Since the pandemic hit, Small Business Administration loans (SBA loans) for e-commerce brands have been the talk of the town.
This is thanks to a flood of applications to loan programs like the Paycheck Protection Program (PPP), which helped businesses maintain operations and retain staff during the pandemic. 💪
With the deadline for PPP loans now passed, e-commerce businesses are eyeing other SBA loan types as possible funding options.
But the situation isn’t clear cut.
SBA loan programs are notorious for long application processes and narrow rules on who can qualify. Plus, there are no outright SBA loans for e-commerce—leaving e-commerce business owners to question whether SBA loans are truly a viable option for them.
In fact, the Federal Reserve’s Small Business Credit Survey found that 32% of small businesses turned to online lenders in 2018.
In this ultimate guide to SBA loans for e-commerce, we’ll dive deep into the world of SBA loans, unveiling their real pros and cons for online retailers.
SBA Loans for E-commerce: Not the Right Fit? You’ve Got Options.
Cash advances
Working capital loans
Find the Optimal Funding Solution for You
What Is an SBA Loan for E-commerce?
Don’t worry. You’re not the first to ask this question—and you definitely won’t be the last.
While people casually drop ‘SBA loans’ into the conversation, for many there’s still a cloak of mystery surrounding them.
Here’s the scoop:
SBA loans are funding secured through a bank or credit union with the help of the US Small Business Administration (a.k.a. SBA). Because SBA loans are partially guaranteed by the government, they come with capped interest rates and fewer fees than traditional bank loans.
The main purpose of an SBA loan is to give small businesses the funding they need to launch, grow, and succeed.
Consequently, there’s a wide range of loans for differing business activities. For example: expanding into new territories, buying real estate, purchasing inventory, and establishing working capital.
How Many Kinds of SBA Loans Are There?
Aside from the emergency PPP loan temporarily brought in during 2020, there are six types of SBA loans:
7(a) loans
Community development corporation (CDC)/504 loans
Microloans
CAPLines
Disaster loans
Export loans
You can apply for an SBA loan online or by mail. SBA loans for e-commerce are a relatively new thing, so it helps to research. Check out these super useful resources created by the SBA, including checklists for each type of loan.
How to Qualify for an SBA Loan for E-commerce
SBA loans have a range of minimum requirements. These include:
Having a high credit score (680+).
Utilizing other funding sources like personal savings before applying.
Conducting or intending to do business in US territories.
Owner is based in the US.
Having collateral to put forward along with 10-20% of your loan amount to surrender as a down payment.
Each loan can have additional requirements, terms, interest rates, and fees.
Let’s take a closer look at each one’s specs, pros, and cons:
7(a) loans
7(a) loans are the most popular and accessible loans (pre-PPP). They help small businesses grow and sustain solid progress.
👍 What to love about 7(a) loans:
Excellent long-term funding option: 7(a) loans have a low-interest rate hovering between 5-10% plus a prime of around 0.25%-4.75%.
Low to no fees = more business liquidity: SBA waives fees for loans under $125,000, while loans above this amount have fees up to 3.5%. There’s no repayment penalty for loans under £15,000 and no ‘balloon’ (lump sum) payment on matured loans.
The Gov’s got your back: The government guarantee aspect of 7(a) loan removes the burden on small businesses and their owners to provide large amounts of collateral. The SBA guarantees 85% of 7(a) loans of $150,000 or less, and 75% of loans above this figure.
Generous loan amounts: There’s no minimum (although banks tend to refuse applications less than $30,000), and you can borrow up to $5 million.
Flexible usage terms: You can use a 7(a) loan to start your business, refinance debt, stabilize your working capital, or buy an existing company.
👎 What’s not so hot about 7(a) loans:
Strict requirements: You can’t be delinquent on any existing loans, and you must have good character and credit.
Personal collateral required: You’ll need collateral to put forward along with 10-20% of your loan amount to surrender as a down payment.
Long, time-intensive processes: It can take months to wait for an answer, and there’s no certainty you’ll be approved.
💘 Who’s the perfect match for a 7(a) loan?
