Overview
SBA loans are a type of business loan offered by banks and online lenders, with a portion of the loan guaranteed by the U.S. government. These loans are typically issued by participating banks and have strict eligibility criteria. However, if a small business qualifies, SBA loans provide flexible repayment terms and lower interest rates, making them an attractive option for entrepreneurs looking for financial support to grow or maintain their businesses.
The government guarantee reduces the risk for lenders, which can help businesses secure funding that might otherwise be difficult to obtain.
What is an SBA Loan?
An SBA loan is a business loan designed to help with startup expenses, expansions, real estate acquisitions, and other needs. It’s provided by private lenders but supported by the federal government.
How do SBA Loans Work?
You apply for an SBA loan through a lender, such as a bank or credit union. The lender then requests a loan guarantee from the SBA, meaning that if you fail to repay the loan, the government covers the guaranteed portion for the lender.
The SBA requires anyone who owns at least 20% of the business to provide an unconditional personal guarantee. This means that if your business can’t make payments, you’re personally responsible for covering them, including your personal assets.
Both the government guarantee and the personal guarantee lower the risk for lenders, making them more inclined to offer loans to small businesses.
Once your SBA loan is approved, the lender handles the closing process and distributes the loan funds. You then repay the lender, typically through monthly payments.
Types of SBA Loans
There are various government small-business loan options, each with different terms and conditions. The ideal SBA loan for you will depend on how you intend to use the funds.
Here’s an overview of the most common types of SBA loans.
Program | Loan Sizes | Purpose |
SBA 7(a) Loans | Up to $5 Million | Working capital, expansion and equipment purchases. |
SBA Express Loans | Up to $500,000 | Fast funding for working capital, expansion and real estate and equipment purchases. |
SBA 504 Loans | Up to $5 million | Purchase long-term, fixed assets like land, machinery and facilities. |
SBA Micro-Loans | Up to $50,000 | Working capital, inventory, supplies, equipment and machinery. |
SBA Disaster Loans | Up to $2 million | Repair physical damage due to a declared disaster and cover operating expenses. |
SBA Export Working Capital Loans | Up to $5 million | Working capital to support export sales. |
SBA Export Express Loan | Up to $500,000 | Expedited funding to enhance a business's export development. |
SBA International Trade Loans | Up to $5 million. | Long-term funding to expand export sales or modernize to contend with foreign competitors. |
Pros of SBA Loans
Competitive Rates
According to federal regulations, participating lenders set SBA loan interest rates based on the prime rate plus an additional markup known as the spread.
It’s important to understand that the annual percentage rate (APR) on a loan differs from the interest rate. The APR includes all loan fees in addition to the interest rate, giving a more comprehensive picture of the loan's cost.
APR rates can vary widely between SBA lenders and non-SBA lenders. For instance, an online lender specializing in SBA loans might cap its APR around 15%, while major online small-business lenders that don’t offer SBA loans might have APRs as high as 99%.
Low Fees
SBA loan fees typically include an upfront guarantee fee, determined by the loan amount and its term, as well as an annual service fee based on the guaranteed portion of the remaining balance. The SBA reviews and adjusts these fees annually.
Currently, there are no upfront guarantee fees for SBA 7(a) loans of $1 million or less until September 2025. Additionally, veteran-owned businesses are exempt from upfront guarantee fees on SBA Express loans.
Longer Terms
One advantage of SBA loans is that they offer extended repayment terms, allowing you to free up more funds for other business needs. The repayment period varies based on the purpose of the loan. Currently, the maximum loan terms are:
Working capital or inventory: 10 years
Equipment: 10 years
Real estate: 25 years
Large Loan Amounts
The funding amount for SBA loans can vary depending on the loan type and your business’s qualifications, but they generally offer substantial loan limits.
For instance, 7(a) loans have a maximum limit of $5 million. The 504/CDC program also offers up to $5 million, but can provide as much as $5.5 million for small manufacturers and certain energy public policy projects.
These loan amounts are significantly higher than what is usually available through online lenders or even banks, which typically have maximums of $500,000 and $1 million, respectively.
Cons of SBA Loans
Hard to Qualify
Even though the government guarantee lowers the risk for lenders when providing loans to small businesses, you still have to meet strict eligibility requirements to obtain an SBA loan. Generally, you will need to have been in business for several years, demonstrate strong financial health, and have a good credit score to qualify.
Slow to Fund
The time it takes to access funds from an SBA loan can range from one to three months, depending on your lender and the type of loan you apply for. The application process is thorough and requires a lot of documentation.
If you need funds quickly, you might want to explore faster small-business loan options.
Requires Some Form of Collateral
SBA loans usually require an unlimited personal guarantee from anyone owning 20% or more of the business. Lenders may also ask other business owners to provide a limited or unlimited personal guarantee.
Depending on the type of loan and your business’s qualifications, you might also need to provide physical collateral or make a down payment. For instance, SBA 504 loans typically require a down payment of 10% or more.
What is Required to Qualify for an SBA Loan?
SBA loan requirements can vary depending on the lender and the specific loan program, but generally, you’ll need to have several years in business and a solid credit history to qualify. Additional SBA criteria include:
Your business must be for-profit and operate within the U.S.
The business owner must have invested their own time and money into the business.
You need to demonstrate a genuine need for financing and explain how you will use the funds.
You must show that your business is capable of repaying the loan.
Your business must meet the SBA’s definition of a small business.
You should have sought funding from non-government sources before applying for an SBA loan.
For newer or smaller businesses, SBA microloans might be an easier qualification option.
How to Get an SBA Loan
1. Make sure your Business is Eligible
To qualify for an SBA loan, lenders generally prefer businesses that have been operating for at least two years, demonstrate strong annual revenue, and have a credit score of around 690 or higher.
If your business is facing financial challenges, securing an SBA loan may be unlikely. Additionally, businesses involved in prohibited activities, like gambling or political lobbying, should not apply.
2. Choose a Lender
The SBA provides a useful tool called Lender Match to help potential borrowers find lenders within two days.
If you’re applying for an SBA loan through a traditional bank, it's beneficial to choose one with a proven track record in processing SBA loans. Here are some questions to ask your prospective lender:
How many SBA loans have you processed?
How frequently do you fund SBA loans?
How experienced is your staff with SBA loan processes?
What is the typical loan amount you handle?
Generally, a bank with extensive SBA experience can offer better guidance and provide a clearer idea of your approval chances. While banks adhere to SBA guidelines, they use their own criteria for underwriting.
For instance, Newtek Bank in Florida is the leading SBA 7(a) lender in the U.S. by lending volume for the 2024 fiscal year, while Huntington National Bank leads by the number of approvals for the same period.
Both Newtek and Huntington are SBA Preferred Lenders, which means they can make final credit decisions on loan applications without needing SBA approval, thus speeding up the underwriting process.
3. Gather your Documents
The required documents for an SBA loan application can differ depending on the type of loan, but your lender will assist you in preparing the necessary paperwork.
Typically, you will need to provide the following documents:
SBA borrower information form
Personal history statement
Personal financial statement
Business financial statements
Personal income tax returns
Business tax returns
Business license
Loan application history
Resumes of business owners
Lease agreement, if applicable
One-year cash flow projection
4. Submit your Application and Wait
The approval time for an SBA loan varies depending on the lender you select. When working with a bank, the process—from approval to receiving funds—can range from 30 days to a few months.
If you need quicker access to funds, you might consider the SBA Express loan, which usually provides faster funding compared to other options. This loan has a maximum limit of $500,000, and the SBA guarantees up to 50% of the loan amount.
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