SBA loans are a great way to fund working capital and other business expenses. They are partially guaranteed by the Small Business Administration and designed to be an affordable option for small businesses. However, they may take more time and be more difficult to qualify for than loans not backed by the SBA.

What is an SBA loan?

An SBA loan is a term loan backed by the Small Business Administration (SBA). There are multiple types, but all are designed to cover working capital, expansion and large purchases for small businesses. 

How do SBA loans work?

The SBA guarantees loans — but it does not lend directly to businesses (outside disaster assistance). Instead, it works with private lenders to fund expenses for small business owners. You apply through the lender, and if approved, the SBA will guarantee a portion of your loan. 

Because they are backed by the federal government, there are limits on the interest and fees your lender can charge. SBA loan rates are based on the loan’s maturity date and total amount in addition to whether you qualify for a fixed or variable rate. 

If your business is unable to pay and defaults on the loan, the SBA will pay the lender the portion of the loan it guaranteed. This means less risk for your lender, but because of this, SBA loans are much harder to qualify for than other term loans. 

But aside from eligibility and lender restrictions set by the SBA, these loans function like any other business term loan. Your loan can be used for a variety of business expenses, and you will pay back your lender on a monthly basis.

Types of SBA loans

There are four main lending programs offered by the SBA: 7(a) loans, Express Loans, 504 loans and microloans.

7(a) loans

SBA 7(a) loans are the most common option for business owners. They are generally unsecured — though some might require collateral — 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 are lower than what a small business might otherwise qualify for. And since you can borrow up to $5 million, they can cover many needs.

You’ll have to pay a fee of up to 3.5 percent of the loan’s guaranteed portion, depending on the loan size. The SBA guarantees up to 85 percent of loans of $150,000 or less, and up to 75 percent of larger loans.

Express loans

Express loans are a type of 7(a) loan. These loans are limited to $500,000, and the SBA only guarantees up to 50 percent. They are functionally the same as 7(a), but the application process is expedited for quick funding. Sometimes, you can receive an approval notice within days rather than weeks. 

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.

Your business can borrow up to $5 million — or $5.5 million for certain manufacturing or energy-efficient projects — with terms of 10, 20 or 25 years. 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. The SBA guarantees up to 40 percent of the loan amount.

You will have to make a down payment of around 10 percent for a 504 loan.

Microloans

Microloans are the smallest funding option offered by the SBA, with a maximum amount of $50,000. 

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. 

They may be secured or unsecured, and interest rates usually range between 8 to 13 percent. Repayment terms max out at six years.

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

Pros 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. 

  • Open to a variety of businesses. Almost every industry is eligible for financing through the SBA loan program. There are some exceptions, but in general, any legal business that meets size requirements may qualify for funding.
  • Capped interest rates. The Small Business Association has a maximum interest rate set for each loan option. While the exact max rate depends on how much your business borrows and other factors, the total expense will likely be lower than other funding options.
  • Limited fees. Like with interest rates, the SBA sets limits on the fees lenders can charge for SBA loans.
  • Access to multiple resources. In addition to loans, the SBA has many resources available for small business owners to use.

Cons of SBA loans

SBA loans are widely available, but it may take longer than with other loans to get funding. 

  • Strict eligibility requirements. Although it depends on the lender you work with, in almost every case, you will need good credit and strong revenue to qualify.
  • Down payment and collateral may be necessary. Some loans, like 504 loans, have a down payment requirement in addition to strict eligibility criteria and required collateral.
  • Application can be time-consuming. Not only can it take weeks for an SBA loan application to be fully processed, but the applications themselves are also lengthy. You will need to provide extensive documentation before your business is considered by a lender.

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 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 and ensure you have all your documents in order. It may take between 30 and 90 days to be approved and funded.

FAQs about SBA loans