If you’d like to start a small business or get funds for your current one, you may encounter challenges getting a regular business loan through a financial institution. But as long as your small business qualifies, you can turn to the U.S. Small Business Administration (SBA) — a government agency with several loan programs that could help when other financing options have failed.
Learn more about how an SBA loan works, which loan programs exist, how to submit an SBA loan application and what to expect during the process.
What is an SBA loan?
Ranging from $500 to $5.5 million, an SBA loan is a source of government-backed financing for small businesses. You can get one to start a new business, fund everyday operational costs, improve your facility or even expand your business. Each SBA loan program has specific rules for the use of these funds.
The SBA only grants loans to small businesses that meet the agency’s requirements. These include owning a registered U.S.-based business that operates for profit, meeting the size limits for the specific business type and meeting the financial standards for the chosen loan program. The SBA also has net worth and net income limits for some programs and requires you to demonstrate that you’ve sought traditional financing options first.
How do SBA loans work?
In most cases, the SBA doesn’t lend funds directly to you. Instead, it works with lending partners that issue the loans. The SBA backs the loans so that the lender faces less risk if you default. In addition, you may need to put up some collateral for the loan. Both the SBA backing and your collateral offer lenders some assurance that can make it easier for you to get a loan or line of credit.
Moreover, you can get competitive SBA loan interest rates, multiple options for SBA loan terms and flexibility for loan requirements such as down payments. You can also benefit from programs for specific uses, such as SBA startup loans or disaster assistance loans.
Common types of SBA loans
You can choose from several types of SBA loans with different allowed uses, borrowing limits, repayment terms and approval requirements. Some options serve as SBA real estate loans for buildings and land, while others suit more diverse business purposes. Understanding your options will help you find the best small business loans for your needs.
SBA 7(a) loans
While variations exist, the SBA 7(a) loan program provides up to $5 million in funding. If you use the loan for real estate, then you get a maximum 25-year repayment term; otherwise, the maximum is 10 years. This type of SBA business loan can have a variable or fixed rate and is available through the SBA's lender network.
You can use your SBA 7(a) funds for most business needs. Potential uses include starting a business, getting assets or supplies, paying off other business debt or using the funds for working capital.
Standard SBA 7(a) loans typically require sufficient collateral for the loan amount, and each owner with at least a 20% stake in the business must make a personal guarantee. Maximum limits for your business's tangible net worth and average net income apply, and you may need to make a down payment. This type of SBA loan also requires extensive documentation.
SBA 504 loans
If you need a large loan to buy some fixed assets, an SBA 504 loan allows you to borrow a maximum of $5.5 million and repay the loan over a term of 10, 20 or 25 years. You pay a fixed interest rate that depends on the current 10-year Treasury rate.
The SBA allows you to use the funds to buy, build or improve land and buildings, as well as purchase equipment for long-term use. In some cases, you can also use it to refinance certain assets. The SBA does not allow you to use a 504 loan on existing debts, inventory purchases, real estate investments or working capital funding.
Certified Development Companies — SBA's community-based partners who regulate nonprofits and promote economic development within their communities — offer these loans in partnerships with banks, and they guide business owners through the application process. Qualifying for a 504 loan requires meeting maximum tangible business net worth and net income requirements. A 10% to 20% down payment also applies.
SBA Express loans
As a type of 7(a) loan for flexible uses, an SBA Express loan suits small businesses that need to borrow $500,000 or less quickly. Like the standard 7(a) loan program, the maximum repayment term ranges from 10 to 25 years. Plus, an SBA Express loan can have a variable or fixed interest rate.
Although you’ll still apply directly through a lender, the SBA agrees to speed up this loan’s approval process to a 36-hour turnaround time. And as long as you don’t need more than $25,000, you may not need collateral.
As an alternative to SBA loan programs with higher credit limits and longer terms, an SBA microloan can give you a maximum of $50,000 that you repay over six years or less. The typical microloan interest rate ranges from eight to 13 percent.
