows what the Small Business Administration requires, how to get the process started and who has an established working relationship with the SBA.
There are tools to find a lender. Assistance finding a lender or bank to apply at (either physical or online) is also available at SBA Small Business Development Centers or by using the Lender Match tool available on the SBA’s website. After providing some basic information including a business plan, amount requested, credit history, veteran status and available collateral, Lender Match will provide the names of several SBA-approved partners with whom you can work.
Since SBA loans are typically a last resort for persons unable to obtain financing through other means, the process can be extensive as well as take more time. But this source of funding can be great for Black owned companies, women, Latinos, and others who struggle with typical funding. applying for an SBA loan requires more paperwork than for a conventional loan. In addition to business information, the SBA will request personal history details of the principals.
Among the business records you may need are past loan applications, financial statements, business licenses, tax liens, as well as any lawsuit and bankruptcy documentation. Also be prepared with any leases and deeds, profit and loss statements, three years of personal and business tax returns, a business plan and an annual projection of income and finances. Also expect to provide names of partners, resumes of business principals and an overview of the business history.
Lenders base decisions on numerous factors. These include an applicant’s credit history, reputation, management experience and ability to repay the loans. There is no discrimination based on ethnicity, race, gender, or sex – this means women and minority businesses (and startups) are treated equally. The lender will also consider the strength of the business, its potential for long-term success, past earnings and projected cash flow.
The time needed to process and approve an SBA loan application is usually longer than for a standard bank loan. This is due to the number of documents that must be reviewed and because both bank and SBA officials must review all the information. This is a major reason you should work with a bank that has an experienced SBA department. Depending on the type of loan requested, it generally takes two to four months to obtain funds.
Other Startup and Business Counseling Services
Current and potential small business owners can obtain free or low-cost assistance from the SBA on a wide variety of topics from preparing business and marketing plans to financing, organization, information on crowdfunding and international trade. Help is available at SBA Small Business Development Centers, Women’s Business Centers, Veterans Business Outreach or SCORE, a non-profit organization offering mentor services to current and prospective small business owners. A variety of business-related webinars can also be accessed on the SBA website.
Small businesses, including start up companies, account for about half of all private-sector jobs. Most Black, Latino, veteran and women owned businesses are small and/or sole-proprietors. The work and financial backing of the Small Business Administration (in the form of low cost loans and free counseling) will take on even greater importance in the months ahead. Female and minority owned companies that are small businesses can get assistance from the SBA.
By Jon McNamara