SBA Loans

SBA loans are small business loans that are partially backed by the Small Business Administration and given by traditional and alternative lenders to small businesses. Because they are backed by the government, the lender can confidently offer lower rates, higher funding amounts, and longer terms, because a portion of that financing is guaranteed to be paid back.

The goal of the SBA loan program is to provide small business owners with the financing they need to launch their start-up, expand their business, recover after disaster strikes, boost working capital, and fill cash flow gaps.

While the terms can be better than other types of small business loans, SBA loans typically take a long time to get approved compared to short-term business loans or working capital loans.

Here are some of the pros and cons with SBA loans compared to other types of business loans, so you can decide if this is the right financing option for you.

Pros of SBA loans:

• Capped interest rates: Both fixed and variable interest rates have a capped maximum limit, often lower than the traditional bank interest rates.
• Large loan amounts: Borrowers can get up to $5.5 million in business funding, which is more than most traditional banks or alternative lenders will offer small businesses.
• Little to no collateral needed: A personal guarantee can be used to secure an SBA loan, though it’s also common for some collateral to be needed depending on the type of SBA loan, loan amount, and borrower credit history.
• Flexibility: There are no unreasonable restrictions on how you can use the loan, so long as it’s for business purposes.
• Continued business support: There are 62 Lead Business Development Centers that you can rely on for counseling and continued support after you’re funded.

The downsides to SBA loans:

• Slow processing times: Due to the high volume of loan applications and extensive paperwork, SBA loans can take anywhere from a few weeks to a few months to process.
• Down payment requirements: Due to minimum down payment requirements of 10% or more, SBA loans might not work for businesses struggling with cash flow.
• Strict credit score criteria: Businesses with poor personal and business credit scores face challenges with SBA loan approval.
• Low approval rates: Compared to other traditional modes of business financing, SBA loans have low approval rates for companies that are considered “high risk,” meaning they have poor business credit scores, lack cash flow, have no financial history, are in high-risk industries, or have other factors that cause the lender to question if they can make payments on time.
• Personal liability on loan defaults: SBA loans require a personal guarantee, putting the borrower’s personal assets at risk if their business defaults on loan payment.
• Restricted to last resorts: SBA loans typically require applicants to show proof that they have not been able to secure other types of financing, meaning you must exhaust other financing options before you apply.

There are five types of SBA loans including the most popular SBA 7(a), the SBA Express, Disaster, 504, and Microloans. Each type of SBA loan serves a different purpose and has different features, from the amount of funding available to the time of approval. Here’s a bit more about each option so you can decide which is right for your company.

SBA 7(A) Loans for Working Capital 
SBA 7(A) loans are one of the most common loans that small businesses apply for. These are generally unsecured loans with a loan amount of up to $5 million. 7(A) loans can be used to cover working capital needs, real estate purchases, debt refinancing, equipment purchases, business acquisitions, and more.

The maturity term of SBA 7(A) working capital loans can be a maximum of 10 years, while for real estate purchases, it can be a maximum of 25 years. SBA offers up to an 85% loan guarantee on loan amounts of $150,000 or less and a 75% guarantee on loans over $150,000.

• Loan amounts
  • SBA 7(a) loans: $5K to $5MM
  • Alternative loans: Up to $500K
• Repayment terms
  • SBA 7(a) loans: Up to 10 years
  • Alternative loans: 6 to 18 months
• Interest rate
  • SBA 7(a) loans: Varies by lender
  • Alternative loans: Varies by lender
• Turnaround time
  • SBA 7(a) loans: 60 to 90 days
  • Alternative loans: As little as 24 hours3
• Credit criteria
  • SBA 7(a) loans: Good to excellent credit
  • Alternative loans: Fair to excellent credit
• Time in business
  • SBA 7(a) loans: 2 years for 100% financing, start-ups also allowed
  • Alternative loans: 6+ months in business
• Use of funds
  • SBA 7(a) loans: Debt financing, working capital, inventory, equipment, expansion
  • Alternative loans: Working capital, inventory, equipment, expansion, payroll
• Application requirements
  • SBA 7(a) loans: Bank statements, business history, and more information required with long application
  • Alternative loans: Bank statements and short online application

Read more about SBA 7(A) loans

SBA Express Loans
Businesses looking for fast financing of up to $500,000 could apply for an SBA Express loan. Unlike SBA 7(A) loans, lenders have the flexibility to follow their own processes and qualification criteria for SBA Express loan approval without the SBA having to review.
For SBA Express loans, lenders get a maximum loan guarantee of 50% from the SBA. Since there is minimum SBA intervention in the loan process, lenders and borrowers have the flexibility to negotiate interest rates. However, the interest rates can’t exceed the SBA maximum rates.

Express loans have a faster turnaround than other SBA loans; however, they are also very competitive when compared to some other SBA loan programs, making them difficult to get approved for.

