- SBA loans typically have lower rates and longer terms than you could qualify for with a conventional loan.
- Although it's easier for a small business to qualify for an SBA loan than a conventional loan, the application requires you to provide extensive documentation of your finances.
- The amount of money you can borrow depends on the type of SBA loan you request. For instance, an SBA microloan is capped at $50,000, while a 7(a) loan is capped at $5 million.
- This article is for small business owners who want to learn about SBA loans and how to apply for them.
As a new small business owner, you need a full grasp of all the funding options available to you. Many small business owners seek out initial loans from banks, friends and family, and other outside investors, but if you've exhausted all of these options, it may be time to look into SBA loans.
There are many different loan types available through the SBA, including options for small businesses that have been affected by a natural disaster or a global event like COVID-19.
What is the SBA?
The Small Business Administration (SBA) is a federal government agency that offers small businesses counseling, contracting and capital. One function of the SBA is to help America's small businesses secure the funding they need to operate and grow. A primary way the SBA does this is through the SBA loan program, which extends guaranteed financing to small businesses through participating lenders.
What is an SBA loan?
The SBA does not lend small businesses money directly. Instead, it sets guidelines for loans that are made by its partners, which include banks, credit unions, community development organizations and microlending institutions. The SBA guarantees that a portion of these loans granted by these groups will be repaid, eliminating some of the risk for lenders.
With an SBA loan, the SBA regulates the amount of money you can borrow and guarantees certain interest rates that are lower than what a bank would typically offer. For some borrowers, the lender may have been unwilling to provide a loan initially. However, when the government is backing a major portion of the loan, the lender may decide the risk is more acceptable.
"The SBA works with lenders to provide loans to small businesses," reads the SBA website. "The SBA reduces risk for lenders and makes it easier for them to access capital. That makes it easier for small businesses to get loans."
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How do SBA loans work?
SBA loans and lines of credit are similar to conventional business loans from banks. The process starts when business owners apply; once approved, the borrower secures funding and then pays it back over time with interest.
What do you need to be eligible for an SBA loan?
To get an SBA loan, you're required to provide extensive financial documentation about your company to both the bank and the SBA. This allows the SBA to determine your eligibility and to see if the loan is a good fit for both the agency and your business.
The SBA has different qualifications for each of its loans. While there are numerous loan types available – from international trade loans to veteran-focused lending programs – the most common SBA loans are the 504 and 7(a). Regardless of which loan you decide to pursue, there are some major benefits to getting an SBA loan.
Costs of an SBA loan
Like other business loans, SBA loans come with costs – most notably interest. Borrowers pay several loan fees, including application fees, appraisal fees (if a loan is being collateralized by assets such as real estate) and perhaps a credit check fee.
In addition to conventional fees, SBA loans have a guarantee fee. This is what borrowers pay in exchange for the SBA guaranteeing a portion of their loan. The guarantee fee applies only to the portion of the loan being guaranteed by the SBA.
Benefits of an SBA loan
You can reap multiple benefits from an SBA-backed loan, including lower interest rates and longer loan terms. However, your situation will be unique to your business. The choice between an SBA loan and a conventional loan may come down to something outside of a conventional benefits list.
Kale Gaston, president of Lendstream Small Business Finance, said SBA loans "do a great job of helping lenders say 'yes' to borrowers." He also noted that SBA programs provide better access to capital and credit enhancement for small business owners. For example, since the SBA guarantee lowers the risk in case of a loan default, lenders can provide funding when the down payment available is too low or the business's cash flow is not high enough for traditional lending options.
These are the biggest advantages of SBA loans:
Lower interest rates
As an example, the maximum interest rate on a 7(a) SBA loan over $50,000 is WSJ Prime plus 2.75%. That cap means you'll be getting a lower interest rate than standard banking interest rates. The rate is used to entice lenders, but it also entitles the borrower to offer a fair market rate.
As of January 2022, the WSJ Prime Rate is 3.25%. Add the 2.75% requirement, and you could get the best possible business loan at just 6% interest. That's well below what many banks offer small businesses, especially those that are struggling financially.
