Get business financing from one of the most sought-after loan programs in the U.S.
- Learn all about Small Business Administration loan basics: how it works, its types, pros & cons, interest rates & more
- Know all about the qualification requirements of SBA financing and the steps to apply for an SBA loan
- Explore alternative lending options to SBA loans for small businesses.
The Small Business Administration is a federal agency dedicated to providing resources for small businesses nationwide. SBA loans are small business loans backed by a federal government guarantee. They offer financing to entrepreneurs and small businesses to cover startup costs, replenish working capital, fund business expansion, and more.
When a small business applies for an SBA loan with a bank or community-based lender, the lender reaches out to the Small Business Administration (SBA) for a loan guarantee. Based on the business’s credit history and requested loan amount, SBA may offer a loan guarantee to the lender. SBA’s loan guarantee signifies that the federal government will pay the lender a guaranteed amount in case the borrower defaults on loan payments.
Also, SBA requires personal guarantees to repay the loan from all stakeholders who own more than 20% of the business. The personal guarantee from the borrower and the loan guarantee from the government reduce the overall risk of the lender while offering a loan to a small business. SBA also requires a minimum down payment of 10% of the loan amount, as it further reduces the lender’s risk.
Once the loan is approved, the lender lays down the terms and conditions of the loan, and based on the loan agreement, the borrower would repay the loan directly to the lender.
Most small businesses prefer SBA loans for the following benefits:
- 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: Get up to $5.5 million of business financing; traditional banks or alternative lenders don’t offer such large loans to small businesses.
- Little to no collateral needed: Personal guarantee secures an SBA loan but it’s also common for collateral to be needed depending on the type of SBA loan, loan amount, and borrower’s credit history.
- Flexibility: No unreasonable restrictions to use the loan amount on any business needs.
- Multiple resource centers: There are 62 Lead Business Development Centers, offering counseling and continued support to businesses after loan disbursal.
There are some downsides to SBA loans as well:
- Slow processing time: Due to the high volume of loan applications and extensive paperwork, SBA loans can take anywhere between 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 due to high competition among many low-credit-risk businesses.
- Personal liability on loan defaults: SBA requires a personal guarantee, which puts borrower’s personal assets at risk if their business defaults on loan payment.
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, refinancing debts, equipment purchases, acquiring other businesses, and more.
The maturity term of SBA 7(A) working capital loans can be a maximum of 10 years whereas for real estate purchases, it can be a maximum of 25 years. SBA offers up to an 85% loan guarantee on loan amounts less than $150,000 and a 75% guarantee on loans over $150,000.
SBA 7(A) Loans
Alternative Loans
Loan Amounts
$5k-$5M
Up to $400k
Repayment terms
Up to 10 years
6-18 months
Interest rate
Varies by lender
Varies by lender
Turnaround time
45-60 days
As little as 24 hours
Credit criteria
Good to excellent credit
Fair to excellent credit
Time in business
2 years for 100% financing; startups also allowed
1+ year in business
** Use of funds**
Debt refinance, working capital, inventory, equipment, expansion
Working capital, inventory, equipment, expansion, payroll
Application requirements
Bank statements, business history, and more required with long application
Bank statements + short online application
For illustrative purposes only.
SBA Express Loans
Businesses looking for fast financing of up to $500,000 could apply for a SBA Express loan. Unlike SBA 7(A) loans, lenders have the flexibility to follow their own processes and qualification criteria for loan approval without SBA review.
For SBA Express loans, lenders get a maximum loan guarantee of 50% from SBA. Since there is minimum SBA intervention in the loan process, lenders and borrowers have the flexibility to negotiate on 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 much more competitive than other SBA loan programs, making them even harder 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 partner – 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 CDC with 10% down payment from the borrower.
These loans are apt for 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 the microloan to eligible borrowers based on their qualification requirements.
Businesses can utilize SBA microloans for working capital, inventory management, equipment purchase, buying furniture, installing fixtures, and more. The maximum term for SBA microloans is six years, and the interest rate can vary.
Depending on the type of SBA loan, the eligibility requirements can vary, and lenders could have some additional qualification criteria for loan approval. Here are some basic eligibility requirements that are applicable for most SBA loans:
Meet Size Standards of SBA
SBA requires businesses to meet a certain size standard to be eligible for small business loans. The business size is calculated based on number of employees and annual receipts. The requirements for business size varies from industry to industry. Here’s the latest SBA table for size standards.
