SBA Loan Guide: Everything You Need To Know About SBA Loans

SBA loans can be a good way to fund working capital and other business expenses if you’ve exhausted other lending options. They are partially guaranteed by the Small Business Administration and designed to be affordable for small businesses.

SBA loans often have competitive rates and low down payments, and some loans come with continued financial counseling to help you start and/or run your company. However, these loans may take more time to apply for, given their strict guidelines, and are often more difficult to qualify for than loans not backed by the SBA.

What is an SBA loan?

An SBA loan is a term loan or line of credit offered by a bank, credit union or alternative lender and backed by the Small Business Administration (SBA). There are several types of SBA loans, but all are designed to cover working capital, expansion and large purchases for small businesses.

SBA loans play a crucial part in making entrepreneurship accessible for businesses across the United States, especially if they don’t qualify for a conventional loan, especially for newer businesses without easy access to financing. 

“The smaller the firm, the less likely a conventional bank will finance them,” says Chris Hurn, founder and CEO of SBA lender Fountainhead. “The SBA serves a very important role in filling that void. It’s doing a good thing to help stimulate the economy, to help create jobs and help finance the firms that will be creating the products and services of the future.”

How do SBA loans work?

In some ways, SBA loans work like conventional business loans. You apply through a lender, and if approved, you’ll receive funds that must be paid back at fixed intervals.

SBA loans tend to be more affordable and have more favorable terms, like longer repayment periods and lower credit score requirements than other business loans. This is because they’re guaranteed by the federal government through the SBA, which will pay out the guaranteed portion of the loan if the borrower defaults.  

Where can I get an SBA loan?

The SBA doesn’t offer loans directly. Instead, the SBA guarantees loans that are offered by approved SBA lenders, which are banks that take on part of the loan and manage the the approval process according to their and the SBA’s standards. Depending on the type of loan, the SBA may take on anywhere from 50 percent to 90 percent of the borrower’s debt if they fail to pay back the loan.

The SBA offers resources to find SBA lenders according to your criteria through their Lender Match site. Lenders will have their own standards for loan approval, along with their own fees and interest rates within the SBA’s parameters, so be sure to shop around. 

How do I choose the right SBA lender?

While there are hundreds of SBA lenders to pick from, choosing the right SBA lender can save you money, boost your odds of approval and get you funding more quickly. Picking a less-experienced lender, on the other hand, can massively slow the process down. 

“When you hear these horror stories an SBA loan that took six months or nine months to close, it’s often because the borrower picked the wrong lender,” Hurn said.

Hurn recommends working with a lender experienced in SBA loans. Preferred SBA lenders in particular are authorized by the SBA to make their own underwriting decisions, which can help speed up the process and allow them to guide you through the application process based on their standards. 

When choosing an SBA lender, be sure to ask:

• How many loans they process a year
• What their average loan size is
• If they’re a Preferred Lender
• How long they’ve been working with SBA loans
• If they specialize in your industry
• What their fees and interest rates are

How long does it take to get an SBA loan?

Most SBA loans take a considerable amount of time to process, often between 30 to 90 days to receive funds. While a long lending process can be frustrating, it’s important for lenders to take time to evaluate an application and ensure that the loan is properly underwritten. As such, borrowers should give themselves plenty of time when they apply for an SBA loan, and make sure they have their documentation and paperwork in order. 

“Despite the fact that you can order dog food on Amazon Prime today and possibly have it this afternoon or tomorrow, that’s not quite how lending always works,” Hurn said. “It’s a process, and it’s best not to wait until the last second.”

SBA loan types

There are many types of SBA loans. Here’s a look at the most common types.

7(a) loans

SBA 7(a) loans are the most common option for business owners. Though some might require collateral, they are generally unsecured and are designed for working capital expenses. But you can use the funding for whatever your business needs, like payroll, expansion or new equipment.

The SBA caps both fixed and variable rates, and in many cases, they can be lower than the interest rates for other types of business loans.

Collateral requirements for 7(a) loans will generally depend on the lender. Smaller loans under $50,000 generally won’t require collateral, while loans over that amount will typically need to be secured with business assets such as equipment or real estate. Loans over $350,000 may require you to put personal assets on the line if the value of your business equipment doesn’t cover the loan balance. 