Flexible payment options
Due to the nature of the SBA's loan program, you may get flexibility when repaying your loan. This is especially true for disaster-relief loans. Companies may be able to defer SBA loan payments, refinance the loan or schedule interest-only payments until more normal economic times resume. Keep in mind that this is highly specific to your business's situation. The minimum down payment is 10%.
Easier qualifications
Credit score requirements are lower with SBA loans than the standards for conventional business loans. If you meet the SBA standards, you can get a loan. This makes it a good option for new businesses and other companies facing financial hardship that could not otherwise qualify for a typical bank loan. By going through the SBA, you're establishing your credibility as a borrower. It also changes the vetting process so the bank is working with SBA to obtain and interpret your financial information.
Longer terms
SBA lenders can provide longer terms as well. Instead of five or 10 years for a real estate purchase, with a balloon payment at the end, the lender can give 25-year terms, eliminating the balloon (final) payment or need to refinance every few years, Gaston said. For shorter-term assets, like equipment, terms could be up to 10 years instead of the usual three to five years.
Longer loan terms mean you have more time to repay what you've borrowed. Depending on your business's situation and the amortization schedule of your loan, a longer loan could be advantageous. It could provide lower monthly payments and give your business more flexibility down the line. Much like flexible payment options, this potential benefit is highly specific to your company's financial situation.
More opportunity
Depending on the state of the economy and world, you may have a better chance of getting an SBA loan compared to a regular loan. In areas that have experienced a crisis, for example, SBA disaster assistance loans are designed to save small businesses impacted by those events. Business owners can work with local lenders to get the funding they need.
In the case of the COVID-19 pandemic, the SBA rolled out a new lending program approved by Congress. This allowed certain businesses to get faster approval and less rigid restrictions.
Drawbacks of an SBA loan
These are some downsides of funding from the SBA:
- It can take 60 to 90 days to close on the loan – much longer than loans from alternative lenders take.
- Your business must have been operating for at least two years to qualify.
- You must have a sound business plan and demonstrated industry expertise.
- A personal guarantee is required from all partners who own 20% or more of the business.
- A guarantee fee is charged for the portion of the loan being guaranteed by the SBA.
Types of SBA loans
You can find a complete list of SBA loans on the agency's website, but here's an overview of the SBA's loans, including typical interest rates, amounts, and other qualifications.
7(a) loans
7(a) loans are the most basic and flexible type of SBA loan. The maximum lending amount is $5 million, and the interest rate is based on the amount you're looking to borrow. The loan can be used for working capital, business expansions and more. Loan maturity ranges up to 10 years for working capital and up to 25 years for fixed assets. You can apply through a participating SBA lender.
7(a) small loans
The 7(a) Small Loan program directly mirrors the regular 7(a) program, but it is for amounts of $350,000 or less.
SBA Express loans
This loan program is for businesses looking to borrow up to $350,000. The interest rate ranges from 4.5% to 6.5%, depending on the amount you borrow. You can use the money as a revolving line of credit or a term loan, which is a similar structure to 7(a) loans.
SBA Veterans Advantage loans
These loans are designed for small businesses owned by veterans and their families. The amounts vary between the SBA Express and 7(a) packages. These loans are processed as a subset of those two loan packages, so many of the same rules apply.
CapLines
This loan package is for working capital loans. The same qualifications for the 7(a) loans are required here. Like the 7(a), the maximum loan amount is $5 million. In addition to meeting the 7(a) requirements, borrowers must file SBA Form 750 and Form 750B.
International trade loans
International trade loans are for 7(a) qualifiers who engage in international trade. The maximum borrowing amount is $5 million, and the loan can be used for a range of expenses, from working capital to equipment purchasing.
Export Working Capital Program
This loan program is for short-term borrowers with businesses in indirect or direct exporting. There is no cap on the interest rate, but the SBA monitors which rate you receive. The maximum loan amount is $5 million, and the funds can be used as a short-term working capital loan.
