What are the typical terms of an SBA loan?

In today's newsletter, I'm going to answer that exact question.

There are several requirements to even be considered for an SBA loan. Here are the most important ones:

• You must be acquiring a small business, as defined by the SBA. But the definition of small varies across different industries. For example, a small framing contractor business is anything at or below $19 million in annual revenue, while vending machine operators must be at $21 million or less in revenue. Certain industries are defined by annual revenue, while others are defined by employee count. Look up your specific NAICS code and its requirements here.
• The business you are acquiring must be a for-profit business, located in the United States.
• Must not be able to acquire this financing from non-government sources (like a traditional bank loan).
• Must not be an ineligible business. This list is long, but a few examples of ineligible businesses are life insurance companies, multi-level marketing companies, and strip clubs.

SBA loan proceeds can be used only for the following activities:

• Acquiring, refinancing, or improving real estate and/or buildings
• Short- and long-term working capital
• Refinancing current business debt
• Purchasing and installation of machinery and equipment
• Purchasing furniture, fixtures, and supplies
• Changes of ownership (complete or partial)
• Multiple purpose loans, including any of the above

What is the maximum amount you can borrow?

SBA 7(a) loans have a maximum loan amount of $5 million, with a maximum guarantee by the SBA of $3.75 million (the maximum the SBA will guarantee on any loan is 75%, unless it's a loan for less than $150k, in which case they guarantee 85%). There are a few exceptions that may limit you to less than the $5m.

What are the terms?

Most SBA loans have a maximum term of 10 years, unless the loan is being used to finance real estate or equipment with a useful life of longer than 10 years.

This is just the general rule; for almost every rule mentioned here, there are carveouts and exceptions for different industries, uses of funds, and unique situations. That's why it's important to always work with a qualified SBA loan broker who can analyze your unique situation and find the specific rules that do apply to you. Email me if you'd like my help!

What about loan rates? These vary according to your business, creditworthiness, and all sorts of other criteria that SBA lenders analyze. But SBA loan rates are capped based on the size of the loan. Here's a helpful graphic:

So that means your interest rate on a $1 million loan would be capped at a maximum of 11.5%, as of August 2024.

Let's take a look at how that might break down on a real deal. Here's an example deal structure:

• $1.25 million purchase price
• $250k down payment, $1 million SBA 7(a) loan
• 10 year term, 10% interest rate.

Let's say the business does $1.5 million in revenue, with $400k in unlevered EBITDA.

How would the loan impact your bottom line?

You'd have principal + interest payments of $13,215.07 per month, or $158,580.84 per year.

That equates to about 39% of EBITDA and 10% of revenue.

There are all sorts of variables that can lower the monthly payments: A longer amortization schedule, higher down-payment, lower interest rate, etc. This is just an example to illustrate how an SBA loan might work!

Thanks for reading. If you have any questions, please feel free to reply directly to this email to connect with me.

Before I go, a quick note:

I own another company called SMB Business Plans with my partner Joe.

Presenting a well thought-out business plan to SBA lenders is a critical part of being approved for financing. We can assist with your business plan, as we know exactly what lenders are looking for.

We help business buyers write up airtight business plans for SBA lenders. If you're looking at getting your business plan in writing, in a format that lenders will like, check us out below:

​smbbusinessplans.com​