Thousands of entrepreneurs use business loans from the US Small Business Administration (SBA) every year.
Of the many different kinds of small-business financing available, SBA loans often are among the most favorable in terms of repayment conditions.
This can make them harder to qualify for than other financial products that a commercial bank might offer, but they’re well worth exploring before submitting an application or committing to a significant financing decision.
The Small Business Administration operates several different small-business loan programs and also works with approved lenders all over the United States to provide small businesses with the funding they need to thrive.
In this post, we’ll cover the basics of SBA financing and the kinds of businesses that are eligible to apply, as well as what is needed to submit an SBA loan application.
What are SBA loans?
As their name implies, SBA loans are a form of business debt administered by either the Small Business Administration or a member of its approved network of participating lenders (with SBA-backed loans).
How do SBA loans work?
An SBA-backed loan offers fixed sums at a specific interest rate over an agreed repayment period and can be used to pay for a broad range of expenses.
Other SBA loans help small business owners make specific kinds of investments with loan proceeds, such as commercial real estate or equipment purchases. Certain SBA financial products, such as the CAPLines small business loan program, are often bundled as part of another primary loan, such as a 7(a) loan.
Knowing the difference between the various types of financing available through the SBA can save entrepreneurs time and effort, allowing them to apply for the right kind of financing for their business.
Types of SBA loans
There are six different types of financing available via the SBA, as well as a handful of additional programs. These are:
- 7(a) loans
- CDC/504 loans
- Disaster loans
- Export loans
Let’s take a look at each type of SBA loan.
The SBA 7(a) loan program
Of all the types of business loans offered by the SBA, the 7(a) loan program is the most popular, thanks to its longer repayment periods and lower interest rates. Unfortunately, these favorable loan terms are also what make 7(a) loans highly sought after and typically harder for many small businesses to qualify for.
Here are a few important details about the 7(a) small business loan program:
- The maximum loan amount a business can apply for via the 7(a) loan program is $5 million.
- Interest rates vary, but typically fall within 7.5% to 10%.
- Working capital loans usually are repaid over a period of up to 10 years, or up to 25 years for commercial real estate loans.
- Applicants should have a credit score of at least 680 and no recent bankruptcies or liens.
While there are no minimum loan amounts under the 7(a) program, it’s highly unusual for the SBA or its network of private lenders to approve applications of less than $30,000.
There are several subtypes of loans available via the 7(a) program, including Express and Small Loans. Both the Express and Small Loan programs offer borrowers a maximum loan amount of $350,000 and feature repayment and credit terms very similar to the primary 7(a) program. Using an SBA loan calculator will help estimate the loan terms and rates.
Ordinarily, 7(a) small business loan applications take between five and 10 business days to process, but express loan applications typically are processed within 36 hours because they require less documentation.
Note that these estimates refer only to initial application processing and are based on complete applications with all required supporting documentation. The actual time it takes for funds to be dispersed can be weeks, if not months, so prospective applicants should bear this in mind before submitting an application.
Another popular SBA program is the 504 loan program. This fixed-rate loan is designed for businesses seeking to construct or purchase commercial real estate. Businesses can also use this loan to modernize their existing spaces, via renovations or the installation of new furnishings or equipment.
These SBA-guaranteed loans are funded in partnership with the SBA and Certified Development Companies (CDCs), from which these loans take their name. CDCs are nonprofit organizations that work with the SBA to fund business growth in their communities.
Typically, the SBA guarantees up to 40% of a CDC/504 loan, with a CDC shouldering 50%. The borrower usually has to fund the remaining 10% of project costs, though this can increase to 20% in some cases.
To qualify for a CDC/504 loan, a business must:
- Be a for-profit business (note that certain types of “passive or speculative” business, such as some financial investment activity, are ineligible for CDC/504 financing)
- Not have fixed assets of more than $15 million
- Have an average net income of no more than $5 million (after federal tax deductions) for the previous two years of operation
There are also several other criteria small businesses must meet in order to qualify for a CDC/504 small business loan, many of which are set forth by the participating CDC. These include community-development and public-policy goals, such as creating jobs, improving the local economy, and expanding economic opportunities to disadvantaged or underrepresented communities.
CAPLines are a type of financing that offers borrowers access to revolving credit for covering short-term expenses, such as payroll obligations, paying overdue contracts or invoices, or purchasing seasonal inventory, among other costs.