Express loans

Express loans are a type of 7(a) loan. They are functionally the same as 7(a), but the application process is expedited for quick funding. While it can sometimes take one to five days for the SBA to process its portion of the application, an SBA Express loan provides a faster turnaround time of 36 hours or less.

Like 7(a) loans, SBA Express loans will typically require collateral if the loan is over $50,000. 

504 loans

The 504 SBA loan program is long-term financing for constructing or purchasing buildings, land and large equipment or machinery. These funds can only be used for qualifying real assets, such as land or equipment, and cannot be used for working capital, payroll or non-asset expenditures, making 504 more restrictive than other SBA loan types.

While 504 loans require collateral, typically the assets you purchase with the loan funds will be used to secure the loan. 

They are funded through Certified Development Companies (CDCs), which are certified by the SBA. A 504 loan will also be partially funded by a third-party lender, which will set the loan’s primary terms and interest rates.

Microloans

Microloans are the smallest funding option offered by the SBA.

Like 7(a) loans, SBA microloans are meant for working capital and other expenses like inventory, supplies and equipment. They cannot be used to repay existing debts or for real estate.

Collateral requirements will depend on the SBA lender. Since SBA microloans are smaller than other loan types, some lenders won’t require collateral or a personal guarantee for the loan. Others may require you secure the loan with business or personal assets. 

Economic Injury Disaster Loans

Economic Injury Disaster Loans (EIDLs) are meant to help companies impacted by a disaster. They’re available to small businesses, agricultural cooperatives and most private nonprofits that are in and have been impacted by a federally-declared disaster. 

The SBA will offer funding at low interest rates, with the amount you can borrow determined by your actual economic injury and financial needs. Loans over $50,000 require some form of collateral, preferably real estate – however,  loans under $200,000 won’t require you to use your home as collateral if you have other business assets you can use instead. 

CAPLines

SBA CAPLines are lines of credit that come in four different forms:

• Seasonal CAPLine: Used for financing seasonal increases in costs, such as inventory or labor.
• Contract CAPLine: Used to help finance the labor and material costs of specific assignable contracts
• Builders CAPLine: Used to finance labor and material costs for a contract or builder renovating or constructing a building.
• Working CAPline: Designed for businesses that can’t meet long-term credit standards.

Like traditional lines of credit, SBA CAPLines will only accrue interest on the balance you withdraw. Lenders will generally require collateral for CAPLine amounts over $50,000, based on their own lending standards. 

How much does an SBA loan cost?

While SBA loans are more affordable than other loan types, they do come with interest rates, down payment requirements and fees based on the loan type, the loan amount and current interest rates. Here’s a breakdown of how much you can expect to pay. 

SBA interest rates

SBA loan rates vary by lender but are based on the daily prime rate plus a set rate determined by your lender, which can’t exceed predetermined rates set by the SBA. Here’s a look at the maximum variable rates for select SBA loan types, calculated using the SBA set rates added to a current prime rate of 8.50 percent. For more information on how rates are set, check out our guide on SBA loan rates.

7(a) loans and CAPLines

Fixed-interest loans will retain the same interest rate throughout the loan’s term, making your payments consistent throughout the repayment period. The SBA uses the prime rate, which is based on the Federal Funds rate, at the time of loan approval to calculate fixed interest loans. 

SBA 7(a) loans and CAPLines fixed interest rates

Variable-rate loans, on the other hand, calculate each monthly payment based on the prime rate at the time of the payment due date, meaning that your payment can go up or down based on the prime rate.

SBA 7(a) loans and CAPLines variable interest rates

SBA 504 loans

SBA 504 Loan interest rates are fixed and are based on the current interest environment, the length of the loan and the 10-year Treasury yield. As such, the rates can vary from month to month. 

SBA 504 interest rates

SBA Express loans

SBA Express loans have a fixed interest rate and have the same rate caps as 7(a) loans with an upper limit of $500,000 in total funding. 

SBA Express loan interest rates

SBA fees

The SBA will have different fee requirements based on the loan type and amount. Lenders can also charge their own fees based on their standards and process, though this will vary from lender to lender. Certain SBA fees can be waived if you qualify as a veteran or if you are in a federally-delcared disaster area.

Down payment and guarantee requirements 

Any business owner who owns at least 20 percent of the business must provide an unlimited personal guarantee, meaning a lender can go after your assets if you default on the loan. And since the guarantee is unlimited, a lender could also take enough assets to cover the full loan amount, interest and even legal fees.

