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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 via 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 as business collateral 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.
Temporary SBA loan changes
The latest coronavirus relief bill has temporarily changed some SBA loan features to promote lending and assist borrowers.
The following changes are on top of additional relief programs for small businesses, such as the Paycheck Protection Program and Economic Injury Disaster Loans, and went into effect Feb. 1:
Loan limits increased. As of Jan. 1, 2021, the borrowing limit for SBA Express loans was increased from $350,000 to $1 million. That maximum will permanently drop to $500,000 on Oct. 1, 2021.
Fees waived. For 7(a) and 504 loans, the SBA will eliminate fees for both lenders and borrowers.
Loan guarantees increased. Until Oct. 1, 2021, the SBA will guarantee 90% of loans from its 7(a) program and 75% for SBA Express loans of more than $350,000. The maximum SBA guarantee is usually 85% for loans up to $150,000, 75% for loans greater than $150,000 and 50% for Express loans.
Payments covered. The government will make monthly payments of up to $9,000 on eligible SBA loans. The number of payments you can receive will depend on when your loan was approved, issued or disbursed.
Types of SBA loans
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.
SBA 7(a) loans
Up to $5 million
Working capital, expansion and equipment purchases
SBA Express loans
Up to $1 million (drops to $500,000 on Oct. 1, 2021)
Fast funding for working capital, expansion and real estate and equipment purchases
SBA 504 loans
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
SBA disaster loans
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
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 are SBA loans 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
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. Loan amounts range from $75,000 to $5 million. 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 temporarily set at $1,000,000, and the maximum amount the SBA could guarantee is 75%.
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.