SBA Community Advantage Loan Program – What You Need to Know

The SBA Community Advantage Loan is designed for small businesses needing working capital, equipment financing, and real estate. Offered through participating lenders, this Small Business Administration (SBA) loan is targeted at businesses that don’t qualify for traditional financing and need up to $250,000 at rates of 10% – 12% for up to 25 years.

What the SBA Community Advantage Loan Program Is

The SBA Community Advantage loan program is part of the SBA 7(a) loan program and offers businesses an opportunity to qualify for an SBA loan from $50,000 to $250,000. Loans are primarily designed for newer, veteran-owned, and underserved businesses that have difficulty securing traditional financing and can benefit from management and technical assistance.

How SBA Community Advantage Loans Work

With an SBA Community Advantage Loan, small businesses are able to get more affordable financing. This is the case because the Small Business Administration (SBA) provides a guarantee to the lender that it’ll repay 75% to 85% of your loan if you fail to do so. Lenders can then provide businesses with financing up to $250,000 that might not otherwise qualify, with terms up to 25 years and rates no greater than about 11.5%.

In order to provide SBA Community Advantage Loans, lenders need to offer 60% of their financing to underserved markets, such as veteran-owned businesses, newer businesses in operation less than two years, rural businesses, and business located in low-to-moderate income communities. This means that borrowers who are underserved by traditional lenders can access the capital they need for their business.

However, capital is not the only thing that many SBA Community Advantage lenders provide. In addition to capital, lenders provide or can refer you to organizations that can educate you in the business management and technical skills necessary to run your business.

Who Is Eligible for SBA Community Advantage Loans

In general, for-profit businesses that are small, as defined by the SBA, are eligible under the SBA’s traditional loan requirements. SBA Community Advantage loans can be used for almost any business purpose. This includes working capital, equipment financing, and real estate like an SBA 7(a) loan.

In some cases, you may also be able to refinance debt using the Community Advantage program. If you are refinancing a non-Community Advantage Loan, your lender will need to demonstrate that the refinancing will result in a 10% cash flow improvement. This means if you were making payments of $200 per month, your new payments would need to be at least $20 or 10% lower.

However, if you plan on refinancing an existing Community Advantage loan, you may also qualify if you receive a loan that is larger by $5,000 or 25%, whichever is greater. This means an existing $25,000 loan could be refinanced without meeting the lower payment requirement if the new Community Advantage Loan is at least $31,250 ($25,000 × 1.25).

When Businesses Are Ineligible for SBA Community Advantage Loans

Even if your business is located in a qualifying location, is considered small by the SBA, and you qualify as a borrower, you may still be ineligible for funding according to the SBA. There are certain exempt industries, such as nonprofits and businesses that primarily generate passive income. Additionally, if you have defaulted on federal debt in the past, you will be unable to qualify.

How Much SBA Community Advantage Loans Cost

The costs of an SBA Community Advantage Loan are regulated by the SBA in order to ensure that higher-risk borrowers from disadvantaged communities can get access to affordable financing options. The costs of an SBA loan are composed of interest up to 11.5%, an SBA guarantee fee up to 3%, and up to $2,500 in third-party fees.

The typical costs you will incur for an SBA Community Advantage loan are:

• Maximum interest rate: Approximately 11.5% (prime interest rate plus 6%)
• SBA loan guarantee fee: 0.25% to 3.0%, depending on loan terms
  Loans with maturities up to one year: 0.25%
  Loans up to $150,000 with a term over one year: 2.0%
  Loans over $150,000 with a term over one year: 3.0%
• Third-party fees: Up to $2,500

The maximum interest rate on this type of SBA loan is about 11.5%. While this is higher than what you would pay for an SBA 7(a) loan (7.75% to 10.25%), it’s much lower than an online business loan (30% to 50%). Rates are typically fixed, but may be variable with SBA approval. However, the starting rate for both may not exceed the current prime interest rate plus 6%.

