What is an SBA loan?

Key points

• SBA loans are small business loans that are partially insured by the U.S. Small Business Administration.
• SBA loans come in various forms, including term loans, microloans and lines of credit.
• While SBA loans take a while to fund and have relatively strict requirements, they can provide favorable repayment terms.

SBA loans are small business loans that are partially insured by the U.S. Small Business Administration (SBA). “The government partners with SBA lenders and guarantees a portion of a loan, meaning the government shares the risk with the bank,” says Rodney Borges, senior vice president of small business lending at California-based Plumas Bank.

As a result, these government-backed loans offer relatively high loan amounts, low interest rates and favorable repayment terms.

That said, they tend to be more difficult to obtain than some other small business financing options, and SBA loans can take several weeks or even months to fund.

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How does an SBA loan work?

The SBA loan program is robust in its offerings, so each loan can work a bit differently than others. Understanding the different available options and the eligibility requirements can help you determine whether an SBA loan is right for your small business.

Types of SBA loans

There are several different types of SBA loans available to small business owners. Here’s a breakdown of the main options:

LOAN TYPE	LOAN AMOUNT	INTEREST RATE	REPAYMENT TERM	COLLATERAL REQUIREMENT	DESIGNED FOR...
Standard 7(a) term loan	Up to $5 million	Based on creditworthiness, but cannot exceed SBA maximum	Up to 10 years (25 for real estate purchases)	No collateral for loans of up to $25,000	Small businesses with big financing needs
Standard 7(a) line of credit	Up to $5 million	Based on creditworthiness, but cannot exceed SBA maximum	Up to 10 years	No collateral for loans of up to $25,000	Small businesses with big financing needs
7(a) small loan	Up to $350,000	Based on creditworthiness, but cannot exceed SBA maximum	Up to 10 years	No collateral for loans of up to $25,000	Small businesses with big financing needs
Express loan	Up to $500,000	Based on creditworthiness, but cannot exceed SBA maximum	Up to 7 years with the potential for an extension	No collateral for loans of up to $25,000	Small businesses with big financing needs
Community Advantage loan	Up to $350,000	Up to the Wall Street Journal prime rate plus 6.5%, depending on loan size	Up to 10 years	No collateral for loans of up to $25,000	Small businesses in low-to-moderate income communities and rural areas, new businesses, veteran-owned businesses and more
Microloan	Up to $50,000	Generally between 8% and 13%	Up to 6 years	Lender may require collateral and a personal guarantee	Startups and small businesses with less financing needs

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How you can use SBA loans

While each loan program can vary, you can generally use SBA loan funds for the following purposes:

• Short- and long-term working capital needs
• Refinancing current business debt (under certain conditions)
• Equipment and machinery, furniture and fixtures, supplies and materials
• Real estate, including land and buildings
• Building construction or renovations
• Establishing a new business or acquiring, operating or expanding an existing one

Before you apply for an SBA loan, make sure you understand the approved loan uses to ensure that it aligns with your plans.

SBA loan costs

SBA loans come with interest and fees, and while they can be less expensive than other forms of business financing, it’s still important to know what to expect. In most cases, interest rates are based on your creditworthiness, but they can’t exceed the maximum set by the SBA for your rate type and loan amount.

For fixed interest rates, here are the caps:

LOAN AMOUNT	RATE
$25,000 or less	The prime rate in effect on the first business day of the month plus 6%, plus 2%
$25,000 to $50,000	The prime rate in effect on the first business day of the month plus 6%, plus 1%
$50,000 to $250,000	The prime rate in effect on the first business day of the month plus 6%
$250,000 or more	The prime rate in effect on the first business day of the month plus 5%

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And here are the caps for variable rates, which are pegged to the prime rate, the LIBOR rate or an optional peg rate:

LOAN AMOUNT	TERM IS LESS THAN 7 YEARS	TERM IS 7 YEARS OR MORE
$25,000 or less	Base rate plus 4.25%	Base rate plus 4.75%
$25,000 to $50,000	Base rate plus 3.25%	Base rate plus 3.75%
$50,000 or more	Base rate plus 2.25%	Base rate plus 2.75%

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Depending on the size of your loan and the type of loan you have, the fee can range from 0% to 3.75% of the guaranteed portion of your loan. For example, if you have a $100,000 loan with an 85% guarantee and a 1% fee, you’ll pay a fee of $850.

