If you are one of the millions of small businesses formed in late 2019 or early 2020, you've likely experienced some loss in 2020. And, before 2020 began, you may have applied for one of many Small Business Loans, or at least considered applying for a loan with the small business administration (SBA).

Whether your company offers a service or manufactured goods, applying for a small business loan is not exactly easy. Many small business owners have the same question on their mind as you—how do SBA loans work?

What are SBA Loans?

SBA loans are guaranteed term loans funded by approved-SBA commercial lenders.

They seek to foster and shore-up the U. S. economy. By empowering U. S. citizens with the tools to succeed as small business owners—all with the intent of injecting cash flow into communities across the United States.

Once the SBA-approved-lender initiates the disbursement of funds, the SBA safeguards that loan from 50% to 85% should the business owner default.

While intriguing, the SBA offers nine different loan types, which helps answer that lingering question: how do SBA loans work?

  1. Standard 7(a) Small Loan
  2. SBA Express
  3. Export Express
  4. Export Working Capital
  5. International Trade
  6. Preferred Lenders
  7. Veterans Advantage
  8. CAPLines are asset-based loans issued as a revolving line-of-credit for businesses not qualified for long-term credit that use collateral or an asset if the business owner defaults.

Calculating the Loan Amount and Applying for an SBA Loan

Before you even begin filling out an SBA loan application. You need to consider how much funding you need to run your small business. You need to ask yourself what the funds are for and think about how you plan to use those funds to build a successful business.

To do that, you must calculate your cost; start by completing your due diligence:

  • Get a clear picture of your monthly expenses.
  • Estimate your profit.
  • Complete a breakeven analysis to determine when you can pay off your loan.

After you've completed all your initial calculations, the SBA loan application process can begin. After submitting your SBA loan application, you'll receive instructions on how to check your SBA loan status. If you choose to apply with ROK, you can take advantage of our Business Financing Advisors to help track your approval progress.

The loan processing should go quickly, and there will be no need to check your SBA loan status daily, which inevitably provides you with the SBA loan payment and SBA loan terms sooner.

What this Means in 2020

For the first time in SBA's history, they faced a seemingly impossible task. One they were not prepared to handle, a pandemic that shut down most of the U. S.

Despite the economic fallout, it meant the SBA needed to act swiftly and promptly. And SBA leadership required an act of Congress to respond to the 30.7 million small businesses and offer emergency loan programs such as the Paycheck Protection Program and Economic Injury Disaster Loan.

Know the Terms

The guidelines set by the SBA govern the 7(a) loan programs and continue to address that pressing question of how do SBA loans work.

One way the SBA protects small business owners is prohibiting SBA-approved lenders from charging fees on SBA loans. All but the Export Working Capital loan.

Now that you've read all about the possible loans you could apply for, and what the terms could mean for you, it's time to figure out how to apply for an SBA loan.

You can apply for an SBA loan by completing our simple 15-second online application to speak with one of ROK's Business Financing Advisors. We'll be able to match you with not only the best SBA financing option for your business, but you can take advantage of our streamlined application process.

EIDL and PPP Loan Terms

Both the EIDL and PPP loans cover for-profit small businesses, non-profits, and the self-employed. By offering an SBA loan for self-employed and non-profits, the SBA took a historical leap by recognizing non-profits, independent contractors, and gig-workers throughout the country as contributing economically.

The EIDL provides financial assistance to small business owners that would have otherwise financially survived "had the disaster not occurred." But how do SBA disaster loans work?

The SBA wrote the terms on the interest at 3.75% fixed if the business is for-profit, and for the first time, the SBA offered assistance to non-profits at an interest rate of 2.75% fixed.

All loans are on a 30-year note without any off penalties or fees if paid off early. The funds for this SBA loan had a specific function of working capital and operating expenses.

The PPP loan, also congressionally approved, gave banks and lenders SBA preferred status for many U. S. banks. The loan use was to assist and incentivize small businesses to make payroll and keep people employed.

Payback and Forgiveness

SBA loan payback is another critical piece you can't afford to overlook for one crucial reason—it helps you stay well-informed. Early prepayment penalties apply to most SBA borrowers, and these vital penalties answer a big part of that question on how SBA loans work.

The assessed fee is a percentage added to the year on which the SBA receives final payment. If paid off in year one, a 5% penalty tacks the prepayment amount: year two, 3%, and year three, 1%.

While under the COVID-19 Disaster Relief Program on SBA PPP loan forgiveness added relief to business owners applying for loan forgiveness on or before week eight or week 24.

The SBA PPP loan forgiveness rules have troubled many small business owners. One ruling sparked a lot of frustration early this year about using 75% of the PPP loan for payroll—a legislative change later reduced to 65%.

Who Qualifies for SBA Loans?

To meet SBA loan requirements are essential to understanding how do SBA loans work. Eligibility requirements for small business owners have their equity and exhausted all alternatives to fund their company before applying for an SBA loan.

Special considerations vary case by case and are applied only to a few select industries, such as franchises, farms, fishing vessels, and medical facilities.

Ineligible businesses include a broad spectrum of industries, firms, organizations, and fields, including illegal activities, prosecution, on-parole, incarceration, probation, criminal proceedings.

Coronavirus Resources

In addition to SBA disaster loans, the SBA made available COVID-19 resources online. Among other options on the SBA website is an entire page entitled, "Coronavirus (COVID-19): Small Business Guidance & Loan Resources."

Furthermore, small business owners can check with local SBA field offices and register with state SBA to receive early updates and learn about pending legislation.

In Closing

The SBA is the go-to resource for U. S. small business owners. Whether you need immediate assistance or guidance, the resources made possible today by the internet has empowered business owners to access more information sooner.

The SBA's mission is to ensure business owners or independent contractors succeed. Small business leaders have the charge and carry the thankless job as employers contributing to 49.2% of private-sector job rates.

About the Author, Madison Taylor

Madison Taylor is the Brand Ambassador at ROK Financial. She is responsible for raising brand awareness and business relationships with business owners across the country. Madison loves that she plays a small role in getting Business Back To Business Through Simple Business Financing and looks forward to hearing what you think about the blogs she creates!Madison has been working in the financial space for six years, and loves it! When she is not at work, you will find her at home learning a new recipe to test out on her family or going on new adventures with her friends.

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