Using an SBA Loan for Equipment Purchases

Backed by the U.S. Small Business Administration, SBA loans can be a good option when a business needs to purchase equipment. An SBA equipment loan is often easier to qualify for than a traditional bank loan, but borrowers will still need good credit and multiple years in business to qualify with most SBA lenders.

Although the loan approval process can be longer than other equipment financing options, SBA loans offer low rates and long repayment periods.

There are a variety of SBA loan types. Here are three options that can be a good fit when you want to use an SBA to purchase equipment for your business:

The interest rates for SBA 7(a) loans range from 11.5% to 15% and typically have repayment terms of 10 years or less when used to purchase equipment.

Funding for SBA loans can be slow, one to three months, generally. However, if you need to purchase equipment quickly, SBA Express loans, part of the SBA 7(a) program, have faster funding times, but also a lower borrowing maximum of $500,000.

To be eligible for an SBA 7(a) loan, your business should meet the following requirements:

• A for-profit business located in the U.S. or its territories.

• Meet SBA small-business size requirements.

• Unable to obtain reasonable terms from nongoverment sources.

• Be creditworthy; generally a credit score of 650 or higher.

• Demonstrate an ability to repay the loan.

SBA CDC/504 loans are generally associated with the purchase of commercial real estate and have maximum loan amounts of $5.5 million. However, SBA 504 loans can also be used to purchase long-term equipment — assets with an expected life of at least 10 years that will be used at a fixed location.

SBA 504 loans are made available through SBA’s community-based partners called Certified Development Companies. CDCs are regulated and certified by the SBA. Interest rates are approximately 3% of the debt and may be included in the total loan amount.

SBA 504 loans have similar requirements as 7(a) loans, with some additional ones:

• Business net worth of less than $15 million.

• Prior two-year average net income of less than $5 million after federal income taxes.

SBA microloans are another option for small-business owners who need funding of $50,000 or less to purchase equipment. Microloans are available to existing businesses and startups through intermediary lenders, which are nonprofit community-based organizations.

Interest rates vary for SBA microloans, but a typical range is from 8% to 13% with a maximum repayment term of six years.

Microloans can be used for the purposes of expanding, rebuilding or improving your business, including the purchase of equipment and machinery.

Each intermediary lender will have its own qualification guidelines, but eligibility requirements for microloans can be less strict than other SBA loan programs. Although lenders will typically require a personal guarantee and collateral.

SBA loans can be easier to qualify for than a bank loan because these small-business loans are partially guaranteed by the SBA. Because of these guarantees — as high as 90% in some cases — lenders can often be more flexible when reviewing borrower qualifications.

SBA loans offer low interest rates and long repayment terms, up to 10 years for some equipment loans. And, in the case of equipment purchases, the assets can act as collateral for business loans.

SBA loans are offered through traditional banks as well as community banks, credit unions and other lenders.

You can get matched to potential lenders through the SBA by completing a short questionnaire online. After answering a few questions about your business, you’ll receive an email in two days that has the contact information of lenders that are interested in discussing an SBA loan. After you talk to the lenders, you can compare loan terms and interest rates.

The lender you select will go over how to apply for an SBA loan and cover what to include in your SBA loan application. In addition to the SBA loan application form, personal financial information and business information, it can be helpful to have pricing quotes for the equipment you plan to purchase.

There are alternative funding options when an SBA equipment loan isn’t the right fit for your business.

If you already have a relationship with a bank, you can check its requirements for in-house loans as well as SBA loans, if available.

Generally, bank loans offer the most competitive terms and rates but can be more difficult to qualify for than an SBA loan. You’ll often need multiple years in business and excellent credit to qualify for a bank loan. And similar to SBA loans, bank loans can be slow to fund.

Online business loans can be an option when you can’t qualify for a bank or an SBA loan or when you need funds quickly. Online lenders typically have more flexible qualification requirements, but also charge higher interest rates than banks.