As a business owner, you’ve probably run across SBA loans for funding and wondered what exactly they are, and if the rumors are true: do you really not have to pay them back?
SBA loans are loans granted through a traditional financial institution, such as SouthEast Bank, backed by the SBA or Small Business Administration. They are one of the more popular choices for financial aid when starting a business due to their lower rates and longer terms.
While there are specific cases where you may not have to pay back an SBA loan, in nearly all cases, you do have to pay back the loan, just as with any other traditional small business loan.
What Are SBA Loans?
SBA loans are loans granted to small businesses to help grow, purchase new assets, or take care of startup costs. Banks or other financial institutions partner with the SBA to lend the loans to the borrower. The Small Business Administration is a federal government agency that helps small businesses with contracting, funding, and counseling. Although banks lend the loans, the SBA provides the guarantee behind SBA loans.
They are good for small business owners just starting out, as some SBA loans guarantee up to 85% of the loan. This means that banks are more likely to approve the loan for a riskier business, although because it is a government-backed loan, it can be harder to qualify for. SBA loans are also beneficial to small business owners due to their lower interest rates and usually higher borrowing amounts, but because of this, they can be hard to qualify for and need a strong credit score.
As with traditional small business loans, borrowers still need to repay SBA loans. If you default on an SBA loan, it can affect your credit score and your future chances at other loans.
The lender, though, will be able to ask for the payout from the SBA if the loan goes into default, which makes them less of a risk.
Types of SBA Loans
When looking to apply for an SBA loan, keep in mind there are several different types of loans, depending on the size and type of business you are running. If you are unsure of which loan is right for your business, speak to your lender, who can go through your finances and goals to determine which one you qualify for.
Just as with other small business loans, all of the loans listed below must be paid back to the lender.
Microloans
As their name implies, microloans are small loans (up to $50,000) for businesses seeking a smaller amount of capital. They help increase cash flow when you are just starting out or need extra money to expand your growing company. Qualifying for a microloan varies from lender to lender, but typically the loan needs some collateral backing and a personal guarantee from the business owner.
7(a) Loans
7(a) loans are the most common type of SBA loan. They can be used for real estate, new fixtures, short and long-term capital, or refinancing business debt. 7(a) loans are larger loans, but the maximum amount granted is $5 million, with a few exceptions. To qualify for a 7(a) loan, your business must:
- Be considered a small business as defined by the SBA
- Do business in the United States
- Be able to demonstrate the need for a loan
- Operate for-profit
- Not be delinquent on any debt owed to the U.S. government
- Have looked into other financial options before applying
CDC/504 Loans
CDC/504 loans are available through CDCs or Certified Development Companies. CDCs regulate nonprofits and promote economic development in different areas of the country. These types of loans are commonly used for major business purchases like real estate or machinery. The maximum loan amount is $5 million dollars, although energy projects can go up to $5.5 million with approval. To qualify for a CDC/504 loan, your business must:
- Operate a for-profit business in the United States
- Have a tangible net worth of less than $15 million
- Have an average net income of less than $5 million after federal income tax for two years preceding your application
- Meet the traditional definition of a small business
- Strong personal credit
What Is an SBA Disaster Loan?
Although microloans, 7(a) loans, and CDC/504 loans are the focus of traditional SBA loans, the SBA also offers disaster loans for businesses, nonprofits, and even homeowners and renters in areas affected by declared disasters, such as flooding, wildfires, and civil unrest.
SBA disaster loans are used to fund losses that aren’t covered by insurance or the Federal Management Agency, replacing or repairing items such as real estate, machinery, inventory, personal property, and business assets.
As with traditional SBA loans, there are a few different types, depending on your business needs and the type of disaster:
- Military reservist loan
- Economic injury disaster loans
- Mitigation assistance
- Physical damage loans
Although you may be approved for a disaster loan in times of hardship, you are still required to pay them back over time.
COVID-19 SBA Loans
The pandemic gave rise to more SBA disaster loans, specifically through the COVID-19 EIDL program, which allowed borrowers to receive up to $500,000 to pay rent, utilities, and other business expenses. The SBA also offered the PPP, or Paycheck Protection Program loan, for qualified businesses to continue paying their workers during the COVID-19 pandemic.
The COVID-19 EIDL program and PPP were closed at the end of 2021, and now many small businesses are wondering if they have to pay back their loans and grants or if any SBA loan forgiveness is available.
With the PPP, there is some forgiveness available, but restrictions apply, including what the money was spent on, the extent the business maintained its employees and the maintenance of wages and hours for the employees. In order to qualify for forgiveness, a business must apply using one of three PPP loan forgiveness applications, depending on their situation. The lender is then allowed 60 days to decide and request payment to the SBA, who then has 90 days to issue the forgiveness amount to the lender, including interest. If anything is left on the loan after the forgiveness, the business must cover that amount.
EDIL loans, on the other hand, need to be paid in full, as with traditional SBA loans. Deferment periods are available, up to 30 months from the date of the note, but interest will continue to accrue.
However, if a small business received an EDIL grant, you do not need to pay anything back. Rather than a traditional EIDL loan, eligible recipients receive what was called EIDL advanced funds, up to $10,000.
To qualify for the EDIL advanced funds, your business needed to:
- Have ten or fewer employees
- Located in a low-income community as defined by IRS Code 45D(e)
- Prove that you suffered more than 50% economic loss over eight weeks compared to the previous year (starting March 2, 2020)
Do You Have to Pay Back SBA Loans?
Aside from the EIDL advance funds that came from the COVID-19 EIDL program, all SBA loans need to be paid back to the lender, and not paying back an SBA loan results in defaulting on the loan. Once a loan goes into default, the lender will try to collect the full amount from the borrower first, then the SBA if the borrower cannot provide it.
Depending on the loan terms, the lender can seize the borrower’s assets that were used as collateral to repay the loan. If the assets do not cover the amount, the lender can then try to collect the personal guarantees that the business owners made at the agreement of the loan. This means the lender can look into personal assets, including real estate and bank accounts, depending on the state laws. If the borrower’s assets are not enough, the lender can turn to the SBA, which guarantees up to 85% on loans up to $150,000 and 75% on loans over $150,000.
Other consequences of defaulting on your SBA loan include a negative impact on your credit score, possible legal action from the lender, and they may accelerate your loan, which means owing the entire loan balance at once, depending on your loan terms. Defaulting on one loan could also impact the ability to qualify for future loans, especially if your credit score is affected.
Ways to Prevent Defaulting on Your SBA Loan
Defaulting on an SBA loan sounds scary, but there are steps you can take to prevent it from happening if you are struggling to pay back your loan.
The best option is to speak to your lender and work with them to explain your situation. Qualified lenders will be able to help you find solutions, such as consolidating other loans to improve monthly payments or refinancing current loans.
Other options include generating more sales, liquidating unnecessary equipment or property, or even selling the business. While the idea of selling your hard work may seem difficult, almost impossible, it’s ultimately the better route than defaulting on the loan, which will hurt future chances of other loans for new business ventures.
We Can Help With Your SBA Loans
If you are struggling to pay back your SBA, contact SouthEast Bank to work with a qualified lender to help you. We will look at your financial situation and assess it to find the best solution to ensure you avoid defaulting on your SBA loans and keep your small business running smoothly and successfully.
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Information contained in this blog is for educational and informational purposes only. Nothing contained in this blog should be construed as legal or tax advice. An attorney or tax advisor should be consulted for advice on specific issues.
