Making investments is one of the fastest ways to achieve financial freedom. It’s a passive asset that grows to support you in later years. One of these investments is businesses that you start and grow. However, many people resort to Small Business Administration (SBA) or SBA loans.

Those who want to take SBA loans often consider whether they can be used for investment apart from their business. Well, don’t worry! We will go through everything you need to know about this so you can make the right choice! Let’s begin.

What are SBA Loans?

SBA, also known as Small Business Administration loans, are a popular financial tool for entrepreneurs looking to start or expand their businesses. Backed by the U.S. government, these loans provide favorable terms and conditions to eligible small business owners.

They are designed to support small businesses by providing access to operate with lower interest rates and longer repayment terms than conventional loans.

With the help of top SBA lenders, small businesses can have access to essentials like working capital, equipment purchase, real estate acquisition, and debt refinancing.

Can You Use SBA Loans for Investments?

SBA loans are primarily intended for business-related purposes. However, there are limitations and restrictions to this. Generally, this loan isn’t for passive investments like investing in stocks, bonds, or real estate for speculative purposes.

SBA financing promotes business growth and job creation, aligning with the government’s objective to support the small business sector. However, certain types of SBA loans have specific criteria for real estate investments.

Before that, let’s look at the permitted and restrictive uses of SBA loans.

Permitted Use of SBA Loan

  • Working Capital: You can use SBA loans to cover the day-to-day operational expenses of your business. It includes inventory costs, payroll, and other essentials.
  • Equipment Purchase: If you’re a business that handles tech or machinery, you can use this loan to buy equipment. It can cover all the technology and equipment needed for the business to function. Apart from that, you can buy equipment that isn’t necessarily technology-based. It includes working tools or raw materials.
  • Real Estate: Surprisingly, you can use SBA loans for real estate! However, you must get the SBA 7(a) and 504 loans. It allows businesses to purchase, refinance, or construct commercial real estate purely for business purposes. You will also provide a valuable avenue for expansion.
  • Debt Refinancing: Some cases allow SBA loans to pay off or manage existing business debt. It helps the business improve its financial position.
  • Business Acquisition: SBA loans can support acquiring an existing business. This opens the gate for entrepreneurs who want to enter new markets or expand their current ones.

Restrictions

SBA loans are convenient and flexible. However, there are some limitations to look out for:

Non-business Investments: SBA loan conditions do not allow users to use this on other investments. It includes stocks, and real estate for other purposes.

Personal Use: SBA loans, as the name suggests, are only for your business. Hence, using it for personal expenses like vacations, purchases, and daily expenses is not allowed.

Types of SBA Loans

Now that we looked through the limitations let’s break down the types of SBA loans you can take. We’ve curated all these for you to choose the loan suited to your needs. There are 6 types of SBA loans.

However, choosing the right SBA loan for your business can be complex.

It’s vital to choose an SBA loan that aligns with your specific needs, whether you’re seeking funding for equipment purchase or aiming for business expansion.

SBA 7(a)

The SBA 7(a) loan is a flexible and affordable option. It offers low interest rates of about 7.25-9.75% and a 10-25 year term which makes it easier to pay off.

However, this loan is not suited for debts or payments. Nor is it available for businesses that are involved in lending, rentals, or investing.

The 7(a) loan also has various types of choices. It includes:

Standard Loan: It is the standard loan given to any verified small business with a 25-year term and a $5 million loan.

Express Loan: This 7(a) loan type provides the fastest service. Funds get in your bank in less than 2 days. However, it has a $350,000 limit and higher interest rates.

Veterans Advantage Loan: This type is to provide help to veteran businesses, people on active duty, or widows and spouses. There is a $5 million dollar limit with an incoming down payment required.

Community Advantage Loan: This is a modified version for businesses in underprivileged areas. It is lenient on the requirements and has a $250,000 limit.

SBA Disaster Loan

SBA Disaster loans provide financial help to those who were affected by floods, tornados, and other calamities. It also provides help to businesses suffering from economic damage.

