Due to the COVID-19 pandemic, the SBA will be covering principle and interest payments for six months for all Community Advantage loans approved between February 1, 2021 and September 30, 2021.
Between PPP loans, disaster relief loans, local grant programs, and the myriad federal and state relief options available, simply finding the right funding opportunity for your small business can feel like a daunting task—let alone understanding how to qualify, apply, and leverage any assistance you might receive.
What are SBA loans?
The U.S. Small Business Administration (SBA) is a government organization aimed at helping entrepreneurs and small business owners launch and grow their businesses across the country. Loan programs are a central part of the SBA’s work, and while the agency doesn’t directly lend money to business owners, it sets guidelines for loans and reduces risk for lenders, making it easier for entrepreneurs to access capital.
7(a) loans are the most common form of SBA loans, as they offer assistance for all sorts of business expenses, while guaranteeing portions of the total amount, capping interest rates, and limiting fees. (You can read more about 7(a) loans in Gusto’s handy Small Business Loan guide).
How does the SBA Community Advantage program (CA) fit in?
The SBA Community Advantage (CA) program is a pilot program within the SBA’s 7(a) Loan Program. Don’t let the phrase “pilot program” scare you away, though—the Community Advantage program has been around since 2011 and was recently extended until at least September 2022.
This program helps small businesses in underserved or low-income areas access 7(a) loans. While CA loans share many of the same application requirements as traditional 7(a) loans, there are a few important differences in eligibility, loan terms, and the lending process itself that make this program unique.
While the federal Paycheck Protection Program (PPP) has played a significant role in the small business sector’s recovery, there are disparities for entrepreneurs in underserved communities. According to a report by the Center for Responsible Lending, the PPP did not offer guidance to lenders about prioritizing borrowers in underserved and rural markets, making it difficult for these small business owners to qualify for relief or receive funding in time to prevent closure or lay-offs.
What types of businesses are right for the SBA CA program?
As mentioned above, CA loans are geared towards for-profit small businesses in underserved communities who need capital to launch or grow; they are particularly focused on providing loans to businesses in low-income areas and rural towns. Typically, these businesses have been operating for less than three years and do not qualify for traditional financing elsewhere.
While traditional 7(a) loans are issued by SBA lenders like national and regional banks, CA loans are guaranteed specifically for “mission-oriented lenders, primarily nonprofit financial intermediaries focused on economic development,” making them more accessible to these communities.
Because the CA program has more flexible eligibility requirements than standard 7(a) loans, it is an ideal option for startups, businesses in “risky” industries like food & beverage, and for women, BIPOC, and veteran entrepreneurs who may face barriers for traditional funding.
CA applicants must meet the SBA’s basic eligibility requirements that it sets for all of its loans.
What are the eligibility requirements for a CA loan?
The general loan eligibility requirements for CA loans are the same as for 7(a) loans.
General SBA loan eligibility requirements:
- For-profit business in an eligible industry operating in the U.S.
- Meet the SBA definition of small business
- Traditional financing options have been exhausted (which means applied for a loan at traditional bank but did not qualify)
- You can prove that you’ve invested your own time and money into the business
- You demonstrate “good character” and an ability to repay the loan
- You have not previously defaulted on any government-guaranteed business loans
Because the SBA Community Advantage loan program aims to extend funding to traditionally underserved small businesses, there are a few more flexible eligibility terms.
Community Advantage flexible eligibility requirements:
- You can demonstrate how long you’ve been in business or show a business plan. Traditional loans require at least 2 years in business, but CA loans are more flexible. If you are a startup, you’ll need to show a thorough business plan with financial projections and any relevant experience.
- Provide some sort of business financials: Most traditional SBA loans require a strong balance sheet, but CA loans only need a business plan with financial projections.
- Have a minimum credit score of 140. Typically, businesses need an excellent credit score to qualify for an SBA loan, but the CA program is more lenient.
What are the CA loan terms?
