- SBA loans are loans typically guaranteed by the U.S. Small Business Administration (SBA), a federal agency. In most cases, the SBA doesn’t directly lend the money to the applicant. Business owners must instead apply for a loan through a lender.
- There are several types of SBA loans. The SBA 7(a) loan is commonly used, but others like the SBA Microloan and 504 loan exist. Each loan has rules regarding funding use, loan terms, and eligibility.
- SBA-preferred lenders are authorized to approve the loan, negating the need to send the loan to the SBA for approval. This may help expedite the loan approval process.
U.S. Small Business Administration loans are government-backed funding options for small businesses. Because the government backs these loans, lenders may be able to provide business owners with access to lower rates and longer terms. The affordable capital enables businesses to invest more easily in their growth, whether through purchasing new equipment or investing in technology and real estate.
The flexibility and access to SBA loans make them a popular choice for small businesses when traditional funding choices like secured or unsecured business loans and lines of credit are out of reach for reasons like poor credit histories or too few years in business, or collateral shortfalls.
To help you decide whether an SBA loan may be right for you, we’ve created this comprehensive guide covering the different loan types, benefits, eligibility, and application process for common SBA loan programs.
What Is an SBA Loan?
SBA loans are a type of business loan that is partially guaranteed by the U.S. Small Business Administration, a government agency. The government guarantees a portion of the loan amount to reduce lender risk, ease eligibility rules, and provide more favorable loan terms. For example, SBA loans generally have longer terms than conventional loans, such as up to 25 years for real estate and 10 years for equipment.
For many programs, the SBA doesn’t lend the money itself, but rather partners work with approved banks, credit unions, and lenders. The loan amounts depend on the type of loan and your borrowing needs, but anywhere from $500 to $5.5 million could be available.
Most Common Types of SBA Loans
The SBA 7(a) loan program is a frequently used SBA program, but other programs may be a better fit depending on what you’ll use the loan for. Here’s a closer look at the SBA loans you may want to consider.
SBA 7(a) Loan
SBA 7(a) loans may be used in a variety of ways, including for:
- Working capital
- Business expansion
- Equipment purchases
- Business debt refinancing
- Real estate purchases
The maximum loan size is $5 million with terms generally up to 10 years for many uses, except real estate, which has terms up to 25 years. Interest rates may be fixed or variable.[1]
SBA CDC/504 Loan
These loans are designed to be used with major fixed assets, like:
- Real estate
- Land
- Heavy machinery
They’re structured so that 50% of funds come from the bank, 40% from a Certified Development Company (CDC), and 10% from the borrower.[2] The lender provides both the permanent loan and the bridge loan, which is ultimately refinanced by the CDC. Certified Development Companies are nonprofit organizations certified and regulated by the SBA to offer 504 loans to small businesses.
The CDC provides loan sizes of up to $5.5 million with fixed interest rates and repayment terms of 10, 20, or 25 years.[3]
SBA Microloan
SBA microloans are targeted to startups, smaller businesses, and nonprofits. The money may be used for things like:
- Working capital
- Inventory
- Supplies
- Furniture
- Fixtures
- Equipment
Loan amounts up to $50,000 are available with terms up to seven years and interest rates generally between 8% and 13%.[4] Interest rates for these loans are sometimes higher than those for other SBA loan programs.
SBA Disaster Loans
SBA disaster loans are one of the only times the SBA acts as a direct lender. Instead of working with approved lenders, the SBA issues loans itself to businesses and nonprofits affected by a federally declared disaster. There are four types of SBA Disaster Loans:
- Physical damage loans
- Mitigation assistance loans
- Economic Injury Disaster Loans (EIDL)
- Military reservist loans
The funds may be used in a variety of ways, including repairing or replacing lost and damaged property and covering operating expenses during federally declared disasters.
Depending on the loan, amounts of up to $2 million are available with low, fixed rates, such as 4% for applicants who are unable to secure a loan or other forms of credit with traditional lenders.
Key Benefits of SBA Loans
Small businesses like SBA loans as an alternative when they’re not approved for traditional loans. These loans may also complement funding from other business loans.
SBA loans may help make the loan debt more affordable through:
- Lower down payments: As little as 10% for many loan programs.
- Longer repayment terms: Spreads costs over time and may help maintain cash flow.
- Competitive interest rates: The SBA may cap rates, sometimes resulting in lower interest rates compared to conventional business loans.
- More flexible eligibility guidelines: Loans guaranteed by the federal government encourage lenders to work with businesses that might not meet traditional small business loan requirements.
- Large loan amounts: Up to $5.5 million available with some programs.
- Use versatility: Depending on the loan, approved uses may cover working capital, expansion, real estate, equipment, or recovery after disasters.
SBA Loan Eligibility Requirements
The SBA sets broad rules, but each lender and loan program may have its own specific requirements. Generally, you need to:[5]
- Be a for-profit, U.S.-based business
- Meet the SBA’s size standards (varies by industry)
- Have a legitimate, sound business purpose for the funds
- Show a demonstrated ability to repay the loan
What your business does, where it operates, and who owns it also play a role in eligibility. While your credit history is also a factor, you may still be able to qualify for startup funding with bad credit.
You can ask lenders for your desired loan’s full list of eligibility requirements.
The SBA Loan Application Process (Step-by-Step)
Applying for an SBA loan may feel overwhelming, but breaking it into clear steps makes the process more manageable. Below is an overview of what the process is like.
Step 1: Determine Your Loan Needs
Decide how much you need and what it will fund (real estate, equipment, working capital, etc.).
Step 2: Find an SBA-Preferred Lender
SBA-preferred lenders generally process SBA applications faster because they’re authorized to approve SBA loans.
Step 3: Gather Required Documents
SBA loans require extensive paperwork, including your business plan and financial projections. Your lender may help you gather the documents you need for your loan, taking into account your unique situation.
Step 4: Complete and Submit Your Application
Once you submit your application, SBA-preferred lenders approve the loan. Those that aren’t SBA-preferred lenders must send the application to the SBA for approval.
Step 5: Closing and Disbursement of Funds
When the loan receives approval, you finalize and sign the contract before the funds are disbursed.
How long it takes for you to receive your funds varies. 7(a) and 504 loans may take one to three months, while microloans and disaster loans may take weeks.
Is an SBA Loan Right for Your Business?
SBA loans may be a great option for businesses needing affordable, flexible financing. Their longer terms, capped rates, and greater accessibility may make them ideal for newer small businesses with limited credit histories or established businesses unable to qualify for the stricter guidelines of traditional business loans. SBA loans may also be a great fit for small businesses needing a second loan to fund expansion operations or other business endeavors.
If you’d like to find out more about SBA loans or traditional business loans, talk with a PNC banker who can walk you through your options and clarify your questions.