Export Express loans
This loan program is similar to the SBA Express loan package, but it's geared toward businesses looking to expand into the export markets. The maximum loan amount is $500,000.
504 loans
Along with 7(a) and SBA Express loans, this is one of the most common SBA loan types. It's for property and other fixed-asset loans. The maximum loan amount ranges from $5 million to $5.5 million, depending on the business size and project. Interest rates vary by situation, but you'll most likely have a fixed rate.
The loans are typically structured with the SBA providing 40% of the total project costs, a participating lender covering up to 50% and the borrower putting up the remaining 10%. To qualify, a business must have a tangible net worth of less than $15 million and an average net income of $5 million or less after federal income taxes for two years before the application is submitted.
504 refinancing program
This program mirrors the 504 loan program, but it is for refinancing existing long-term fixed-asset loans. To qualify, you must be current on all your payments for 12 consecutive months before applying.
Non-7(a) microloans
This program offers very small loans to newly established or growing small businesses. The loans can be used for working capital or to purchase inventory, supplies, furniture, fixtures, machinery or equipment. The SBA makes funds available to specially designated intermediary lenders, which are nonprofit organizations with experience in lending and technical assistance. Those intermediaries then make loans of up to $50,000, with the average loan being about $13,000. SBA microloans cannot be used to pay existing debts or to purchase real estate. Interest rates range from 7.75% to 8.5%. You must meet the 7(a) requirements to qualify.
Disaster loans
The SBA offers this option to businesses that have been impacted by a declared disaster. These low-interest loans can be used to repair or replace damaged real estate, personal property, machinery, equipment, inventory and business assets. Read our guide to creating a disaster plan for your business.
You can find further details on each type of SBA loan program on the SBA's website.
Steps to get an SBA loan
Here are some of the different routes you can take to get an SBA loan.
1. Apply through your local bank.
This is one of the most common ways to apply for an SBA loan. Working closely with your local bank allows you to quickly get in touch with the SBA, as banks often have a designated employee or representative who deals directly with the agency and can help you get the process started.
If you're working with a bank that you do business with regularly, it'll be easier to get your documentation submitted and work on the next steps. If you don't already have a relationship with a local bank, and the banks you've visited can't provide you with a loan option, there are other routes to finding the right lender for your small business.
There are two main types of SBA loans you can get through a local bank: 7(a) and 504 loans. The 7(a) loans encompass standard business financing, while the 504 loans are geared more toward long-term real estate purchases. Within both these types are a few different loan products. You can talk with your lender about which one is right for you. These loans include standard-term loans of varying sizes and more unique loan products like the Builders CAPLine.
2. Visit a Small Business Development Center.
Use the SBA website to find your nearest Small Business Development Center. These centers provide small businesses with more than just lending help, but it's often a great first step toward finding the right lender.
By meeting with an SBA representative, you can take the first step in getting funding. While you're at the center, take advantage of some of the agency's other services:
- Business plan development
- Manufacturing assistance
- Financial packaging and lending assistance
- Exporting and importing support
- Disaster recovery assistance
- Procurement and contracting aid
- Market research help
- Healthcare guidance
Every state has multiple development centers. You can find one and take advantage of its services here.
3. Use Lender Match.
Sometimes you may not be able to work with a local bank or make it to your nearest Small Business Development Center. If that's the case, the SBA still has you covered.
The SBA provides an online tool called Lender Match that processes your claim and matches you with several SBA-approved partners. You can find a match in as little as two days and start the funding process immediately afterward.
However, before you use Lender Match, gather some documentation and information about your business. While the program is quick and easy, it doesn't guarantee you'll be matched with a lender. Make sure you have the following ready for your potential lender:
- Your business plan
- The amount of money you need and how you'll use the funds
- Your credit history
- Financial projections
- Some form of collateral
- Industry experience within your field
A lot of this documentation and information will be required when you apply for an SBA loan, whether or not it's online. Lender Match is a great tool for small business owners looking to quickly connect with funding options and evaluate their choices.