There are several different types of CAPLine products:
- Builder’s CAPLines, which cover expenses directly related to the construction or significant renovation of commercial property, such as labor, building materials, and permits
- Contract CAPLines, which finance specific contracts for general administrative expenses or operational overheads
- Seasonal CAPLines, which provide a small business inventory loan for seasonal increases and accounts receivable
- Working Capital CAPLines, which fund a range of short-term operational costs for small businesses, such as accounts payable and inventory purchases
Although the SBA and private lenders can and do issue CAPLines as stand-alone small-business loan products, they’re usually offered alongside mainstream SBA loans, such as the 7(a) loan program.
The SBA disaster loans program helps small businesses affected by natural disasters, such as hurricanes, earthquakes, and floods.
Businesses can apply for an SBA disaster loan only for incidents officially declared disasters by the president of the United States, the secretary of agriculture, or the SBA itself.
There are four primary types of disaster loans administered by the SBA:
- Home and personal property loans
- Business physical disaster loans
- Economic injury disaster loans (EIDL)
- Military reservists economic injury loans
The SBA offers several business loans designed for businesses that need help exporting their goods overseas or expanding into new markets beyond the United States.
The SBA offers three main types of export loans:
- SBA Export Express loans: Gives exporters up to $500,000 in short-term loans and lines of credit for export.
- SBA Export Working Capital loans: Provides exporters up to $5 million and a 90% guarantee for short-term loans and lines of credit.
- SBA International Trade loans: Gives exporters up to $5 million in long-term loans for facilities, equipment, and permanent working capital. You can also refinance existing debt under this program.
Because of all the complexities of international trade, the specifics of the SBA’s export loans deserve their own article. That said, a business owner interested in this kind of financing may want to contact an SBA export finance manager or get in touch with SBA’s Office of International Trade for more information.
The SBA Microloan program is intended to help entrepreneurs from traditionally underrepresented groups secure funding when other financing options have been exhausted or do not apply.
As their name suggests, SBA microloans are much smaller than other SBA loans. Borrowers can apply for as much as $50,000, but the average SBA microloan is around $13,000. Nonprofit organizations that serve specific geographic regions administer the loans themselves and can have stringent eligibility criteria, depending on the borrower’s situation or business purpose.
Specifics of SBA microloans include:
- SBA microloans typically have interest rates of between 8% and 13%.
- Loans can be repaid over a maximum repayment term of six years.
- Applicants should have a credit score of at least 640 and may need collateral to support their application.
- SBA microloans cannot be used to refinance business debt or purchase real estate.
Although much smaller than other types of SBA loans, microloans can take several weeks or even months to process, so a business owner seeking this kind of financing may want to consider the timeframe before submitting an application.
To apply for an SBA microloan, contact an SBA-approved intermediary lender in your area.
Pros of SBA loans
Competitive interest rates are one of the biggest advantages of SBA loans. Using approved lending partners, the SBA guarantees a portion of the loan, reducing risk for lenders.
As a result, lenders offer borrowers lower interest rates. Alternative financing or traditional loans typically have higher rates. For example, an SBA loan may cap its interest rate at 12.75%, while small-business lenders that don’t offer SBA loans can offer loans with rates as high as 99%.
The SBA charges a guarantee fee based on the loan amount and the percentage of the loan that is guaranteed. This fee helps cover the SBA’s costs for providing the loan guarantee.
Depending on the loan size, there’s a fee of between 0.25% and 3.75% of the guaranteed portion. Some lenders also charge an origination fee and various fees. However, the SBA changes their fee structure every year.
- There are no upfront guarantee fees or annual service fees for SBA 7(a) loans of $500,00 or less through September 2023
- There are no upfront guarantee fees for SBA Express loans to any veteran-owned business
SBA loans often come with longer repayment terms compared to traditional loans. These extended terms allow borrowers to have lower monthly payments, making the loan more manageable and reducing the strain on the business’s cash flow.
For example, SBA 7(a) loans, one of the most popular SBA loan programs, can have repayment terms of up to 10 years for working capital and equipment purchases, and up to 25 years for real estate financing.
