Sara Routhier, Managing Editor and Outreach Director, has professional experience as an educator, SEO specialist, and content marketer. She has over five years of experience in the insurance industry. As a researcher, data nerd, writer, and editor she strives to curate educational, enlightening articles that provide you with the must-know facts and best-kept secrets within the overwhelming world o...

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Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He also has an MBA from the University of South Florida. ...

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Reviewed by Joel Ohman
Founder, CFP® Joel Ohman

UPDATED: Aug 7, 2012

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The Small Business Administration (SBA) offers commercial borrowing to businesses across the nation. So long as an entrepreneur’s company operates for profit, engages in business in the United States (or in a U.S. territory), has reasonable owner equity to invest, and has already used alternative financial resources, then that business owner may be eligible for at least one SBA loan type.

Since SBA financing is secured by the federal government, lenders tend to be more lenient on granting these requests to applicants. Additionally, the terms for repayment are usually between five and 25 years, and they typically come with very competitive interest rates.

For those interested in applying for an SBA loan, there are three primary types to choose from prior to submitting an application:

  • Special Purpose 7(a) Loans
  • Micro Loans
  • 504 Loans

All of these government-backed financing opportunities are meant to help aspiring entrepreneurs in different areas.

The 7(a) Loan Program

What many may not know is that the SBA caters to businesses that don’t qualify for traditional financing. The 7(a) Loan Program is designed for business that have a “weakness” in their applications. Whether that weakness is a simple credit score deficiency or a problem with incoming cash flow, the 7(a) Program invites all business owners to apply for borrowing.

Financing under the 7(a) Loan Program can be used for the following:

  • The purchase of buildings or land
  • Construction or expansion of existing buildings
  • Working capital
  • Debt refinancing
  • The purchase of an existing business

Money from the 7(a) SBA Loan Program cannot be used for debt refinancing when refinancing would lead to lender loss. The money also cannot be used to repay delinquent taxes, non-beneficial business changes, or the payment of a business owner’s salary.

The Micro Loan Program

The SBA’s Micro Loan Program enables entrepreneurs to apply for small, short-term financing in amounts of up to $50,000. However, the average micro financing agreement is for $13,000.

Money from the SBA’s Micro Program can be used to purchase:

  • Working capital
  • Inventory or supplies
  • Furniture or fixtures
  • Machinery or equipment

Micro SBA loans are restricted from being used for existing debt repayment and the purchase of real estate.

The 504 Loan Program

The SBA claims that their 504 loan program benefits small businesses, the communities in which they reside, and all participating lenders, touting as a “win-win-win” program. The 504 program provides business financing while promoting business growth and job creation.

504 loans are meant for established businesses that have a substantial downpayment they can put towards a large amount of financing. Applicant’s can apply for up to $5 million through the 504 program.

SBA 504 loans are long-term fixed-rate financing that can be used for the following purposes:

  • To acquire fixed assets
  • To fund expansion
  • To finance modernization efforts

Proceeds from the 504 SBA Loan Program cannot be used for working capital, inventory, debt consolidation, repayment of debt, or refinancing of debt.

Financing through this program is offered by Certified Development Companies (CDCs). CDCs are nonprofit corporations that promote economic development to the areas in which they reside. A list of CDCs in your area can be found by contacting your local SBA office.