Finding the right SBA lender
The SBA offers a number of alternatives to working with a bank. As you begin the process of applying for an SBA loan, it is important to know what each lender has to offer. This makes choosing the right SBA partner a much easier process.
| LendingTree | OnDeck | Biz2Credit | Rapid Finance | Credibly | Fundit | |
|---|---|---|---|---|---|---|
| Monthly revenue required | $10,000 | $8,500 | $20,000 | $10,000 | $23,000 | $10,000 |
| Minimum credit score | Varies | 600 | 670 | 550 | 640 | None |
| Pro | Up to 4 financing options | Prepayment benefits | Immediate approval | Immediate quotes | 24-hour approval | No hard credit check |
| Con | Minimal customer support | Business lien required | Origination fees | Minimal customer support | Terms dependent on state | Profile required |
| Loan limit | $500,000 | $250,000 | $6 million | $1 million | $400,000 | $20 million |
| Funding time | Up to 8 weeks | Same business day | 3 business days | Same day | 2 days | 2 months |
LendingTree
LendingTree is not a direct lender, but it provides an instant list of loan options for small business owners, including SBA loans. If your business cash flow isn't stable, LendingTree is a good resource for finding loans with flexible repayment terms. One of the best-known SBA partners, LendingTree also offers business resources like blogs and videos to guide business owners through the lending process.
OnDeck
If you need funds immediately, OnDeck is worth considering. OnDeck is most popular for short waiting times, with some businesses receiving funds on the date of approval. This lender doesn't require high credit scores, but it does require a business lien and personal guarantee from applicants. OnDeck also requires more frequent payments than other lenders, as well as a minimum of $100,000 in annual revenue to qualify for funding. Read our review of OnDeck for more details on this lender.
Biz2Credit
If you need additional startup funding for your business, our Biz2Credit review will provide more details on the lender. While it has high revenue requirements, Biz2Credit is known for same-day approval. Other Biz2Credit benefits include low interest rates and the option to negotiate payments from your business's future profits.
Rapid Finance
Rapid Finance, a great option for new businesses that are growing, is known for flexibility. This lender offers small business owners more input than most lenders when it comes to loan types, amount and repayment terms.
Credibly
If you apply for a Credibly loan, you'll be supported by the lender's dedicated business consultants – a great resource if you need help choosing the best option for your business.
Fundit
This lender offers loans with no minimum credit score requirement. On the other hand, Fundit has very limited customer support, which can make the application process complex for small business owners. It also requires you to create a profile before you can apply for funding. While Fundit offers same-day financing, the standard waiting period for funding from an SBA loan can be up to two months.
Typical documentation needed for an SBA loan
The SBA requires extensive financial documentation before you can get approved for a loan. This is because SBA loans are usually the main option for small businesses that can't otherwise qualify for loans from traditional banks.
The SBA guarantees a portion of the loan with the bank you're working with. That means it wants a comprehensive picture of your business's finances, how your company has performed in the past and where your business is headed in the future.
It also means the SBA requires personal financial information from you and the major stakeholders in your company. This is because many of these loans require the borrower to sign a personal guarantee for the loan.
It's important to learn what you need to submit before you start the process. These documents can include the following.
Personal statements
- Personal financial and background statements
- Statement of personal history (SBA Form 912)
- Personal financial statement (SBA Form 413)
- Personal records of past loans you've applied for
- Names and addresses of all your subsidiaries and partners
- Resumes for all business principals
Business financial statements
- A profit and loss statement current within 90 days of your application
- Supplementary profit and loss schedules from the last three fiscal years
- Business records of loans you've applied for
- Three years' worth of signed business and personal tax returns for all of the business's principals
- Business certificate and license
- Copy of property leases or deeds
- List of debts
- Resumes of key team members
- Business overview and history
- Business plan
Projected financial statements
- One-year projection of income and finances
- Written plan that explains how you will reach revenue projections
Additional considerations
The SBA also advises small businesses applying for a loan to prepare their answers to the relevant questions, such as these:
- Why are you applying for this loan?