Large loan amounts
The funding you get is based on the type of SBA loan you receive and your business qualifications. SBA loans are typically large, with maximum loan amounts for the SBA 7(a) loan program being $5 million. The maximum loan amount for the 504 program is $5.5 million.
Cons of SBA loans
Hard to qualify
Small Business Administration loans can be hard to qualify for. SBA sets strict criteria for borrowers to make sure loans go to creditworthy, well-paying businesses.
Slow to fund
Another drawback of SBA loans is that they can take a long time to process, approve, and fund. The application process for an SBA loan is quite extensive and requires the submission of various financial documents, business plans, and other pertinent information.
The SBA and lending institutions will carefully review these documents, and the approval process can take anywhere from several weeks to a few months. This can be problematic for businesses in need of immediate financing or those facing time-sensitive opportunities.
Personal guarantee required
A personal guarantee is a legally binding commitment by an individual (usually the business owner) to repay the loan if the business defaults on its payments.
The SBA requires a personal guarantee from anyone who owns 20% or more of the business applying for the loan. If the business can’t repay the loan, a person’s personal assets, like their house, savings, or other property, could be at risk.
Eligibility requirements to qualify for an SBA loan
First, applicants should ensure they meet the basic criteria for an SBA loan. This includes:
- A credit score of at least 680 (unless otherwise specified)
- A profitable business that has been in operation for at least two years
- No defaults on debt obligations owed to the federal government, including student loan repayments
- No bankruptcies or business liens
- A business debt-service coverage ratio of at least 1.25 to demonstrate that the business can comfortably repay a loan
- A potential down payment of between 10% and 30%, depending on the type of loan application being submitted
How to apply for an SBA loan
1. Research lenders
Start by identifying potential lenders that participate in the SBA loan program. You can search for SBA-approved lenders on the SBA website or consult with your local SBA office for recommendations.
Check the SBA Lender Match tool to find the best lender for your business.
2. Complete the loan application
Fill out the loan application provided by your chosen lender. This includes information about your business, personal finances, and the purpose of the loan.
3. Prepare a comprehensive business plan
A strong business plan is crucial for SBA loan approval. Create a business plan that includes the following:
- Executive summary
- Company overview
- Market analysis, sales
- Marketing strategies
- Management and organizational structure
- Financial projections
4. Submit financial documents
You’ll need to provide your lender income statements, balance sheets, and cash flow statements. You may also need to submit personal financial statements and tax returns.
5. Await approval and closing
If approved, you’ll move forward with the closing process, which includes signing loan documents and getting the money.
Consider speaking with an SBA adviser
Small Business Administration loans can help startups hire more staff, purchase additional inventory, secure new commercial space, and keep the lights on during difficult times. That said, applying for an SBA loan is a significant financial decision that should not be taken lightly.
If you’re concerned about how business financing might affect your business, or you want to learn more about the loan programs discussed above, you can contact a Small Business Development Center in your area to arrange a meeting with an SBA adviser.
Free advice is also available via the SBA’s SCORE program, which has hundreds of chapters nationwide to support entrepreneurs at every stage of their journey. Or, if you’re ready to make your application, learn how to get a small business loan.
Shopify Capital: An alternative to SBA business loans
An alternative to SBA loans for Shopify store owners is a merchant cash advance or working capital loan with Shopify Capital. Unlike an SBA loan, which requires the business to meet a set of basic criteria to qualify, Shopify uses the data from previous sales to see how much money the merchant is qualified to borrow. Repayment is made through the merchant’s future sales.
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SBA loan FAQ
What is an SBA loan and how does it work?
An SBA loan is a government-backed loan designed to help small businesses obtain financing. The SBA works with approved lenders, guaranteeing a portion of the loan, which reduces the risk for lenders and makes it easier for small businesses to secure funding.
Who qualifies as SBA?
The SBA’s loan options have slightly different requirements. Generally, however, an eligible small business must operate in the US for profit, and have owner equity to invest in a down payment. Small businesses must also try alternative financing options before seeking an SBA loan.
Do SBA loans have to be paid back?
Yes. Repayment periods for SBA loans vary from as little as six years for microloans to 25 years for commercial real estate loans under the 7(a) loan program.
Is it hard to get a loan from SBA?
In general, SBA loans are easier to get than traditional bank loans, and most for-profit businesses are eligible. SBA loans have low interest rates and fees, longer terms, and more flexible repayment options.