SBA 504 Loans
SBA 504 loans offer small businesses up to $5.5 million to invest in long-term assets that facilitate business growth and job creation. These fixed-rate loans are made available through SBA’s community partners – Certified Development Companies (CDCs). The loan amount follows the 50-40-10 structure that is 50% of the loan amount is provided by the lender, 40% of the amount is offered by a CDC, and a 10% down payment is required from the borrower.

These loans are good business expansion funding, as they can be used for buying land, real estate, machinery, and other critical equipment. Businesses can also use 504 loans for renovation and remodeling projects such as upgrading the building, reconstructing streets and parking lots, etc. SBA 504 loans cannot be used for working capital, debt consolidation, or investment in rental properties.

SBA Microloans
SBA offers microloans of up to $50,000 to small businesses through non-profit intermediary community lenders. These lenders extend microloans to eligible borrowers based on their ability to meet their requirements.

Businesses can utilize SBA microloans for working capital, inventory management, equipment purchases, buying furniture, installing fixtures, and more. The maximum term for SBA microloans is six years, and the interest rate can vary.

SBA Disaster Loans
SBA disaster loans are meant to help business owners recover after disaster strikes. These loans provide up to $2 million in funding for businesses and up to $50,000 for personal property. The personal property damage funding cannot be used on vacation homes, but it can be used to cover the cost of clothing, cars, essentials for personal use, and repairing a damaged primary residence.

The SBA only provides these loans if the disaster is known and featured in their list, which you can find here.

When you work with our partners, the eligibility requirements include:

• At least 12 months in business
• Minimum $250,000 in annual gross sales
• Fair to excellent credit: 660 to 850 

Other qualifications of the program are as follows. To qualify for an SBA loan, the company must: 

• Meet a size standard.
• Be a for-profit business.
• Operate in the USA or USA territories.
• Have a strong credit history (lender requirement).
• Not be eligible for traditional types of business loans.
• Be in an eligible industry. 

Here’s some more information on each of the qualifiers.

Business Size
The business size is calculated based on the number of employees and annual receipts, and the requirements for business size vary from industry to industry. Here’s the latest SBA requirements so you can see if your business meets this qualification.

Be a For-Profit Business
SBA loans are available only for for-profit businesses. Non-profit organizations need to consider other modes of financing, including government grants, fundraising from donors, and traditional bank loans.

Operate Business in the USA
Only businesses that are physically located and operated in the USA and its territories are eligible for SBA loans.

Meet Credit History Requirements
SBA offers loans to only those businesses that have clean credit history with no previous loan defaults. A minimum credit score of 640 or above is needed to qualify with most lenders; however, a score of 680 or higher is ideal for SBA loan approval.

No Other Reasonable Financing Options Available
Businesses cannot qualify for SBA loans until they have exhausted all other means of affordable financing from non-government lenders.

Do Not Fall Under Ineligible Businesses Category
Businesses from industries such as consumer cooperatives, lending firms, gambling, real estate investment firms, and nonprofits are not qualified to apply for SBA loans.

There are terms and conditions that change depending on the type of SBA loan you are applying for. These include the: 

• Loan maturity terms.
• Collateral and personal guarantee requirements.
• Interest rates.
• Prepayment penalties or curtailments.
• Total amount of financing. 

Loan Maturity Term 
The maturity term, also known as the loan term, is the period within which the loan amount needs to be repaid to the lender along with interest. 

• SBA 7(A) Loan: Maturity term of up to 10 years for working capital and equipment financing; up to 25 years for real estate purchases.
• SBA 504 loan: Maturity term of 10, 20, and 25 years available based on the CDCs’ criteria.
• SBA Microloan: Maturity term of up to seven years. 

Collateral or Personal Guarantee 
In general, the SBA requires a personal guarantee from all owners of the business with at least 20% ownership and doesn’t need collateral for loan approval for loans under $25,000.

Lenders might have their own qualification requirements for collateral on top of this. 

• SBA 7(A) loan: SBA needs personal guarantee and lenders might ask for collateral based on loan amount and business’s history. 
• SBA 504 Loan: CDCs require the real estate property or equipment purchased with the loan to serve as collateral.   
• SBA Microloans: Lenders might require personal guarantee as well as collateral. 

Interest Rates
Interest rates applied on SBA loans can be either fixed or variable. Lenders have the flexibility to decide the interest rates, but they cannot exceed the SBA maximum interest rate limits. Here is where the SBA lists the current maximum interest rates.

Prepayment Penalties
SBA charges a prepayment fee when 25% or more of an outstanding loan balance is prepaid within the first three years of a 15-year loan maturity period. 

• Prepayment penalty during first year of loan – 5% of prepayment amount
• Prepayment penalty during second year of loan – 3% of prepayment amount
• Prepayment penalty during third year of loan – 1% of prepayment amount

The Amount of Funding Available 
Each type of SBA loan has a different maximum amount of financing that can be given, with the 504 being the highest at $5.5 million for specific use cases, 7(a) being the next highest at $5 million, and the microloan being the lowest maximum at $50,000.