This type of loan offers flexibility since you can use the funds for most small business needs. The exclusions include real estate and debt repayment.
The SBA funds a network of nonprofit intermediary microlenders. While each lender sets its standards, you can expect to be required to provide a personal guarantee and show collateral to qualify for a microloan. You’ll apply for and manage the loan through the microlender directly.
SBA disaster loans
If a presidentially declared disaster has affected your small business, you could qualify for an SBA disaster loan. The SBA has programs for businesses experiencing physical damage or economic injury as well as for military reservists whose small businesses have experienced interruptions.
Each disaster loan program specifies allowed uses, and you typically can’t use the money for business expansion. Additionally, you may need to show the SBA that you’ve used insurance or other available resources to cover losses.
SBA disaster loans usually have limits of $2 million and maximum 30-year loan terms. They may require collateral depending on the loan type and amount. Unlike with the other loan types, you apply directly through the SBA, which provides the funding. You can apply to multiple programs if you qualify.
How to get an SBA loan
Before applying, compare SBA loan interest rates, repayment terms, loan amounts and requirements to find which loan type fits your business’s needs, and consider using an SBA loan calculator to estimate your payments based on this information. If you need an SBA disaster loan, you’ll work directly with the SBA during the application process. Otherwise, you must find an SBA-approved lender, submit the application and documentation and wait for your lender’s decision.
1. Determine whether your business meets the eligibility requirements
Since SBA loan requirements vary, check the specific program’s page on the SBA’s website to make sure you meet the basic requirements. These can include qualifying under the SBA’s definition of a small business, operating in an allowed industry, needing the money for an allowed business purpose and having a good financial standing. Prepare to meet any additional lender requirements for your credit score and collateral as well.
2. Use the SBA's lender match tool to find an SBA-approved lender
Unless you’re applying for a disaster loan, use the SBA’s lender match tool, which will ask for some basic contact details and information about your business and its funding needs. According to the SBA, you should hear back from potential lenders within two days. In the meantime, gather some important documents and information, such as your business plan, financial statements, proof of collateral and needed loan amount.
3. Submit your business documentation and loan application
The SBA website has an online application for its disaster loan programs. For SBA-backed loans, your chosen lender will walk you through the application process.
While the exact application requirements vary, you can expect to provide extensive information about your business, its owners and its financial situation. You may also have to complete SBA forms for the specific loan program.
Your lender will request documentation that can vary by loan type. Some examples could include the following:
- Business and personal financial statements and tax returns
- Proof of business ownership
- Prior business loans
- Business background
- Resumes and contact information for owners
- Proof of loss (for disaster loans)
4. Wait for a loan approval notification
After submitting your application, your lender will start processing it and may request additional documentation if needed. If the SBA makes the credit decisions for your loan type, it will also review your application.
You can contact your lender to ask about the application timeline and monitor your SBA loan status. Upon approval, your lender will contact you with the next steps. You can then expect to complete the closing paperwork before you receive your SBA loan funds.
SBA Loan FAQs
How do I check my SBA loan balance?
How long does it take to get an SBA loan?
What is the Small Business Administration?
The SBA is a government agency that has supported and advocated for small businesses since 1953. In addition to its loans and other funding programs, the SBA provides extensive information and online training on its website to help with starting, operating and expanding small businesses.
The SBA also helps small businesses get federal contracts and access business mentoring services in the community. What's more, it offered emergency loans and SBA loan forgiveness programs that helped businesses during the pandemic.
What happens after an SBA loan is approved?
How hard is it to get an SBA loan?
Summary of Money's what is an SBA loan
SBA loans are a good option for small businesses that may struggle with securing traditional financing. Whether you’re seeking the best LLC loans or business expansion loans, the SBA’s numerous loan options could help you accomplish your business goals. Read each program's terms carefully and assess whether your business will meet SBA and lender requirements. You’ll also want to make sure your business’s financial health warrants an SBA loan and that you can prove your financial need to the lender.