SBA Loan Repayment: Understanding Your Options and How It Works
Getting access to funding is often a critical challenge for small business owners who want to expand their businesses. The U.S. Small Business Administration (SBA) offers a variety of loan programs to help small business owners access the funding they need. Like most loans, they need to be repaid.
While these loans can provide a lifeline for many entrepreneurs, understanding the repayment process is essential to maintaining a healthy financial footing. In this article, we will delve into how SBA loan repayment works, the timelines, and what could happen if you can’t pay back your small business loans.
Whether you're a seasoned entrepreneur or a newcomer to the world of small business financing, this guide will provide you with the knowledge and insights you need to navigate the complexities of SBA loan repayments and build your business.
What Are SBA Loans?
SBA loans are made through financial lenders but are backed by the Small Business Administration, an independent agency of the federal government. The SBA offers a number of different loans, such as the SBA 7(a), SBA 504 loan, and microloans that are geared toward different business needs.
Because the SBA backs the loans, borrowers might find it easier to get approved and get the financing they need. The SBA has specific guidelines for lenders and a strict application process.
SBA loans aren’t the only type of financing available for small business owners looking for reasonable loan terms from nontraditional lenders. Backd, for example, offers a working capital advance of up to $2 million with repayment terms of up to 16 months and a business line of credit of up to $750,000 with six- or 12-month repayment terms.
How Does SBA Loan Repayment Work?
In general, the repayment process for an SBA loan is pretty straightforward. If you have received an SBA loan, you can find out the details, including repayment terms and loan amount, on the SBA loan portal. If you got a loan through an SBA lender, they should walk you through the repayment process so you know how long it will take to pay back your loan and how to make your first payment.
SBA loans are considered long-term business financing. In other words, the repayment terms are usually long. The repayment terms vary by lender as well as the type of SBA loan:
7(a) loans: The loan term will depend on your ability to repay and other factors, but it will be no longer than 10 years for working capital and equipment and no longer than 25 years for real estate.
504 loans: There are 10-, 20-, or 25-year maturity terms available.
Microloans: Repayment terms can't exceed six years.
To make a payment, you can go to Pay.gov to create an account and make either a one-time payment or recurring payment. You’ll need to provide some information in order to complete the transaction, including:
Loan number
Monthly payment amount
Next payment date
Term of your loan
You can pay for your loan through a bank account, a PayPal account, or a debit card. You can’t pay for loan payments using a credit card.
Can You Pay Back Your SBA Loan Early?
While you can pay back your SBA loan early, you could be penalized. The penalty amount depends on the type of loan you received and other factors.
If you decide to repay your SBA 7 (a) loan early, you could be penalized if you have a maturity of 15 years or more. If you pay back 25% or more of the outstanding balance or make a prepayment within the first three years of the loan, you could be charged a penalty of 1%-5% of the prepayment amount.
For SBA 504 loans, a prepayment penalty applies during the first half of the loan term. The rate and schedule is determined when the loan is made and is based on the Debenture Rate. In general, the rate decreases by 1/10 each year for 20- or 25-year terms and by 1/5 for 10-year terms. The loan can be paid off without a penalty during the second half of the term.
Microloans do not have a prepayment penalty.
If you want to pay back your SBA loan early, make sure it makes sense for your business. It's also important to read the loan agreement before signing any contract to check that you agree with all of the terms, including the repayment schedule.
Do All SBA Loans Have to Be Repaid?
The majority of SBA loans need to be repaid. There is no forgiveness system in place like there is with federal student loans. However, during the coronavirus pandemic, borrowers who applied for a Paycheck Protection Program (PPP) loan from the SBA may have the loan balance forgiven, provided they meet certain requirements.
Other disaster relief programs, such as the COVID-19 Economic Injury Disaster Loan (EIDL), need to be paid back, unless it was a COVID-19 EIDL Advance, which is like a grant. If you’re unsure if your EIDL funding was a loan or grant, you can check the SBA.gov portal to be sure.
What Happens If You Can’t Pay Back an SBA Loan?
Growing a business can be tough. If you’re unable to make your monthly payments and are delinquent or default on your loans, it can not only hurt your business but your personal assets as well. The specific process will vary, depending on the lender.
Some of the potential consequences of not paying back an SBA loan include:
Collection efforts: The lender may attempt to collect the debt through various means, including seizing any collateral pledged, garnishing wages, or taking federal payments due, such as IRS tax refunds, disability, military pensions, etc.
Damage to credit score: If you don't repay your SBA loan, it could damage your credit score, which can make it difficult to get other loans in the future.
Personal liability: In some cases, the borrower may be personally liable for the debt, meaning their personal assets, such as their home or car, could be seized to repay the loan.
Legal action: If the lender is unable to collect the debt, they may initiate legal action against the borrower to recover the debt. This can result in court judgments and additional fees and penalties.
Can You Reduce or Delay Your SBA Loan Repayment?
If you are struggling to repay your SBA loan, you should contact your lender as soon as possible. Many lenders offer hardship programs or other options to help borrowers who are experiencing financial difficulties.
By working with your lender and being proactive about your repayment obligations, you can avoid defaulting on your SBA loan and mitigate the potential consequences.
You can also discuss other options, such as paying only part of the loan amount due or refinancing with the lender, especially if you are experiencing cash flow difficulties. You can also send in an offer in compromise, which allows you to settle with your SBA lender for less than the owed amount, but it should only be used as a last resort.
Find the Best Type of Funding for Your Small Business
By understanding the repayment process for SBA loans and choosing the right repayment option, you can take control of your finances and achieve your business goals. While SBA loans can be a great option for entrepreneurs, their rigorous application process and long-term repayment terms may not appeal to all small business owners who are looking for funding.
Backd has flexible repayment options, which can help borrowers manage their cash flow and avoid defaulting on their business financing. We offer working capital advances with payment terms up to 16 months and business lines of credit with 6 or 12 month terms. And with a business line of credit, each time a payment is made, the loan balance increases, much like a traditional credit card.
Both the working capital advance and business line of credit provide a different level of flexibility, depending on your financial situation and repayment goals.
Overall, Backd's flexible repayment options can provide small business owners with the support they need to manage their finances and succeed in the long term. Apply now and get up to $2 million in working capital or up to $750,000 in credit in just 24 hours.