You’ll also likely need to provide a down payment of 10 percent to 30 percent. With all these assurances, a lender takes on less risk when lending, which is why SBA loan rates and terms are more favorable.

Pros and cons of SBA loans

SBA loans are one of the best funding options available because of the cap on interest rates and the reduced risk to business owners. But that doesn’t mean they’re a good fit for everyone. Here’s a look at the pros and cons of SBA loans.

Pros of SBA loans

• Open to a variety of businesses
• Capped interest rates
• Limited fees
• Access to multiple resources

Cons of SBA loans

• Strict eligibility requirements
• Down payment and collateral may be necessary
• Application can be time-consuming

SBA eligibility requirements

Because an SBA business loan is offered through an individual lender, requirements vary widely. Eligibility depends on your business’s industry, size and ability to repay. Your business will have to meet the small business size standard for its industry; 

In general, to be eligible for an SBA loan:

• You have to be a small business. The standards will depend your industry and the loan type, and are outlined on the SBA website.
• You need to be for-profit. Non-profit businesses are excluded from SBA loan eligibility.
• Your business must to be based in the United States and be owned entirely by US citizens. US Nationals and Lawful Permanent Residents count as citizens in this case.
• You need to be able to repay the loan. The SBA lender will check your credit history and revenue when
• You must have exhausted all other non-government loan sources. If you’re able to qualify for a similar loan on similar terms from a private lender, you may not qualify.
• You must be an eligible business type.

How to apply for an SBA loan

Although the SBA guarantees its loans, you still apply for these loans like you would with any other business loan.

1. Check eligibility requirements. To qualify for an SBA loan, you will need to meet common eligibility requirements — in addition to having good personal credit and strong revenue.
2. Find a lender. Use the SBA’s Lender Match Tool to find a lender that fits your business’s needs. Since some lenders may have other criteria your business needs to meet, check with them before you apply.
3. Gather your documents. As with any loan, you must provide financial and legal documents. Tax returns, profit and loss statements, a business plan and other information are frequently required when you apply.
4. Submit the application. SBA loans typically take longer to process than other business loans. Because they are more involved, double-check your application before submitting it and ensure you have all your documents in order. It may take between 30 and 90 days to be approved and funded.
5. If your SBA loan is denied, you can reapply in 90 days.

Challenges in obtaining SBA loans

SBA loans aren’t always easy to get. If you’re wondering why your SBA application was denied or only partly approved, here’s what you can do. 

If you are rejected for an SBA loan, don’t be discouraged. Ask your lender why you were rejected, review your application and apply again if you believe you’ll be able to qualify the next time. 

Alternatives to SBA loans

If you don’t qualify for an SBA loan or are denied, other funding options are available. Some options to explore are:

• Business credit cards. Business credit cards are a revolving line of credit that are good for emergency needs and some day-to-day spending. You may be able to earn points or get introductory rates with some cards.
• Grants. You don’t have to pay back grant money, making it appealing for small businesses. However, it takes time to apply and get approved for grants, so they are not a great solution for businesses that need money soon. Grants are available at the local, regional and federal levels from government and private sources.
• Crowdfunding. You may also want to explore setting up a crowdfunding page online for a startup business. You can do so through a platform like GoFundMe, which facilitates small donations from private donors. You don’t have to pay the money back but may not be able to receive the funds if you don’t meet a minimum percentage of your goal set by the platform.
• Business loans from traditional or online lenders. Even if you’ve been denied other business loans, it’s worth exploring more traditional and online lenders. Loans from online lenders are particularly appealing because they don’t have a traditional underwriting process and can often payout within a few days.

Frequently asked questions about SBA loans

• Do SBA loans have to be paid back?
  

  Yes. While the SBA offers some grants, its loans do have to be repaid. Terms range from six to 25 years.

• Are SBA loans hard to get?
  

  The SBA makes qualifying easier than most traditional lenders by offering lower credit score minimums and guarantees to reduce lenders’ risk. This allows them to offer longer repayment terms and better interest rates.

• What do you need to qualify for an SBA loan?
  

  Your business will need to be profitable and have steady revenue. Each business owner will need to have good finances and financial history as well as a good to excellent credit score.