If you have a loan with a repayment term of 15 years or longer, you may also face a prepayment penalty if you pay off the debt within three years of disbursement. With that said, lenders are not allowed to charge origination fees, processing fees, application fees or other fees not expressly allowed by the SBA.

Who qualifies for SBA loans?

While each program may have its own requirements, the SBA generally requires that your business:

• Operates for profit
• Be considered a small business as defined by the SBA
• Be engaged in, or propose to do business in, the U.S. or its possessions 
• Have reasonable invested equity
• Use alternative financial resources, including personal assets, before seeking financial assistance
• Be able to demonstrate a need for a loan
• Use the funds for a sound business purpose
• Not be delinquent on any existing debt obligations to the U.S. government

Note that there are several businesses that are ineligible based on the nature of their business. Examples include pyramid sales plans, dealers of rare coins and stamps, real estate investment firms, businesses that engage in gambling activities and more. Review the eligibility criteria before you apply.

While the SBA doesn’t provide details on minimum revenue and credit scores with most of its loans, each individual lender will have its own criteria. 

“The primary driver of both consumer and commercial base loans is repayment ability—an individual needs to have an income source that can repay that debt,” says Borges. “The lender has to be convinced to be your partner and feel confident that you’re going to be successful.”

Pros and cons of SBA loans

Depending on your situation and needs, an SBA loan may or may not be the right fit for you. Here are some of the benefits and drawbacks to consider.

PROS	CONS
• Capped interest rates: Some forms of business financing can be incredibly expensive, but if you qualify for an SBA loan, your interest rate will never exceed the federal agency’s maximum.	• Long funding times: It can take between 60 and 90 days for most SBA loans to fund, which means they’re not great if you have immediate financing needs. Express loans go faster but can still take between 30 and 60 days. “Working with an experienced SBA lender will speed up the process and help business owners navigate any challenges,” says Borges.
• A variety of options: There are many different loan programs available, so it shouldn’t be too difficult to find a loan that can help solve your capital needs.	• Borrower requirements: You may be required to put up collateral to secure your loan and even provide a down payment. Some loans also require a personal guarantee, which means that you need to use personal assets to pay off the debt if your business can’t.
• Flexible loan amounts: Whether your financing needs are big or small, you can find an SBA loan that can help you get the amount you need.	• Must have good credit and financials: It can be difficult for newer businesses to get approved for an SBA loan. If your business is well established, though, you’ll still need to exhibit strong financials and a good credit history. Actual requirements can vary by lender.

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SBA vs. other small business loans

As a small business owner, you’ll have a lot of different financing options to choose from. Here are some of the differences you’ll find with other common choices via banks, credit unions and online lenders:

• Loan terms: You can generally borrow more with an SBA loan than you can with conventional business loans, particularly if you go through an online lender. Additionally, SBA loans may offer longer repayment terms than many alternatives.
• Interest rates: Whether fixed or variable, SBA loan interest rates are capped, but that’s not true with other business loan options. In some cases, interest rates can be in the double or even triple digits. Fees can vary based on the type of loan you get.
• Collateral and personal guarantee: It’s common for small business loans to require collateral and a personal guarantee, but you may not be required to put up collateral on smaller SBA loans.
• Loan choices: The SBA loan program has several different loan options. But depending on your situation, you may benefit from alternative financing options, such as invoice factoring, crowdsourcing, venture capital and more.

As with any other financial choice for your small business, it’s important to shop around and compare multiple options before deciding which one to pursue.

Frequently asked questions (FAQs)