Be A For-Profit Business
SBA loans are available only for for-profit businesses. Non-profit organizations need to consider other modes of financing such as government grants, and traditional bank loans.
Operate Business in the US
Only businesses that are physically located and operated in the US 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, however a score of 680 to 700 is ideal for SBA loan approval.
No Other Reasonable Financing Options Available
Businesses should consider SBA loans only after 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.
Maturity term, also known as 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, equipment financing; up to 25 years for real estate purchase.
SBA 504 loan – Maturity term of 10, 20, and 25 years available based on the CDCs’ criteria.
SBA Microloan – Maturity term of up to six years.
Collateral or Personal Guarantee
In general, SBA requires personal guarantee from all owners of the business and doesn’t need collateral for loan approval. But lenders might have their own qualification requirements for collateral.
SBA 7(A) loan – SBA needs personal guarantee; lenders might ask for collateral based on loan amount and business’s character.
SBA 504 Loan – CDCs require real estate property or equipment purchased through loan amount 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.
Prepayment Penalties
SBA charges a prepayment fee when 25% or more of outstanding loan balance is prepaid within the first three years of the 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 loan – 1% of prepayment amount.
Updated as of November 2023.
Applying for SBA loans can be a daunting process due to the sheer volume of documentation and long-processing times. Let’s simplify the process in easy steps:
1. Ensure you qualify for SBA loans
Your business should meet basic SBA requirements such as be a for-profit business in the US, meet SBA’s size standards, and have a decent credit score of 680 or more.
2. Choose the type of SBA loan
Based on the use of the loan and the loan amount, decide which type of SBA loan is apt for your business.
3. Find the right SBA lender
SBA works with third-party lenders, CDCs, and other intermediary lenders to offer guaranteed loans to small businesses. Most traditional lenders such as banks and credit unions offer SBA loans but you must verify if you meet the lender’s qualification requirements as well.
4. Gather documents, and complete the paperwork:
While applying for SBA loans, you need to gather/prepare following documents:
- SBA loan application form
- Personal Documents: Personal credit score, criminal history, personal financial statement, income tax returns of last three years.
- Business Documents: Business credit score, business tax returns, business financial statements, any past loan application records, business plan
- Proof of Valid Business: Business license, certificate of doing business.
5. Submit your SBA loan application:
Once all documents are prepared as per the lender’s requirement, you can submit the SBA loan application to the lender. The lender then reviews the application and submits it for SBA’s review. Once the loan application has been approved by SBA and the lender, the loan agreement will be finalized.
Ready to apply?
Find the right financing solution for your small business needs.
In general, startup companies have a hard time finding business financing from traditional lenders. SBA recognizes this struggle of new businesses and offers a variety of SBA startup loan options such as SBA 7(A) loans, 504 loans, microloans, and SBA Community Advantage loans.
Competitive interest rates, longer repayment terms, and flexibility towards annual revenue make SBA loans a good choice for startups.
While SBA loans are a popular source of financing for small businesses, long wait times, extensive paper-work, and low approval rates lead to businesses falling short on their funding needs. Thankfully, there are other alternative sources of business funding:
Traditional Bank Loans
Big national banks as well as small regional banks offer small business loans to entrepreneurs. Since traditional bank loans don’t have to follow SBA rules and guidelines, it gives borrowers more leverage to negotiate with the bank.
Loans from Online Lenders
Alternative lenders, also known as online lenders, offer fast, flexible, and affordable small business loans. Unlike SBA loans, they have less stringent eligibility criteria with options to customize the loan terms as per your business needs.
Most alternative lenders offer a variety of business loans including working capital loans, short-term business loans, equipment financing loans, emergency business loans, and business expansion loans to name a few.
Compared to traditional business loans offered by banks, SBA loans have lower-interest rate, flexible credit requirements, longer repayment terms, and no prepayment penalty after three years of loan disbursement.
The timeline for SBA loan approval varies based on the type of loan you apply. SBA (7A) loans can take 60-90 days for approval whereas SBA 504 loans can take up to 6 months.
SBA loans are highly competitive and require stringent requirements, making them difficult to get approved for.
You can get a maximum loan amount of $5 million through SBA 7(A) loans and a maximum of $5.5 million through SBA 504 loans. According to SBA 7(A) and 504 summary report for 2023, the average SBA 7(A) loan amount is $479,658 while the average SBA 504 loan amount is $1,083,622.
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