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SBA Loan Overview: Types, Pros and Cons, How to Apply

An SBA loan is a small-business loan offered by banks and online lenders, and partly guaranteed by the government.
Written by Jackie Veling, Ryan Lane
Edited by Ryan Lane
Last updated on June 27, 2022
What Is an SBA Loan?

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SBA loans are small-business loans partially guaranteed by the U.S. Small Business Administration and issued by participating lenders, usually banks.
SBA loans have tight lending standards, but their flexible terms and low interest rates can make them one of the best ways to fund a business. Here’s an overview of how SBA loans work, the types of SBA loans that are available and how to get SBA financing for your small business.

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What is an SBA loan?

An SBA loan is a government small-business loan that can help cover startup costs, working capital needs, expansions, real estate purchases and more. This type of financing is issued by a private lender but backed by the federal government.

How do SBA loans work?

You apply for an SBA loan through a lending institution like a bank or credit union. That lender then applies to the SBA for a loan guarantee, which means if you default on an SBA loan, the government pays the lender the guaranteed amount.
The SBA requires an unconditional personal guarantee from everyone with at least 20% ownership in a company. This guarantee puts you and your personal assets on the hook for payments if your business can't make them.
Both the government guarantee and the personal guarantee reduce the risk for lenders — making them more willing to work with small businesses.
Once you’re approved for an SBA loan, your lender is responsible for closing the loan and disbursing the loan proceeds. You repay the lender directly, usually on a monthly basis.

Types of SBA loans

There are several SBA loan programs available — each with its own terms and conditions. The best SBA loan for you will depend on what you plan to use the funding for.
Here’s a summary of the most common types of SBA loans.
Program
Loan size
Purpose
Up to $5 million.
Working capital, expansion and equipment purchases.
Up to $500,000.
Fast funding for working capital, expansion and real estate and equipment purchases.
Up to $5.5 million.
Purchase long-term, fixed assets like land, machinery and facilities.
Up to $50,000.
Working capital, inventory, supplies, equipment and machinery.
Up to $2 million.
Repair physical damage due to a declared disaster and cover operating expenses.
Up to $350,000.
Normal business purposes; cannot be used for revolving credit.
SBA Export Working Capital loans
Up to $5 million.
Working capital to support export sales.
SBA Export Express loans
Up to $500,000.
Expedited funding to enhance a business’s export development.
SBA International Trade loans
Up to $5 million.
Long-term funding to expand export sales or modernize to contend with foreign competitors.

Pros of SBA loans

Competitive rates

Per federal rules, participating lenders base SBA loan interest rates on the prime rate plus a markup rate known as the spread.
Note that the annual percentage rate on a loan is different from the interest rate. The APR is a percentage that includes all loan fees in addition to the interest rate.
APRs can vary substantially between SBA lenders and non-SBA lenders. For example, an online lender that specializes in SBA loans may cap its APR around 10%, while major online small-business lenders that don't offer SBA loans have loans with APRs as high as 99%.

Low fees

Fees for SBA loans usually consist of an upfront guarantee fee, based on the loan amount and the maturity of the loan, and a yearly service fee — based on the guaranteed portion of the outstanding balance. The SBA reassesses its fee structure each year.
Fees for SBA 7(a) loans of $350,000 or less are currently being waived.

Longer terms

Another perk of SBA loans is that you get more time to repay them, which means you’ll have more money available for other business needs. The loan term will depend on how you plan to use the money. The current maximum maturities are:
  • Working capital or inventory loan: 10 years.
  • Equipment: 10 years.
  • Real estate: 25 years.

Large loan amounts

Although the amount of funding you receive will vary based on the type of SBA loan and your business’s qualifications, SBA loans generally offer large loan maximums. The SBA 7(a) loan program offers a maximum loan amount of $5 million and the 504/CDC program offers a maximum loan amount of $5.5 million.
These are much larger loan amounts than are typically offered by online lenders or even banks — who generally max out at $500,000 and $1 million, respectively.

Cons of SBA loans

Hard to qualify

Although the government guarantee reduces the risk that lenders face when issuing loans to small businesses, you’ll still need to meet strict eligibility criteria to get an SBA loan. Typically, you’ll need several years in business, strong business finances and a good credit history to qualify.

Slow to fund

Depending on your lender and the type of SBA loan you apply for, it can take anywhere from one to three months to access funds. Plus, the SBA loan application process is detailed and requires extensive documentation.
If you need capital quickly, you’ll want to consider a faster small-business loan alternative.

Personal guarantee required

SBA loans typically require an unlimited personal guarantee from anyone who owns 20% or more of the business. Lenders may ask that other business owners provide a limited or unlimited personal guarantee as well.
You may also need to put up physical collateral or offer a down payment — in addition to signing a personal guarantee — to secure your SBA loan.

What is required to qualify for an SBA loan?

SBA loan requirements vary based on the lender and the particular loan program. Regardless of your lender or SBA loan program, however, you’ll have to meet a set of standard criteria from the SBA, such as:
  • You must be a for-profit business operating in the U.S.
  • The business owner must have invested equity, such as their own time and money, into the business.
  • You must be able to demonstrate a need for financing and show the business purpose for which you’ll use the funds.
  • You must be a small business as defined by the SBA.
» MORE: Learn about SBA loan requirements and see if you’ll qualify.

How to apply for an SBA loan

1. Make sure your business is eligible

To qualify for an SBA loan, lenders typically like to see at least two years in business, strong annual revenue and a good credit score, which starts around 690.
If your business is struggling, an SBA loan is probably out of the question. And if it falls into any of the ineligible categories, such as charitable and religious institutions, you shouldn’t apply.

2. Choose a lender

The SBA offers a convenient Lender Match tool to match potential borrowers with lenders within two days.
If you’re applying through a traditional bank, it helps to work with one that has a track record of processing SBA loans. Ask your potential lender these questions:
  • How many SBA loans do you make?
  • How often do you fund SBA loans?
  • How experienced is your staff in the process?
  • What is the dollar range of the loans you make?
In general, a bank with multiple years of SBA experience will be able to better guide you, including letting you know your chances of being approved. Banks will follow SBA guidelines but use their own underwriting criteria to evaluate loan applications.
As an example, Live Oak Bank based in Wilmington, North Carolina, is the most active SBA 7(a) lender in the United States by lending volume as of March 31, 2022. To qualify, you must be in good financial standing and able to show personal and business tax returns for the past three years.

3. Gather your application documents

SBA loan applications can vary based on loan type, but your lender should be able to help you prepare your paperwork.
Here are some of the documents you will need:
  • SBA’s borrower information form.
  • Statement of personal history.
  • Personal financial statement.
  • Personal income tax returns.
  • Business tax returns.
  • Business license.
  • Lease agreement if applicable.
  • One-year cash flow projection.

4. Wait

The time it takes to get approved for an SBA loan will depend on the lender you choose. With a bank, the entire process — from approval to funding — can take from 30 days to a couple of months.
Short on time? The SBA has another type of loan called SBA Express, which aims to respond to loan applications within 36 hours. The maximum amount for this type of financing is $500,000 and the maximum amount the SBA could guarantee is 50%.

Learn more about getting an SBA loan: