SBA Community Advantage Loans: A Complete Guide

Every small business has one thing in common: they all need cash to operate. Money is required to start a new project, expand a business, or purchase the equipment required for daily operations, and sometimes that money has to come through financing. As many business owners know, though, this isn’t as easy as simply walking into a bank and receiving a loan, especially in underserved areas.

Sadly, whether we’re talking about an inner-city business or one that is owned by a woman or minority, funding can be hard to get. But funding for these demographics is critical, not just for the success and survival of the individual business, but to improve the economy throughout underserved markets. This is why the Small Business Administration has launched the SBA Community Advantage Loan Program. Read on to find out more about this innovative pilot program.

What Is The SBA Community Advantage Loan Program?

The Small Business Administration offers loads of resources for small business owners, including training, educational materials, and even funding. Any small business owner that has ever attempted to take out a loan knows just how difficult it can be to obtain traditional funding. This holds especially true for those in underserved communities.

What Is An Underserved Community?

Underserved communities typically include inner cities and rural areas. Federally designated Low-to-Moderate Income communities are considered underserved. Any business that has more than 50% of full-time staff members that are low-income or live in LMI areas is considered an underserved market. Businesses that are owned by minorities, women, and veterans are also included in this definition.

The SBA assists small business owners in becoming empowered and successful, and businesses in underserved markets are no exception. After all, a successful business doesn’t just benefit the owner – it also helps stimulate the economy and create jobs, which is especially critical in these low-income areas.

This is why the SBA has launched the SBA Community Advantage Loan Program. This financing program allows businesses in underserved areas to receive low-interest financing with reasonable terms. Business owners that can’t receive financing through traditional loan programs can take advantage of competitive rates and terms through this SBA pilot program.

Because this is an SBA pilot, there is a limited amount of time during which businesses can apply for and receive a Community Advantage loan. This small-scale project from the SBA will expire on March 31, 2020, after which businesses will have to consider one of the Administration’s other loan programs, such as the 7(a) program.

Community Advantage VS Standard 7(a) Loans

When exploring the options for SBA business loans, the Standard 7(a) program is typically the most popular. Why, then, would a business consider applying for a Community Advantage loan? Looking at the differences between the two programs can help determine which is the best choice for any business.

First, it’s important to understand how SBA loan programs work. The Small Business Administration does not provide funding directly to small businesses. Instead, the SBA has created a framework and standards that enable banks, credit unions, and nonprofits to act as intermediaries and provide low-interest loans with flexible terms for business owners. Because these loans are backed by the SBA, there is less risk for the lender, so it can feel confident in loaning money to startups and established small businesses.

The SBA Community Advantage program was launched in 2011 and will be available through 2020. This program provides loans of up to $250,000 to qualifying small businesses. Because 85% of loan funds up to $150,000 and 75% of funds more than $150,000 are guaranteed by the SBA, lenders are more willing to work with businesses that have failed to obtain traditional financing. Loans can be used for almost anything, including the purchase of equipment or real estate, to refinance existing debt, or for use as working capital.

The maximum interest rate for these loans is set by the SBA as the prime market rate plus 6%. Rates are typically around 7% to 9%, which varies by lender. The background of the borrower, including credit score, could affect the interest rate, but it will never go above the SBA’s set maximum. Terms for these loans are dependent on how the money is used. Equipment purchases and working capital come with a maximum maturity of 10 years, while real estate purchases have a maximum term of 25 years.

The Standard 7(a) program has a few differences when compared to the Community Advantage program. For starters, the maximum loan amount for 7(a) loans is much higher. Borrowers can receive up to $5 million through this program, which makes it the better choice for anyone seeking more than $250,000. If you need a smaller loan and don’t qualify for the SBA Community Advantage program, you may want to consider SBA Microloans.

Interest rates for loans obtained through the 7(a) program vary and depend upon the amount borrowed. Rates are currently set at the prime rate plus a maximum of 4.75%. Average interest rates range from about 7% to 9% and are comparable to the rates of the Community Advantage program.

The repayment terms are also similar between the two programs. Loans used for working capital and equipment have maximum terms of 10 years, while real estate purchases have terms up to 25 years.

One of the biggest advantages of the Community Advantage program is that businesses without adequate collateral can be approved since the SBA backs between 75% to 85% of the loan. Collateral requirements will vary by lender.

