Without a doubt, Small Business Administration 7(a) loans are one of the best ways to finance your small business. They’re guaranteed by the federal agency, which allows lenders to offer them with flexible terms and low interest rates. Getting one can help you grow your business without taking on possibly crippling debt.
SBA loans, as the 7(a) loans are also known, are the agency’s most popular type of financing. There’s one big downside, however: It can be tough to get a loan from the SBA.
Still, low annual percentage rates make the SBA program one of the smartest ways to fund your company. With some know-how and preparation, you may be able to secure some of the lowest business financing available. And if you don’t qualify for an SBA loan, there are faster, more accessible ways to borrow money, including online small-business loans.
Here’s what you need to know about SBA loans:
Summary of SBA loan types
|Loan type||What you need to know|
|7(a) loan program (SBA’s flagship loan program)||
|504 loan program||
|SBA disaster loans||
What is an SBA loan?
SBA loans are small-business loans guaranteed by the SBA and issued by participating lenders, mostly banks.
The SBA can guarantee up to 85% of loans of $150,000 or less and 75% of loans of more than $150,000. The agency says its average loan amount was about $375,000 in 2016. The program’s maximum loan amount is $5 million.
If you’re looking to open a new location, hire employees or refinance an existing loan, SBA loans are a great option. SBA loan rates and terms typically are more manageable for borrowers than other types of financing.
What interest rate can I get on an SBA loan?
In keeping with SBA rules, participating lenders set their interest rates based on the prime rate plus a markup rate known as the spread.
|SBA loan size||7(a) loan paid off in under 7 years *||7(a) loan paid off in over 7 years *|
|$25,000 or less||9.75%||10.25%|
|$25,001 to $50,000||8.75%||9.25%|
|More than $50,000||7.75%||8.25%|
|*Rates calculated with the current prime rate of 5.50%|
Note that the APR on a loan differs from the interest rate. The APR is a percentage that includes all loan fees in addition to the interest rate.
For example, SmartBiz, an online lender that specializes in SBA loans, offers APRs of 9.7% to 11.04% for regular 7(a) loans and 7.38% to 7.43% for its 7(a) commercial real estate loans. Live Oak Bank, established in 2007, offers SBA loans with APRs of 5.50% to 8.25%.
In contrast, major online small-business lenders that don’t do SBA loans offer financing with APRs that can be as high as the triple digits.
What are the repayment terms for SBA loans?
In addition to the low APRs, another perk of SBA loans is that you get more time to repay them than you would get on non-SBA forms of lending from banks or online lenders.
The loan term depends on how you plan to use the money, according to the SBA:
- Working capital or daily operations: seven years
- New equipment purchases: 10 years
- Real estate purchases: up to 25 years
For SBA loans, a longer term means a lower interest rate and lower regular payments. That means you’ll have more money available for other business needs.
SBA loans also can provide a way out of a damaging financial situation. Terry Trumbull, owner and president of Trumbull Meats in Hamburg, Michigan, got an SBA loan through SmartBiz that allowed him to refinance much more burdensome funding. It was “killing me,” he says, and the SBA loan provided relief. But he did have to wait a couple of months and deal with many requirements, he adds.
What is an SBA loan guarantee?
Lenders provide the funds that make up an SBA loan, but the agency guarantees a portion of the amount, up to a $3.75 million guarantee. That means if you default on the loan, the SBA pays out the guaranteed amount. This guarantee lets lenders offer longer terms for repayment than they otherwise could, which means your monthly payments will be lower.
» Are you having trouble making payments on your SBA loan? Find out what to expect and some possible resolutions if you’re facing default on an SBA loan.
Do SBA loans require a personal guarantee?
The SBA requires a personal guarantee from every owner with at least a 20% ownership stake and from others who hold top management positions. A personal guarantee puts you and your personal assets on the hook for payments if your business can’t make them.
How do I get an SBA loan?
