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What Is an SBA Loan?

These small business loans offer more favorable terms than some of the alternatives, but they also have relatively strict eligibility requirements.

Written by Ben Luthi / September 8, 2022

  • 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.[1]

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.[2]

Inside this article

  1. How does an SBA loan work?
  2. Pros and cons of SBA loans
  3. SBA vs. small business loans
  4. Frequently asked questions

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:[3-5]

Loan typeLoan amountInterest rateRepayment termCollateral requirementDesigned 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 creditUp to $5 millionBased 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 loanUp to $350,000Based 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 loanUp to $500,000Based 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 loanUp to $350,000Up to the Wall Street Journal prime rate plus 6.5%, depending on loan size Up to 10 yearsNo 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
MicroloanUp to $50,000Generally between 8% and 13% Up to 6 yearsLender may require collateral and a personal guarantee Startups and small businesses with less financing needs

How you can use SBA loans

While each loan program can vary, you can generally use SBA loan funds for the following purposes:[3]

  • 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.[3]

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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.[6]

For fixed interest rates, here are the caps:[6]

Loan amountRate
$25,000 or less The prime rate in effect on the first business day of the month plus 6%, plus 2%
$25,000 to $50,000The prime rate in effect on the first business day of the month plus 6%, plus 1%
$50,000 to $250,000The prime rate in effect on the first business day of the month plus 6%
$250,000 or moreThe prime rate in effect on the first business day of the month plus 5%

And here are the caps for variable rates, which are pegged to the prime rate, the LIBOR rate or an optional peg rate:[6]

Loan amountTerm is less than 7 yearsTerm is 7 years or more
$25,000 or less Base rate plus 4.25% Base rate plus 4.75%
$25,000 to $50,000Base rate plus 3.25%Base rate plus 3.75%
$50,000 or moreBase rate plus 2.25%Base rate plus 2.75%

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.[6]

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.[6]

Who qualifies for SBA loans?

While each program may have its own requirements, the SBA generally requires that your business:[3]

  • 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.[6]

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."

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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

  • 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.
  • 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.
  • 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.

Cons

  • 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.[7] "Working with an experienced SBA lender will speed up the process and help business owners navigate any challenges," says Borges.
  • 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.[1, 3]
  • 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.[2]

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.[3, 8-9]

  • 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.[6, 9-10]

  • 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.[11]

  • Loan choices: The SBA loan program has several different loan options.[3] But depending on your situation, you may benefit from alternative financing options, such as invoice factoring, crowdsourcing, venture capital and more.[2,12-13]

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

How do you apply for an SBA loan?

Visit the SBA's website to use its Lender Match tool. You'll start by describing your needs and answering a few other questions. Then the federal agency will send your information to lenders. Within a couple of days, you'll receive an email with contact information for interested lenders. You'll be able to talk to each lender and get an idea of what the interest rate, repayment terms, fees and other features look like. With that information, you can narrow down your list to one lender and submit an application directly to the lender.[14]

Can you use an SBA loan to buy a business or just start one?
Article Sources
  1. "Loans," U.S. Small Business Administration (SBA), https://www.sba.gov/funding-programs/loans.
  2. Meredith Turits, "SBA Loan Process and Timeline: An Insider Look at Every Stage," Fundera, February 2, 2021, https://www.fundera.com/business-loans/guides/sba-loan-timeline.
  3. "Types of 7(a) Loans," SBA, https://www.sba.gov/partners/lenders/7a-loan-program/types-7a-loans.
  4. "Pilot Loan Programs," SBA, https://www.sba.gov/partners/lenders/7a-loan-program/pilot-loan-programs.
  5. "Microloans," SBA, https://www.sba.gov/funding-programs/loans/microloans.
  6. "Terms, Conditions, and Eligibility," SBA, https://www.sba.gov/partners/lenders/7a-loan-program/terms-conditions-eligibility.
  7. "How Long Does It Take To Get An SBA Loan?" Funding Circle, October 21st, 2021, https://www.fundingcircle.com/us/resources/how-long-does-it-take-to-get-an-sba-loan/.
  8. "Best Private Business Loans," Clarify Capital, https://clarifycapital.com/private-business-loans.
  9. "Short Term Loans for Small Business," Ondeck, https://www.ondeck.com/short-term-loans.
  10. "Merchant Cash Advance for Small Businesses- What You Need to Know," Ondeck, https://www.ondeck.com/loantype-merchant-cash-advance.
  11. "Unsecured Business Loans - What You Need to Know," Ondeck, https://www.ondeck.com/loantype-unsecured-business-loans.
  12. Chris Motola, "14 Types Of Alternative Loans for Small Businesses," Merchant Maverick, May 27, 2022, https://www.merchantmaverick.com/types-alternative-financing-small-business/.
  13. Vanessa Kuhlor, "What is Venture Capital?" Silicon Valley Bank, https://www.svb.com/startup-insights/vc-relations/what-is-venture-capital.
  14. "Lender Match connects you to lenders," SBA, https://www.sba.gov/funding-programs/loans/lender-match.

About the Authors

Ben Luthi

Ben Luthi

Ben has been writing about money since 2013. He's been on staff at NerdWallet as a credit card writer and for Student Loan Hero, where he covered student loans and other personal finance topics. Ben's work has appeared in U.S. News, The New York Times, Experian, FICO, Credit Karma, Bankrate and more

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