Under the terms of 7(a) loans, lenders do not have to take collateral for loans that do not exceed $25,000. Lenders may opt to demand collateral for loans up to $350,000. Once the loan exceeds this amount, the SBA requires that the lender collateralize the loan up to the total loan amount. If business assets are not enough collateral, trading assets and personal real estate will be used. It’s also important to note that a personal guarantee is required to receive both 7(a) and Community Advantage loans.

Aside from the maximum loan amount, one key difference between the two programs is which businesses are eligible. Any for-profit business or startup that meets the general requirements set by the SBA can apply for a 7(a) loan. Only businesses that have met the qualifications of operating in an underserved area can apply for and receive Community Advantage funding.

If an SBA Community Advantage loan is the right choice for you, read on. If the 7(a) program sounds more in tune with your needs, read more about SBA 7(a) terms, rates, and eligibility.

Who Is Eligible For A Community Advantage Loan?

All applicants for an SBA Community Advantage Loan must meet the standard eligibility requirements set forth by the SBA.

Business owners applying for a Community Advantage loan must own a for-profit small business as defined by the SBA. This means that businesses should have fewer than 500 employees and under $15 million in annual revenue. Businesses must be based in the United States and must also be in the area that is served by their chosen lender. Businesses that participate in illegal operations, lending, or investment services are not eligible.

All applicants must have a purpose for obtaining the loan, be able to prove that they can repay the loan, and be able to demonstrate a need for the funding. In addition, applicants must have exhausted other financing options before applying for a loan through the SBA.

A good credit score is required for all SBA loans, including the Community Advantage program. A minimum score of 680 is recommended for the highest chance of approval. Any negative marks on a credit report will need to be explained to the lender. Unsure of your score? There’s no need to be – find out how you can obtain your free credit score before talking to a lender.

Finally, the SBA has requirements specific to the Community Advantage program. In order to qualify for a loan, the applicant must operate the business in an underserved market. By the SBA’s definition, this includes Low-to-Moderate Income communities, businesses where over half of the full-time staff is low-income, Empowerment Zones, Enterprise Communities, Promise Zones, and HUBZones.

In addition to the underserved communities previously listed, startups that have been in business for fewer than two years are also eligible to apply. Servicemembers and military veterans who qualify for the SBA Veterans Advantage program and meet all other requirements can also apply for a Community Advantage loan.

If you’re still unsure if the SBA Community Advantage program is right for your business, take a look at the requirements for other types of SBA loans that may better serve your needs.

How Do I Apply For An SBA Community Advantage Loan?

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If you need a loan of $250,000 or less and you operate your business in an underserved area, the SBA Community Advantage program may be the right choice for your financing needs. After you’ve determined that you’re qualified for the program, the next step is to begin the application process.

To begin, you will need to find a lender that offers SBA Community Advantage loans. You can use the SBA website to find a local lender in your area or you can ask your existing financial institution for a list of SBA Community Advantage lenders. Once you’ve found a lender, you’ll need to work with them online, over the phone, or in person to complete the application process.

Your lender will guide you through the process and will provide the details specific to your loan, such as interest rates, terms, and collateral requirements. The lender will also require personal information from you relating to your credit, finances, and business history. You can get started ahead of time by gathering a few critical documents.

To apply for your loan, you will need to provide financial statements, personal and business tax returns, and personal and business credit reports. You should plan to have all documents for at least the last two years.

For startup ventures that have been in operation for fewer than two years, a solid business plan and financial projections will be required to process your application. Please note that other documentation may be required for both established and startup businesses.

Once the application is completed, approval and funding typically take several months because of the lengthy underwriting and closing processes. The entire process from application to funding takes an average of 30 to 90 days (and sometimes longer). If you need approval in a hurry, consider the advantages of an SBA Express Loan.

After the application is approved and the underwriting and closing process is complete, funds will be distributed and you can use them to purchase, update, or expand your small business.

Final Thoughts

It’s no secret that SBA loans can be tedious to apply for and difficult to obtain, but the benefits of these small business loans outweigh the drawbacks. If you operate in an underserved community and need low-interest financing to improve your business, the SBA Community Advantage Program is certainly an option worth considering.

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