- How will you use the loan proceeds?
- What assets do you need to purchase, and who are your suppliers?
- What other business debt do you have, and who are your creditors?
- Who are the members of your management team?
Why your business plan matters
Whether you're a new startup or an established company, you have a higher chance of your application being approved if you have a well-written business plan.
"The business plan not only is the road map that will guide the business from planning to startup to (hopefully) success, but also will show any potential lender that the potential business owner does have a clear view and understanding of the business, how to run it and, most importantly, how the loan will be repaid," said David Hall, a public affairs specialist with the SBA in Washington, D.C., in an email interview with Business News Daily.
Gaston agreed, noting that lenders want to know how knowledgeable you are about your business and the market.
"The concept may be great, but what the lender is looking for is that the individual is driven, capable and determined," he said. "You really need to understand what you are doing every step of the way and be able to convey that to the lender during the application process."
Hall also recommended taking full advantage of the business planning resources offered by the SBA and its partners, such as SCORE, Small Business Development Centers and Women's Business Centers.
SBA loan FAQs
Is it hard to get an SBA loan?
That largely depends on your financial situation. The SBA is looking to provide loans for businesses that may not otherwise qualify. However, that doesn't mean the SBA is looking to invest in failing businesses.
If your business is in financial trouble – not due to a natural disaster or a national economic event, like the COVID-19 pandemic – it may still be difficult to be approved for an SBA loan.
You may need to provide more documentation, and it may take longer, but the overall qualifications for the SBA are usually less stringent compared to those of a regular bank.
Can you get an SBA loan with no money?
This depends largely on your business's overall financial situation. If your company is struggling because of some outside event, like a hurricane or earthquake, you may be able to qualify, even if you're in a dire financial situation.
This is also true for companies affected by the COVID-19 pandemic and other major economic events. But if your business has been poorly run and you have a bad financial history that is not the result of a national event, you may still not qualify with the SBA for a loan.
How long does it take to get approved for an SBA loan?
Approval typically depends on the type of loan you are seeking. It's not unusual for the review and approval process to take 60 to 120 days.
According to Funding Circle, SBA Express loans take up to 36 hours, but you must also receive approval from the lender, which can take several weeks.
For standard loans, the SBA typically approves them within seven to 10 days. The lender, again, may also take several weeks to reach a decision, which could be six weeks or more. There's extensive documentation to review, since businesses often have to provide more financial and logistical documentation for an SBA loan than a bank loan. Plus, representatives at both your local bank and the SBA have to review it before you are approved. [Read related article: How to Secure a Business Grant]
Who qualifies for SBA loans?
These are the SBA's criteria for businesses to be eligible for a 7(a) loan:
- Your company must operate in the United States.
- It must be a for-profit company.
- There must be reasonable equity for you (the owner) to invest.
- You should use financial resources (other than the loan), including personal savings and assets, before seeking funding from the SBA.
Lenders also set certain qualifications for SBA loans. Many lenders require a minimum of $100,000 in profits each year. Some also require a credit score of 620 or higher. When you're seeking an SBA loan, ask about the bank's requirements upfront. While you may not meet one lender's criteria, another lender may consider granting you a loan, so always explore your options.
What can SBA loans be used for?
Most commonly, SBA loans are used to purchase or improve real estate or equipment. However, funds can also be used to make payroll, finance exports, add inventory or provide working capital. Each SBA loan program stipulates how funds can be used.
However, SBA loans cannot be used for speculation. These are some examples:
- Floor-plan financing, such as for retailers or auto dealers
- Real estate development or investment (e.g., buying a rental property)
- Lending money to other businesses or individuals
In addition, businesses in the gambling industry are not eligible for SBA loans.
How much of a down payment do you need to provide for an SBA loan?
In many cases, the down payment you need to secure an SBA loan is substantially lower than for other types of loans. You may need to provide 10% for an SBA loan down payment, whereas other loans may require 20% to 30% for a down payment.
Max Freedman and Marci Martin contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article and related articles.