We Answer Your Top 6 SBA Loan Questions

As a small business owner in Illinois, you're already juggling many responsibilities and concerns. If finding affordable financing is on your to-do list, we can help. In this article, we answer several FAQs about SBA Loans to help you decide if it's the right option for your business. Still have questions about your specific situation? As a Preferred SBA Lender, Town and Country Bank and Peoples Prosperity Bank can answer any question you may have about SBA Loans or the application process. Just reach out to one of our Commercial Bankers.

1. How is an SBA Loan different from conventional business loans?

The U.S. Small Business Administration (SBA) offers a variety of funding programs for American small businesses. SBA loans are guaranteed by the federal government, which makes it less risky for banks to loan money to newer and smaller businesses that might otherwise be turned down for conventional commercial financing.

SBA-backed loans also come with certain advantages, such as longer repayment terms, lower down payments, flexible overhead requirements, and no collateral needed in some cases.

However, the unique benefits of SBA loans also come with eligibility requirements that non-SBA business loans don't have. To qualify for an SBA loan, your business will need to:

• Meet certain size standards
• Demonstrate an ability to repay the loan
• Have a sound business idea
• Be a for-profit business
• Be located and operating in the U.S.
• Have owner-invested equity in the form of time or money
• Exhaust other financing options first

As you can see, SBA loans differ from conventional financing in their requirements and perks. It's a great option for existing businesses that may not have enough collateral and those that are still building a credit history.

When assisting businesses with the appropriate financing, our experienced Commercial Bankers are here to help borrowers with securing a traditional commercial loan, which typically involves less paperwork and red tape. However, if certain borrowers do not qualify for such financing, we may be able to offer assistance with an SBA guaranty.

2. What types of SBA Loans are available?

Let's look at the two most popular SBA loan programs, which we offer to businesses as financing options.

SBA 7(a) Loan Program

7(a) loans are guaranteed between 50% and 90% through the SBA, which makes it easier for banks to lend to small businesses without sufficient collateral. Qualifying businesses can borrow up to $5 million with a 7(a) loan. This is the best option when real estate is part of a business purchase, but 7(a) Loans can also be used for a variety of common financing needs such as:

• Working capital
• Accounts receivable
• Inventory
• Debt refinancing
• Equipment, real estate, and property renovation. 

SBA 504 Loan Program

The CDC/504 loan is intended for the purchase of assets, primarily large pieces of equipment and commercial real estate, with long-term, fixed-rate financing. Qualifying businesses can borrow up to $5.5 million to buy a major asset and enjoy a long-term fixed interest rate. As a whole, banks work with SBA-approved Certified Development Companies (CDC) to provide SBA 504 loans.

3. Do SBA Loans require collateral?

The answer depends on the type of loan you apply for and how much you need to borrow. In most cases, collateral is required, but unlike a non-SBA guaranteed loan, the loan will not be declined simply because there is insufficient collateral. When it comes to CDC/504 loans, the project assets being financed are generally used as collateral. Personal guarantees of the principal owners are also required.

4. Do SBA Loans count as income?

The proceeds of your SBA 7(a) or 504 loan don't count as taxable income. You may also be able to deduct up to 100% of the interest you pay on your SBA loan. Consult your tax advisor as IRS requirements apply.

5. Do SBA Loans have prepayment penalties?

Yes, both SBA 7(a) and 504 loans come with certain prepayment penalties.

• SBA 7(a) loans: Prepayment fees exist if the loan term is 15 years or more and the borrower pays off more than 25% of his/her balance in any of the first three years.
• 504 loans: The prepayment penalty decreases during the first 5 years for loans of 10 years and the first 10 years for loans of 20 or 25 years.

6. Do SBA Loans report to credit bureaus?

While the SBA itself does not report to credit bureaus, the individual business lender that you work with (such as Town and Country Bank and Peoples Prosperity Bank) will report your new loan to the credit bureaus.

Start the SBA Loan application process!

Town and Country Bank and Peoples Prosperity Bank is proud to be one of the best banks for small business loans in Central Illinois and the Metro East. We are approved to offer SBA loan products under the SBA's Preferred Lender and Express programs. Ready to learn more about SBA loans and get started? Download our SBA Application Checklist and request a consultation with our Commercial Banking team today. You can also visit your nearest Central Illinois or Metro East branch location. 

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