Besides interest, your lender may charge fees up to $2,500 in addition to the SBA guarantee fee, which ranges from 0.25% to 3% of the loan amount depending on the loan size. This guarantee fee allows the SBA to guarantee part of the loan to the lender, reducing the minimum qualifications and ensuring that more businesses are able to get access to capital.

Where to Get SBA Advantage Loans

There are 85 active lenders across 39 states offering SBA Community Advantage Loans to borrowers. The lenders with the largest geographic reach are Accion and LiftFund, serving the Southwest and Sunbelt regions, respectively. Most SBA Community Advantage lenders only serve a specific state or geographic region, so when searching for a lender, make sure to include your location in your search.

Approved lenders include Community Development Corporations (CDCs), SBA Authorized Microloan Providers, Community Development Financial Institutions, and other SBA- authorized nonprofits. Although some lenders offer an online application, typically you will need to visit their office in order to apply.

With Accion, you can submit your application online as long as you are located in the Southwest region of the United States. It will typically take eight to 10 weeks to get approved, with the bulk of that time spent collecting and completing the paperwork requirements. Among these will be personal and business financial statements and tax returns. The great thing about Accion is that it offers multiple loans from the SBA that you will be considered for as well.

Three SBA Community Advantage Loan Providers

Three of the best SBA lenders for Community Advantage Loans are:

Accion

Accion provides several SBA loans, including 7(a) loans, nationwide. However, its SBA Community Advantage loan is offered only in the states of Arizona, Colorado, Illinois, Indiana, Nevada, and Texas. You’ll need to have a credit score of 575 or greater to qualify, with funding taking eight to 10 weeks after you’ve completed its simple online application.

LiftFund

LiftFund is best for borrowers in the Sunbelt region of the U.S. It offers multiple SBA loans, and its SBA Community Advantage loans follow stated SBA requirements. After you apply online, you’ll be connected with a local representative who will guide you through the application process, with funding typically available in eight to 10 weeks.

The 504 Company

The 504 Company is best for borrowers in the tristate area of New Jersey, New York, and Pennsylvania. Its SBA Community Advantage loan follows the typical SBA requirements, and it also offers SBA 504 loans to borrowers. Its online application takes 20 minutes to complete, with funding available in eight to 10 weeks.

What the SBA Community Advantage Loan Terms Are

The largest SBA Community Advantage Loan you can get is up to $250,000. Technically, the minimum can be as small as needed. However, for loans smaller than $50,000, most Community Advantage program lenders will offer an SBA Microloan for those amounts. The typical terms for an SBA Community Advantage Loan are up to 10 years for working capital or equipment and up to 25 years for real estate.

The terms for this type of SBA loan are:

• Loan amount: Up to $250,000
• Repayment term: Up to 10 years for working capital or equipment and up to 25 years for real estate
• Repayment schedule: Monthly

Although you can qualify for multiple Community Advantage loans, your total loan amount cannot exceed the $250,000 maximum at any point. Larger loan amounts are reserved for the best-qualified borrowers. However, you can apply for another SBA Community Advantage Loan as you pay off the balance, or if you have not reached the $250,000 limit.

How to Qualify for SBA Community Advantage Loans

In order to qualify for an SBA Community Advantage Loan, your lender must be reasonably assured that your business will be able to repay the loan. This includes the credit score of the business and its owners (140 or greater SBSS score), the historical performance of the business, and the past cash flows of the business. Additionally, in order to qualify, businesses need to have a 1.25x debt service coverage ratio (DSCR) and collateral for loans in excess of $25,000.

The requirements you will need to meet to qualify for an SBA Community Advantage loan are:

• Minimum SBSS score: 140
• Cash flow: No specific requirement, but 1.25x DSCR is a good starting point.
• Down payment: Minimum 10%, including existing businesses, startups, and change of ownership. This down payment can be called an equity contribution, as the funds are not held in a specific account, but can be invested in the business to demonstrate that owners are putting money into the business as well.
• Collateral: Loans over $25,000 must be fully collateralized by a first lien on all financed assets and additional liens on all fixed assets and real estate up to the loan amount.
• Personal guarantee: Required from all 20% and greater owners.
• Management experience: Depth and length of management experience in the business and industry are considered.
• Business size: You must meet the SBA small business requirements, typically less than 150 employees and annual revenue below $750,000 to $38.5 million, depending on your industry.