A 7(a) loan is best for established entrepreneurs with a history of employment in traditional management roles who are focused on scaling.
CTA: Need help with your working capital? SellersFi specializes in alternative funding options like working capital loans and cash advances.
Community development corporation (CDC)/504 loans
CDC/504 loans are community-focused funding solutions designed to develop the economy and infrastructure through small businesses. You can secure between $5-$5.5 million, depending on your business type.
👍 What to love about CDC/504 loans:
What you see is what you get: The loan is fixed in part, and the interest rate tends to be lower than the average market rate.
Long-term funding solution: You choose between a 10 or 20-year repayment period, giving you more certainty on what you’ll pay back, and when.
Less of your capital is at risk: You only need to lay a 10% down payment. The lending bank and SBA cover the remaining balance. The SBA-backed portion amortizes, and there are no surprise balloon payments.
👎 What’s not so hot about CDC/504 loans:
Restricted loan usage: You can only use CDC/504 loans to buy key fixed assets that create jobs or stimulate growth, i.e. buying buildings and improving existing facilities. Using this loan to buy inventory, restructure or refinance debt, or organize your working capital is a no-go.
High barrier to entry for divergent entrepreneurs: Like 7(a) loans, the owner needs a proven track record of relevant management expertise and a solid educational background.
You must be free from financing obligations: You can’t have any other external funding sources.
💘 Who’s the perfect match for a CDC/504 loan?
These loans work well for financially stable business owners who plan to expand their brands.
Microloans
Microloans are small loans of up to $50,000 given to businesses and some non-profits for expansion purposes. You’re free to use this funding to rebuild, relaunch, repair, or optimize your small business.
Flexible usage rules: A wide selection of business activities fall into a microloans remit, i.e. arranging your working capital, buying supplies, and repairing machinery.
Do more with less: This loan’s expansiveness is useful for beginner businesses who often have to address more than one issue at once.
Negotiable rates: Since you’ll secure a microloan from intermediary lenders, interest rates vary and are negotiable. They’re often 8-13%.
No lengthy payment terms: Microloan terms are short and sweet, capped at 6 years—so, it won’t affect your company’s liquidity for too long.
👎 What’s not so hot about microloans:
For expansion purposes only: You can’t use this loan to get your business on the property ladder or pay off debt.
Possible training and planning requirements: Back to school you go! Some microloans require applicants to complete training or planning tasks requirements before they consider your application.
The funds may not be enough: If you’re advanced in your e-commerce journey a cap of $50,000 might fulfill your capital needs and you’ll need to combine other capital sources.
💘 Who’s the perfect match for a microloan?
Microloans are good for less established businesses that have the potential to grow. The flexibility gives them the ability to set their business up for success.
CAPLines
CAPLines are funding solutions created to help small businesses fulfill their short-term and recurrent obligations. There are four types of CAPLines:
Builder Line
Contract Loan
Seasonal Line of Credit
Working Capital Line of Credit
The most relevant for e-commerce sellers are the latter two.
👍 What to love about CAPLines:
They’re short-term funding sources: You won’t get stuck in a repayment schedule that feels like forever.
High lending amounts: You can borrow up to $5 million.
High level of SBA backing: The SBA will guarantee 85% of loans under $150,000 and 75% of loans above this figure.
Affordable interest rates: Ranges between 2.25% and 4.75%
👎 What’s not so hot about CAPLines:
Need to show you can repay the loan: This could be an issue if your business is or has been in a financial tight spot.
Strict requirements: They have the same requirements as 7(a) loans plus a few extra criteria, depending on the loan type.
Risk of early repayment charge: For example, penalties apply if you repay a loan with 15-year maturity or more within the first 3 years.
Interest rates can be variable: You may end up paying back more than you expected.
💘 Who’s the perfect match for CAPLine?
CAPLines match well with businesses that have a specific purpose for the credit line (that matches SBA’s usage rules).
Disaster loans
Disaster loans are granted to help businesses recover from declared disasters like riots, pandemics, and hurricanes. You can borrow up to $2 million.
Economic injury loan: Helps businesses recover from financial loss, i.e. decreased working capital.