The basic terms of CA loans are similar to the SBA’s traditional 7(a) loans, with a few key differentiators when it comes to use of funds, fees, and collateral:
- Maximum CA Loan Amount: $250,000
- Maximum CA Interest Rate: Prime + 6%
- Percent of Guaranty: The SBA will provide a 85% guaranty for loans of $150,000 or less and 75% guaranty for loans of $150,001 or more
- Repayment: SBA loan programs are generally intended to encourage longer-term small business financing. Loan maturities are based on the ability to repay, the purpose of the loan proceeds, and the useful life of the assets financed. Standard SBA loan maturities are as follows:
- 25 years for real estate
- 10 years for equipment
- 10 years of working working capital or inventory loan
- Eligible use of proceeds: CA loans may be used for any normal business purpose, except those specifically prohibited by SBA. This includes working capital, real estate purchases, renovations, equipment purchases, debt refinancing, and more. Funds may not be used for revolving lines of credit.
- Fees: CA loans will require an upfront SBA guarantee fee that can range from 0.25% to 3.0% based on the loan amount and repayment terms. While your lender also has some discretion to charge their own additional fees, they are restricted to a maximum processing or application fee of $2,500.
- Collateral: For loans of $25,000 or less, your CA lender is not required to take collateral. For loans above $25,000, SBA guidelines state that the lender should follow the collateral policies they have in place for other, similarly-sized non-SBA loans.
- Personal Guarantee: All SBA Community Advantage loans require a personal guarantee.
CA loans offer more flexible requirements, long repayment terms, low interest rates, and the opportunity to use the funds for virtually any business-related expense. But, keep in mind that CA loans are offered in lower amounts compared to other SBA loan programs, the application process is very detailed, and it can take many months to get approval and receive your funds.
How do I apply for a CA loan?
The first step in the SBA CA program loan application process is finding a Community Advantage Lender. Then, gather the documentation you need and fill out an application form. We’ll walk you through it here.
Who are CA lenders?
The SBA requires that any Community Advantage lender must make at least 60 percent of its loans in a defined “underserved market.” Per guidance issued by the agency, these include:
- Low-to-moderate income communities, emphasizing low and very-low income communities
- Businesses where more than 50% of the full-time workforce is low-income or resides in a low-income community
- Legally defined empowerment zones and enterprise communities
- New businesses (firms in business for no more than two years)
- Veteran-owned businesses
- Legally-defined promise zones
- Legally-defined opportunity zones
- Rural areas
A lender also must have one of four statuses to participate in the program:
- Certified Development Companies (CDCs)
- Microloan program intermediaries
- Intermediary Lending Pilot (ILP) program Intermediaries
- Non-federally regulated Community Development Financial Institutions (CDFIs) certified by the U.S. Treasury Department
How to find a CA Lender
There are over 100 approved SBA Community Advantage lenders across the country. To find a lender in your area, visit the SBA’s Loan Center map. Also, check out our list of CDFIs here to find local institutions.
Gather documentation for your CA loan application
The next step in the application process is gathering all the necessary documents and forms. Your CA lender will help you gather and submit all of the required materials for your loan application. Be sure to view the SBA’s 7(a) Loan Application Checklist here.
To streamline the process, it’s a good idea to have as much documentation ready as possible. Although some of the required materials will vary depending on the lender, you will likely need to provide some or all of the following:
- Business and personal tax returns
- Your resume and those of any co-owners / management
- Business financial and/or bank statements (if you’re a startup, you can provide financial projections instead)
- Business plan
- Any relevant legal documents (like an LLC filing, for example)
Required SBA Forms
Again, your CA lender will help you gather all the correct forms during the application process. To give you an idea of what’s required, all Small Business Applicants must complete and sign the following forms:
- SBA Form 1919, Borrower Information Form and any additional SBA forms required by SBA Form 1919 in response to “yes” answers (for example, SBA Form 912, Statement of Personal History)
- SBA Form 2449, Community Advantage Addendum.
How long does the application process take?
If the Community Advantage lender you’ve selected decides to move forward with your loan request, approval and funding can take anywhere from 30 to 90 days, and sometimes longer. This, of course, depends on the lender, how long it takes to compile the necessary documentation, and other situational factors. Program guidelines do specify, however, that the SBA should turn around their portion of the application approval process within 5 to 10 days.
Are there resources to help my small business?
This post was written by Levi Morehouse, the founder and CEO of Cetrus. Ceterus exists to empower small business entrepreneurs. They assist thousands of small business owners with automated financial reporting and bookkeeping, and know firsthand how overwhelming the loan application process can be.