In addition to these requirements, you will also need to demonstrate that your business and owners are creditworthy and can repay the amount that you are borrowing. The better you can show this to the lender, the more likely it will approve you. This includes not only your financial condition but also your management experience—both in business and in the industry.

How to Apply for SBA Community Advantage Loans

Applying for an SBA Community Advantage program is designed to be easier and quicker than other SBA loan applications. The forms required by the SBA include borrower information, personal and business tax returns and financial statements, and information on past counseling received by the business.

When you apply for this type of SBA loan, you’ll typically need to provide:

• SBA Form 1919 – Borrower Information Form: Description and history of your business, its 20% or greater owners, and any key employees.
• Personal financial statement and tax returns: You’ll need to provide personal financial statements (SBA Form 912) and tax returns for all owners with at least 20% ownership in the company.
• Business financial statement and tax returns: You’ll likely need to provide two years of historical financial information if it exists, along with projections for at least a year.
• SBA Form 2449 – Community Advantage Addendum: You’ll need to complete this form with information about the type of assistance and counseling your business has received in the past and the organizations that provided it.

Assembling all of this paperwork can be a difficult process, which is why the SBA limited the Community Advantage Loan Program to experienced SBA lenders that can help you complete an application. The entire process can take longer than 90 days to complete, but you can reduce this time by having your paperwork prepared ahead of time and by being responsive to any additional requests from your lender.

SBA Community Advantage vs SBA 7(a) Loans

The SBA Community Advantage Loan is part of the larger SBA 7(a) loan program. The aim of both programs is to extend credit to communities underserved by traditional lenders. A primary difference between the programs is the maximum loan amount, with SBA Community Advantage loans available up to $250,000 versus the SBA 7(a) loan limit of $5 million.

SBA Community Advantage loans also have slightly higher interest rate limits of 6% over the prime rate, compared to the maximum on SBA 7(a) loans of 4.75% over the prime rate. However, both loans offer similar repayment terms, and SBA Community Advantage loans are easier to be approved for due to the higher SBA guarantee of up to 85%, reducing the risk for lenders.

Compared to the 7(a) program, which has 3,531 participating lenders, the SBA Community Advantage program has significantly fewer, with just 85 active lenders as of March 2019. This is also reflected in the number of outstanding loans and the gross loan balance offered under each of the programs.

Outstanding SBA Community Advantage vs SBA 7(a) Loans

To put that in some perspective, according to a Congressional Research Service report, in 2018, lenders approved over 60,000 SBA 7(a) loans totaling nearly $25.4 billion, with an average SBA 7(a) loan size of $420,401. This was part of the reason the Community Advantage Program pilot was started—to ensure that borrowers who needed smaller loans had access to SBA guaranteed credit.

Since the program started in 2011, loan approvals for the SBA Community Advantage programs have grown rapidly, with the most recent 2018 data indicating that 4,906 loans were approved, totaling $643 million.

Source: Congressional Research Service Report

Pros & Cons of SBA Community Advantage Loans

The SBA Community Advantage program offers benefits to small businesses that may not be available with traditional financing. You can get low rates and long repayment terms for working capital, equipment, or real estate. However, in order to get the loan, you will need to find a participating lender and meet both the SBA and lender qualifications.

Pros of SBA Community Advantage Loans

Some benefits of SBA Community Advantage Loans are:

• Low interest rates compared to traditional financing alternatives: The SBA guarantee and regulation of the loan allows lenders to keep SBA loan rates below what borrowers would typically get from traditional lenders.
• Long repayment terms compared to traditional financing alternatives: Repayment terms up to 25 years on real estate, and up to 10 years for other uses, allows borrowers to make smaller payments, freeing up cash flow to reinvest in the business.

