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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 finance a business. Here's what to know about SBA loans and how to maximize your chances of approval.
What is an SBA loan?
An SBA loan is a type of government small-business loan that's issued by private lenders but backed by the federal government. The SBA has several loan programs, including 7(a) loans, 504 loans and Microloans (more on these below).
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.
SBA loan changes: fall 2021
Several changes to the COVID-19 Economic Injury Disaster Loan took effect in fall 2021:
Loan limits have increased. Borrowers can apply for up to $2 million in COVID EIDL loan funds, up from the previous cap of $500,000.
Repayment terms have been extended. COVID EIDL borrowers will begin repayments two years after the origination of the loan.
Eligible use of funds has been expanded. COVID EIDL borrowers can now spend loan funds to prepay commercial debt or make payments on federal business debt — in addition to covering operating expenses, buying equipment and paying other debt.
Several temporary changes to other SBA loan programs expired as of October 2021:
The SBA Express loan limit is now $500,000.
The maximum SBA 7(a) loan guarantee has reverted to 85% for loans up to $150,000, 75% for loans greater than $150,000 and 50% for SBA Express loans.
Paycheck Protection Program loans are no longer available. Here’s information about PPP loan forgiveness.
SBA loan programs
There are multiple types of SBA loans — each with its own terms and conditions. The best SBA loan for you will depend on what you plan to use the funding for.
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.
SBA Community Advantage loans
Up to $250,000.
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.
Next steps to getting an SBA loan:
Benefits of SBA loans
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 APR 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%.
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.
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.
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. Gather your application documents
If you think you qualify, the best place to start is the SBA website, which includes a loan application checklist. Use this to gather your documents, including your tax returns and business records.
Here are some of the documents you will need before applying:
SBA’s borrower information form.
Statement of personal history.
Personal financial statement.
Personal income tax returns.
Business tax returns.
Lease agreement if applicable.
One-year cash flow projection.
3. 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 Sept. 30, 2021. To qualify, you must be in good financial standing and able to show personal and business tax returns for the past three years.
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 financing program called SBA Express, which aims to respond to loan applications within 36 hours. The maximum amount for this type of financing is $500,000 as of Oct. 1, 2021, and the maximum amount the SBA could guarantee is 50%.
Once your application is approved, your lender is responsible for closing the loan and disbursing the loan proceeds. You repay the lender directly, usually on a monthly basis.