Here are some of the documents you’ll need before applying:
- SBA’s borrower information form
- Statement of personal history
- Personal financial statement
- Personal income tax returns (previous three years)
- Business tax returns (previous three years)
- Business certificate or license
- Business lease
- Loan application history
Then ask your SBA district office for the names of a few approved lenders. The agency also recently set up the SBA Lender Match tool to match potential borrowers with lenders. Banks follow SBA guidelines but use their own underwriting criteria to evaluate loan applications.
The SBA has another financing program called SBA Express, which aims to respond to loan applications within 36 hours. If your credit and small-business finances are in excellent shape, the wait may be shorter. The maximum amount for this type of financing is $350,000, and the maximum amount the SBA could guarantee is 50%.
How do I pick the right bank?
If you’re applying through a traditional bank, it helps to work with one that has a track record of processing SBA loans. Patty Staples, senior vice president and chief credit officer at Evangelical Christian Credit Union, suggests you 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 experience in processing SBA loans will be able to give you guidance, including letting you know your chances of being approved.
“If you choose the right bank,” she says, “the lending staff will facilitate that process and make it as easy as possible.”
SBA loans online: SmartBiz and Live Oak
Banks are the most popular place to get SBA loans, but online platforms have made it easier and faster to apply.
We compared two top options: SmartBiz, based in San Francisco, and Live Oak Bank, based in Wilmington, North Carolina.
You must have an established business and solid personal and business finances to qualify.
When is SmartBiz the right choice?
If you’re looking for an SBA loan of less than $350,000 for working capital or debt refinancing, SmartBiz is a good choice. It works with partner banks to underwrite SBA 7(a) loans of $30,000 to $350,000, with APRs of 9.7% to 11.04%. The lender also offers SBA 7(a) commercial real estate loans from $500,000 to $5 million with APRs ranging from 7.38% to 7.43%. Read more in our SmartBiz review.
SBA 7(a) Loan
- Loan amount: $30,000 to $350,000
- APR: 9.7% to 11.04%
- Loan term: 10 years
- Funding time: As quickly as seven days but typically several weeks
- Read our SmartBiz review
SBA 7(a) Commercial Real Estate Loan
- Loan amount: $500,000 to $5 million
- APR: 7.38% to 7.43%
- Loan term: 25 years
- Funding time: Within 45 days
- Read our SmartBiz review
When is Live Oak Bank the right choice?
Live Oak Bank is second only to Wells Fargo in dollar volume lent through the SBA program. Its APRs range from 5.50% to 8.25%. Loan amounts range from $75,000 to $5 million; the average in 2018 was $1.2 million.
To qualify, your business must be in one of the 17 industries the bank funds: accounting and tax firms, agriculture/poultry, automotive, educational services, family entertainment, funeral service, government contracting, healthcare and dental, hotels, insurance, investment advisory, pharmacy, renewable energy, self-storage, senior care, veterinary and wine/craft beverage. You can read more in our Live Oak Bank review.
- Loan amount: $75,000 to $5 million.
- APR: 5.50% to 8.25%.
- Loan term: 10 to 25 years.
- Approval time: Average of 45 days to process an SBA loan application.
- Read our Live Oak Bank review
How long does it take to get an SBA loan?
Applying for an SBA loan can take weeks, even months.
Your chances of being approved are greater if your personal and business finances are in good shape. “If a company has been in business for at least two years, is profitable and has cash flow to support loan payments, it’s likely a good candidate for an SBA loan,” SmartBiz CEO Evan Singer says.
When is applying for an SBA loan not worth my time?
If your business is struggling, an SBA loan is probably out of the question. And if it falls into any of the ineligible categories the SBA spells out on its site, don’t bother applying.
Applying for an SBA loan is a time-consuming process that might take your focus away from running your company. So for some small-business owners, especially those just starting out, it might not be worth the hassle.
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Find and compare small-business loans
If an SBA loan isn’t the right fit, look for small-business loans to meet your needs and goals with the help of NerdWallet’s comparison tool. We gauged lender trustworthiness and user experience, among other factors, and made recommendations based on categories including your revenue and how long you’ve been in business.