👍 What to love about disaster loans:
Favorable interest rates: Interest rates are capped at 4%.
Simple and fast application and pay-outs: It’s an expedited process to account for the fact that they’re for emergencies.
👎 What’s not so hot about disaster loans:
Varied repayment schedules: You could end up with an accelerated payback plan.
Non-repayment penalties & additional fees: If you’re unable to repay, you may incur fees.
💘 Who’s the perfect match for disaster loans?
Disaster loans are a lifeline for businesses in a tight spot or negatively affected by issues out of their control.
Export loans
These loans are designed to help exporters buy stock and operate between and across borders.
👍 What to love about export loans:
High SBA guarantee level: These loans boast the highest SBA guarantee at 90% (for up to $4.5 million).
Short-term lending option: For example, the line of credit has a 12-month repayment schedule for working capital and 3 years for loans.
Flexible loan option: An express loan program offers up to $500,000 in a fast-track loan to exporters. International Trade Loan (ITL) 7-year maximum term for a line of credit and 25 years for real estate.
Affordable interest rates: From 0%-11% depending on the loan type.
👎 What’s not so hot about export loans:
Taxing experience getting approved: You’ll need to prove your export history and provide a range of documents like income statements, projections, and plans.
Personal collateral requirement: Some of the loans (like the Express loan) require owners to put forward personal assets as a guarantee.
High fees: Late and early repayment fees can reach up to 5%.
SBA Loans for E-commerce: Not the Right Fit? You’ve Got Options.
Depending on the unique needs of your business, SBA loans for e-commerce can be hit and miss. But don’t worry: there’s a funding solution out there to suit every business.
You just have to know what to look for. Let’s take a look at some accessible options:
Cash advances
With cash advances, you commit to selling a portion of your predicted future sales at a discount in return—which means cash advances aren’t loans.
👍 What to love about cash advances:
No fixed repayments: This offers more flexibility and means you only repay according to your sales volume.
Fixed interest amount: You’ll pay a specific interest figure, with no surprises.
Keep your collateral: Many funding providers don’t need you to provide personal security.
Get funded fast: With certain flexible providers you can secure up to 90% of your previous day’s sales for a small fee (We can think of one that does just that 😉).
👎 What’s not so hot about cash advances:
More expensive than other lending options: Interest can total up to 30% with some cash advances.
Not a permanent fix: If you have recurring cash flow problems, this may not be for you.
Potentially lower liquidity: When funding providers collect the portion you sold to them, there will be less cash to go around.
Loss of control in parts of your business: Many lenders have guidelines you need to adhere to, like zero cash payments.
Only worth it if your store has steady sales: You’ll need high sales volume and online payments.
Working capital loans
These loans are designed to help businesses address financial shortfalls and get their working capital back on track.
👍 What to love about working capital loans:
Relaxed requirements: Working capital loans are often super flexible about their requirements. For example, at SellersFi you need just 6 months of selling history and $20,000 in net online sales to qualify for funding.
Faster approval than traditional loans: With some providers, you can go from application to approval in less than a week.
You can repay early: Early repayments won’t be penalized by most providers.
Flexibility in how you allocate the funds: You won’t get a slap on the wrist for investing cash where you see fit.
👎 What’s not so hot about working capital loans:
Set repayment installments: This may make other lending options unviable due to cash flow strain.
Higher interest rates: Since working capital loans are short-term funding options, they come with higher rates of up to 30%.
Finding the Optimal Funding Solution for You
SBA loans remain a lifeline to growing businesses that meet the stringent requirements to secure approval—but they aren’t for everyone.
The time-cost commitment combined with archaic requirements makes SBA loans unattainable for many e-commerce sellers.
Luckily, when it comes to e-commerce funding, the world is your oyster, and today there is a wealth of funding options to choose from—whether it’s a working capital loan, cash advance, or even a credit card.
Don’t go with unsuitable funding because you think it’s the only option available. Explore all your options and invest time in choosing a funding source that works for you. The outcome? A solid financial foundation for your e-commerce business to thrive. CTA: Want to know more about alternative funding solutions? Speak with a SellersFi expert today.
