When you’re searching for small business financing, it’s easy to become overwhelmed by all of the different options on the market. From short-term loans to lines of credit, there are many types of business loans out there today—and it can be tough to know which one is right for your business.
This being said, as you explore your options, you may come across the term “guaranteed business loans.” What are guaranteed business loans?
Unfortunately, there is a common misconception that guaranteed business loans refer to business loans that you’re guaranteed to be approved for. In reality, guaranteed business loans are loans that are secured, or backed by a guarantee—in other words, loans that provide a security measure for a lender in the case of default, guaranteeing that they’ll receive payment.
Since this type of business loan is often misunderstood, we’ve compiled this guide to help explain everything you need to know about guaranteed business loans.
We’ll go into detail reviewing how these loans work, as well as discussing the best options for small business owners. Plus, we’ll explore how to qualify and apply for guaranteed business loans and answer a few frequently asked questions around this loan topic.
Let’s start with the basics: What are guaranteed business loans?
As we mentioned above, the term “guaranteed business loans,” is often misconstrued. When many people think of this term, they think of loans that they’re guaranteed to qualify for.
Unfortunately, this is not what guaranteed business loans are—in fact, there is never a complete guarantee that you’ll qualify for a loan, and therefore, if you see a lender advertising this way, you’ll want to take caution in proceeding with them.
This being said, those who are looking for loans that they’re “guaranteed” to qualify for are often doing so because they have poor credit and have been denied from qualifying for loans or other financing products.
If you are looking for loans with flexible qualifying requirements, as opposed to guaranteed business loans, you’ll want to check out our guide to bad credit business loans.
With this differentiation made, let’s discuss what guaranteed business loans actually are. As we explained briefly above, in the world of small business lending, the term “guaranteed” means that these are loans that are guaranteed by some form of collateral, deposit, or agreement—meaning that the lender will be paid back their money, even in the event of a borrower’s default.
In this way, guaranteed loans are not all that different from secured business loans. Overall, however, there are two overarching categories that are often used to talk about guaranteed business loans: loans guaranteed by the SBA and loans with a personal guarantee.
Let’s learn more.
The most common type of guaranteed business loans are SBA loans.
SBA loans are guaranteed by the Small Business Administration, even though the SBA doesn’t actually provide the loans. Instead, these loans are provided by SBA lending partners, most often banks, and the SBA guarantees a portion of the loan that is offered.
In this way, the SBA decreases risk for the lender by promising that the lender will get a large percentage of the value of the loan back, even in the case of default.
Typically, the SBA will guarantee up to 85% of the value of the loan, thereby securing these loans for small business owners.
The other type of loan that falls under the “guaranteed business loans” umbrella is a personally guaranteed business loan.
This is a very general categorization, however, because almost any loan can be personally guaranteed.
To explain, when you make a personal guarantee on a business loan, you’re essentially promising the lender that you will use your personal assets to repay the loan if your business is not able to pay the loan back.
Therefore, when you sign a personal guarantee, you’re giving a lender the legal right to collect on your personal assets to recoup their losses in the case of default.
So, now that you have a better sense of the two categories of guaranteed business loans and how they work, let’s break down your best options.
Ultimately, although it’s very common to see business loans that require a personal guarantee, SBA loans will be a better option for those who can qualify.
After all, if you default on a loan with a personal guarantee, you’re putting your business and personal assets at serious risk.
With this in mind, the SBA offers guaranteed business loans through a few different programs. Let’s explore the details.
SBA 7(a) loans are the most popular and common type of guaranteed business loans out there.
These loans can come in amounts as high as $5 million and are suitable for a wide range of business purposes: buying another business, renovating a current space, purchasing equipment, refinancing debt (in some cases), or simply handling working capital needs.
Terms on these guaranteed business loans typically depend on the way you’re using the financing—working capital needs will get the shortest terms (10 years), and commercial real estate purposes will have the longest terms (up to 25 years).
Interest rates on SBA 7(a) loans will ultimately depend on your lender and qualifications—however, the lender won’t be able to charge a rate above the SBA’s set maximum (currently 7% to 9.5%).
This being said, the SBA will guarantee up to 85% for 7(a) loans up to $150,000 and 75% for 7(a) loans greater than $150,000. The SBA will also charge a guarantee fee, which normally gets passed on from the lender to the borrower. This fee can range from 0% for loans under $150,000 to 3.5% on loans of more than $700,000.