It helps them to recover and bring it back up. It has a 3-30-year term and an interest rate of 4-8%.

CDC/SBA 504

The CDC/SBA 504 loan is perfect for commercial real estate and equipment. The Administration collaborates with local community developers and helps small businesses.

It gets divided by the SBA lender giving 50% of the funds, CDC giving 40%, and the business for the last 10%. It has a term length of 10 or 20 years and an interest rate of 4.71-5.06%.

SBA Export

The Export Loan program was initiated to help businesses to venture into international markets. Their duty is to help them transition and expand it by opening up trading channels.

It also has three types of export loans to choose from. SBA International Trade, SBA Export Express, and SBA Working Capital. It has a term length of 3-25 years and an interest rate of 5.75% – 10%

SBA Microloan

If you’re looking into a short-term program then try SBA MicroLoan. They provide small loans, mostly under $15,000. It is ideal for those starting a business. They are provided by nonprofit lenders and have a cap of $50,000. It has a term of up to six years and an interest rate of 8-13%.

SBA CAPline Program

Another loan type for people looking into short-term investments is the CAPline Program. It has a term length of 5 or 10 years and an interest rate of 5.75-8.25%

How this works is that the SBA provides 4 credit lines for the business to target the type of reason it needs access to the capital for.

Seasonal: It covers the seasonal costs of inventory and labor.

Contract: It helps in any contract-based payments.

Builder: It covers construction or renovation work.

Asset: To convert the assets into liquid cash.

How Do I Qualify For the SBA Loan?

Ready for your SBA Loan investment? Here are the eligibility criteria:

For the business

  • It has to be generating profit or targeting to make a profit.
  • Operate or locate in the country where you’re taking the loan from.
  • SBA loans should not be the last place to get a loan. You must show proof of other placeholders.

For the Applicant:

  • You must show proof of your investment and time into the business.
  • You must own at least 20% of the business.
  • You will need a credit score of around 650-700.
  • Have proof that shows you have management experience and a commitment to deliver good results.
  • Must provide a personal statement to attest to having a good character.
  • You’re not on any sort of probation.
  • Not have any record of criminal charges
  • You do not have any record of defaulting on loans.

How to Apply?

If you qualify to apply for a SBA loan, congratulations! Let’s jump right into the application process and how to invest in this life-changing loan. It’s time to think about how you intend to use the money. How will it play a part in your business? 

Qualification Check

First, look through whether you meet the requirements above. Next, you need to have a credit score of 650-700. Lastly, plan how you want to use this loan, making it sound efficient.

Prepare the Documents

Get the necessary documents listed below. Make sure they’re up to date. You will need:

  • Business License/Certificate
  • Driver’s License
  • Bank Statements
  • Business Bank Account Information
  • Business Tax Return of 3 years
  • Personal Tax Return of 3 years
  • Credit Card Processing Statements
  • Credit Report
  • Personal Financial Statements
  • If you own any real estate or collateral provide the proof.
  • Business’s Current Profit and Loss Statement
  • Debt Schedule
  • A/P or A/R Report
  • Application of United Capital Source 1

Fill out the Application Form

You can call any SBA loan center or bank to provide you with an application. Fill in the details properly and double-check for errors.

It can be both an online or a physical paper form. In both cases, you will be asked to put in your information and the desired loan amount.

Speak to a Representative and Wait For Approval

When you finish applying, a representative will explain all the rules and details about the loan. They will fill you in on the terms, rates, and options you can choose to repay.

This extra step provides a better experience for the user as there are no hidden questions or fees, and you can be at ease with the decision.

Lastly, wait for the approval. Generally, these loans can take about 2-5 weeks to finalize. When you get the approval, the funds you applied for will appear in your bank account.

Conclusion

Investing with a SBA loan should only be limited to business purposes. So yes, you can still invest in things; just make sure they are relevant to your work.

Undoubtedly, SBA loans are an excellent initiative to help small business owners reach their entrepreneurial dreams. So before you apply, go through the guidelines and rules properly before making a decision. And if you have any questions, reach out to a consultant immediately.