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SBA Loan Overview:
Types, Pros and Cons, How to Apply
SBA loans are small-business loans offered by banks and online lenders and partly guaranteed by the government.
Check SBA loan rates for 2023SBA loans offer some of the lowest rates on the market, but rates can change based on the Federal Reserve's actions.
Many or all of the products featured here are from our partners who compensate us. This influences which products we write about and where and how the product appears on a page. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.
⏰ Estimated read time: 11 minutes
SBA loans are business loans partially guaranteed by the U.S. Small Business Administration and issued by participating lenders, usually banks. These loans have tight lending standards, but if you can qualify for an SBA loan, their flexible terms and low interest rates can make them one of the best small-business loans.
Here’s an overview of how SBA loans work, the types of SBA loans that are available, what each loan type can be used for and how to get SBA financing for your small business.
As of Aug. 1, 2023, the new SBA standard operating procedures, or SOP, have gone into effect, creating changes to the 7(a) and 504 loan programs. Here are some important updates:
For 7(a) loans
Loan sizes. Standard 7(a) loans have been redefined as loans greater than $500,000, whereas 7(a) small loans are those of $500,000 and less.
Down payments. Also called equity injections, these requirements are now subject to the lender’s discretion, except in the case of a complete change of ownership, which requires a 10% down payment.
Use cases. SBA loans can now be used for partial changes of ownership and religious activities.
Interest rates. For variable rate loans, the maximum allowable rates now range from the prime rate + 3% to the prime rate + 6.5%. Interest rates vary based on the size of your loan; maturity no longer plays a factor. These rules apply to all types of 7(a) loans, with the exception of Export Working Capital Loans.
Fees. Lenders can charge a flat fee of up to $2,500 on any SBA 7(a) loan.
Collateral. SBA lenders are not required to take collateral for loans of $50,000 or less (previously $25,000 or less). For loans of more than $50,000, lenders must use the collateral policies that they have in place for similarly-sized non-SBA commercial loans.
For 504 loans
Job creation requirements. For every $90,000 that the CDC lends, you must create or retain at least one job. Small manufacturers must create/retain one job for every $140,000. These numbers increased from $65,000 and $100,000, respectively.
For both loan types
Personal resources. Previously, you had to show that funding was not available from your personal resources as part of the “credit not available elsewhere” qualification requirement. Now, SBA lenders are not required to consider the personal liquidity of borrowers as part of their review.
What is an SBA loan?
An SBA loan is a 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.
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
%, while major online small-business lenders that don't offer SBA loans have loans with APRs as high as 99%.
You can use NerdWallet’s SBA loan calculator to estimate your monthly payments and find out how much you’ll spend on interest based on different rates.
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.
There are no upfront guarantee fees or annual service fees for SBA 7(a) loans of $500,000 or less through September 2023
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
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.
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.
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 gambling or political lobbying, you shouldn’t apply.
How much do you need?
We’ll start with a brief questionnaire to better understand the unique needs of your business.
Once we uncover your personalized matches, our team will consult you on the process moving forward.
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.
For example, Live Oak Bank based in Wilmington, North Carolina, is currently the most active SBA 7(a) lender in the United States by lending volume in the 2023 fiscal year
If you’re short on time, you might opt for the SBA Express loan, 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 guarantees is 50%.
An SBA loan is a business loan issued by a financial institution, usually a bank, and partially guaranteed by the U.S. government. There are many types of SBA loans that can be used for different purposes. In general, though, these loans’ low interest rates and long terms make them great choices for business owners who can qualify.
You’ll typically need several years in business and a good credit history to qualify for an SBA loan. Exact requirements vary by lender. If your business is newer or smaller, SBA microloans may offer an SBA loan option that’s easier to qualify for.
In general, SBA loans are not as difficult to get as business bank loans. Because they’re backed by the U.S. government, they’re less risky for banks than issuing their own loans. But SBA loans are usually harder to get than online business loans, which may require less time in business and lend to borrowers with lower credit scores.
Yes, you have to pay back an SBA loan. But the loan terms — the amount of time you have to pay your lender back — tend to be longer than other types of business loans.
Funding maximums vary based on the type of SBA loan. SBA 7(a) loans are available in amounts up to $5 million and CDC/504 loans are available up to $5.5 million. SBA Express loans are available up to $500,000 and microloans are available up to $50,000.