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.

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.

Why are SBA loans more affordable than other business loans

These loans are more affordable because most SBA loans are backed by the federal government, which provides an SBA loan guarantee. 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.

Any business owner who owns at least 20 percent of the business must also 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.

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. Loans from a lender who is a part of the SBA’s Preferred Lender Program tend to be faster since they do not require SBA approval before moving forward with the process.

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.

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.

504 loans

The 504 SBA loan program is long-term financing for constructing or purchasing buildings, land and large equipment or machinery. They are funded through Certified Development Companies (CDCs), which are certified by the SBA.

The SBA has a tool to find a local CDC. 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.

While they are open to every small business, they are geared toward underrepresented groups, such as woman- or minority-owned businesses.

Economic Injury Disaster Loans

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

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 $25,000 require some form of collateral, preferably real estate.

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.

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

Rates current as of April 2024; calculated with current prime rate of 8.50%.

SBA Express loans

Rates current as of April 2024; calculated with current prime rate of 8.50%.

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

How to qualify for an SBA loan

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; depending on the loan type, there may be caps on the number of employees, net worth and income.

That said, the SBA has a few basic requirements. You must be a for-profit business that operates in the U.S. The person or people applying for the loan must have equity in the business.

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.

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.