Whereas 7(a) loans are the most general type of financing option offered by the SBA, CDC/504 loans are much more specific.
CDC/504 loans are meant specifically for financing major fixed asset purchases like equipment or commercial real estate.
These loans can be issued in amounts up to $20 million with terms from 10 to 25 years. Unlike 7(a) loans, which are just offered by a single lender, SBA CDC/504 loans are provided by a bank, certified development company (CDC), and the borrower (who provides a down payment).
Once again, interest rates on these loans will vary, but generally, fall between 4% and 7%.
The SBA guarantee will apply to the 40% of the loan provided by the CDC. As with the 7(a) loans, you’ll also have to pay an SBA guarantee fee on these loans.
Finally, the SBA microloan program is the SBA’s third program offering guaranteed business loans designed for smaller funding needs.
In fact, SBA microloans are guaranteed in a different way. With these loans, the SBA partners with nonprofit lenders (called intermediaries), and provides funds for them to lend out through the microloan program.
These microlenders provide direct loans of $50,000 or less to small businesses in their communities. Business owners can use SBA microloans for a variety of purposes, similar to a 7(a) loan.
In addition to having smaller loan amounts, SBA microloans also have shorter terms, with a maximum length of six years. Interest rates on these guaranteed business loans generally range from 6.5% to 13%.
As for fees, the SBA doesn’t charge fees for the microloan program.
Overall, SBA guaranteed business loans are an ideal option for small business owners—because the government guarantees that the lender will receive compensation in the case of default, bank lenders are more likely to work with small business owners they wouldn’t normally approve.
Plus, with the regulations and guidelines set out by the SBA, business owners have access to loans with long terms, high amounts, and low-interest rates.
This being said, although technically easier to qualify for than traditional business loans from banks, there are still significant requirements involved with qualifying for an SBA loan.
Therefore, if you’re looking to qualify for one of these guaranteed business loans, you’ll want to keep the following requirements in mind:
Your personal credit score will be one of the most important factors to determine whether you’ll qualify for guaranteed business loans from the SBA.
Your credit score is a strong indication of your borrowing history, and therefore, your ability to pay back a loan.
For this reason, you’ll want to have at least a 650 (or higher) credit score to qualify for an SBA loan.
Although some SBA lenders will work with startup owners with solid credit scores (notably, Chase SBA loans are worthwhile options for startups), most SBA lenders will want to work with more established businesses.
A business that’s been around for a few years has proven it can withstand the regular ups and downs that come with running a business.
For this reason, you’ll have a much easier time qualifying for guaranteed business loans when you’ve been in business for at least two years.
Your business’s financials will also have a large impact on the guaranteed business financing you qualify for from the government.
Paired with your credit score, SBA lenders will want to see that you’re financially able to pay back the loan.
Therefore, SBA lenders will want to look at your annual revenue, cash flow, liabilities, and more.
Although not all SBA loans will require collateral—in other words, fixed assets to put up to secure your loan—it’s worth determining what you can offer.
Generally, the SBA prefers lenders to obtain adequate collateral, when available, to secure the loan. Therefore, you’ll want to be sure you have fixed assets like real estate, equipment, or inventory, worth enough to serve this purpose.
Although SBA loans are your top option for guaranteed business loans that have large amounts with long terms and low rates, these loans are still issued by banks—which means a slow and time-consuming application process.
Nevertheless, if you’re looking for one of the most competitive loan products on the market, it will be worth it to gather and submit an SBA loan application.
Therefore, if you know which loan program you’re interested in and have found a lender to work with, you’re ready to dive into the application process. To do so, you’ll need to provide documents like financial statements, information on your collateral, a description of your business, and a statement of how you’ll use the loan proceeds, among others, such as:
At the end of the day, it’s easy to see how people misunderstand the term “guaranteed business loans.”
It’s important to remember that guaranteed business loans don’t refer to loans that you’re guaranteed to be approved for as the borrower, but instead, loans that are secured with a guarantee to protect the lender. In this way, it’s helpful to remember that guaranteed business loans can be considered synonymous with secured business loans.
Ultimately, although there are a variety of loans that can be secured by a personal guarantee, your best options for guaranteed business loans will be SBA loans. Through these products, you’ll have access to business financing with ideal rates, terms, and amounts—making SBA loans one of the most desirable funding options, even though the qualifications and application process will be more taxing than other solutions on the market.