Cons of SBA Community Advantage Loans

Some downsides of an SBA Community Advantage loan are:

• Not available nationwide: According to an SBA Federal Register notice dated September 2018, the SBA has ceased expanding the program and approving new lenders. There are 39 states with at least one lender that offers that program, which means it may not be available for your business.
• Can be difficult to qualify: The SBA requires that your business be a certain size to qualify for all of its loans, including some disaster loans. Additionally, you will need to meet requirements set by the lender to get the loan, which can make it a prohibitive process.

Alternatives to SBA Community Advantage Loans

Sometimes an SBA Community Advantage Loan is not the best option for your business or is simply unavailable. There are other SBA programs for which your business may be able to qualify, like SBA Express and Microloans. Additionally, you can use some retirement savings to fund your business interest-free. Finally, there are alternative online lenders with whom you may be able to qualify for working capital.

Some financing alternatives to this type of SBA loan are:

• SBA Express Loan: SBA Community Advantage loans are a great option for many businesses. However, if you don’t qualify or there is no lender in your state that offers the loan, there are also SBA Express Loans, which are offered nationwide, up to $350,000 with terms up to 10 years.
• Microloan: Another great alternative to SBA Community Advantage loans are microloans. These loans don’t exceed $50,000 and are offered by the SBA, USDA, and independent nonprofits. Typically, repayment terms and qualifications favor smaller businesses that may have difficulty qualifying elsewhere.
• ROBS: If you need to finance your startup and you have retirement savings in a qualifying account, you may be able to use a Rollover for Business Startups (ROBS) to withdraw the funds without taxes and penalties. The process is complicated, but it can be beneficial for your business. To ensure everything is handled correctly, we recommend using one of the top ROBS providers.
• Online business loans: If you need financing quickly, and would like to handle everything online, there are alternative online business loans available to finance your business. However, keep in mind that unless you are prime credit borrower (680 or greater personal credit score), rates for these loans are typically higher than similar SBA loans.

SBA Community Advantage Loan Frequently Asked Questions (FAQs)

We’ve done our best to cover all the details of the SBA Community Advantage Loan Program. However, as with any type of financing, there are always unanswered questions. We covered some of the most common questions below.

The most frequently asked questions about the SBA Community Advantage Loan are:

Can a startup qualify for an SBA Community Advantage Loan?

Startups can qualify for an SBA Community Advantage Loan; these loans are designed so businesses can start, grow, and expand. However, you will need to demonstrate extensive experience in your field. If you need to borrow less than $50,000, an SBA Microloan may be a better option, with interest rates from 8% to 13%.

Can the SBA Community Advantage Loan be used as a revolving line of credit?

The SBA does not allow Community Advantage Loans to be used as revolving lines of credit. Once you’ve received the loan, the only way to get additional funds under the program is to apply for another loan. However, the SBA does offer CAPLines for small businesses needing a revolving line of credit.

Can the SBA Community Advantage Loan be used for refinancing existing debt?

In some circumstances, you may be able to refinance an existing non-federal loan with an SBA Community Advantage Loan. In order to qualify, the refinancing will need to improve your overall cash flow by at least 10% or the new loan needs to be 25% or $5,000 greater than the outstanding loan.

Refinancing an existing SBA guaranteed loan is more difficult and much rarer. You will need to demonstrate that the existing lender was unwilling to grant a second loan or modify the existing terms. Additionally, you will need to use a different lender than the one that originated the first loan. For both refinancing options, you will be disqualified if you have any late payments during the prior 12 months.

Bottom Line

SBA Community Advantage loans are a great option for small businesses and startups that can’t qualify for traditional financing. Funds can be used to support working capital, finance equipment, and real estate. Loans can last up to 25 years, with interest rates of 10% to 12%, and are available up to $250,000. Approved SBA lenders can help you qualify, apply, and ultimately get your business funded.