Loans backed by the U.S. Small Business Administration (SBA) have long been the gold standard of small business funding. These loans offer business owners flexible financing options with competitive interest rates.
What is an SBA loan, how can you qualify for one, and how can it help your business? Let’s learn more.
What Is an SBA Loan?
An SBA loan is a small business loan that’s at least partially backed by the U.S Small Business Administration. The loans are issued by participating lenders and banks. A business owner can use an SBA loan to cover a range of business costs:
- Commercial real estate
- Refinancing business debts
While SBA loans have strict eligibility requirements, they offer distinct advantages over other types of business financing.
How Do SBA Loans Work?
Since SBA loans are administered through traditional lenders, your bank or credit union will likely be your first stop. After you meet with the lender, the lender will apply to the SBA for a loan guarantee. The guarantee means that the SBA will pay the lender if you default on the loan.
The SBA also requires an unconditional personal guarantee from the borrower, as well as anyone with at least 20% ownership of the company. This can be risky because it means that you’re personally responsible for the loan in its entirety. Failure to pay the loan in full can put your personal assets in jeopardy.
Your lender will close the loan and distribute the funds accordingly. You’ll repay the lender directly over the lifespan of your loan.
SBA Prepayment Penalty
If your SBA loan has a maturity date of 15 years or longer, you can be assessed a prepayment penalty if you pay 25% or more of your loan within three years of receiving it. The prepayment penalty varies by year:
- During the first year: 5% of your total loan amount
- During the second year: 3% of your total loan amount
- During the third year: 1% of your total loan amount
Additionally, since you’ll make payments through a bank or credit union, your lender may assess additional prepayment penalties.
SBA Loan Types
The SBA offers multiple SBA loan types, each offering specific advantages for different small business needs.
- SBA 7(a) Loans – SBA 7(a) is the most common form of SBA loan. These loans are used for working capital, expansion, and equipment and property purchases. SBA 7(a) loans can also be among the largest, with amounts as high as $5 million and loan terms as long as 25 years.
- SBA Express Loans – As the name suggests, SBA Express loans are typically smaller than SBA 7(a) loans, with amounts that go up to $350,000. These can be great options for businesses with strong credit histories that need money fast.
- SBA 504 Loans – SBA 504 loans are used for fixed assets, including real estate, new construction, or equipment. Loan amounts are flexible and range from $125,000 to $20 million.
- SBA Microloans – SBA microloans are available for sums of up to $50,000. They are ideal for businesses with strong credit that need quick access to cash for operational costs such as supplies and inventory.
- SBA Disaster Loans – If your business was affected by a declared disaster, you might qualify for an SBA disaster loan. Loan amounts of up to $2 million can cover repairs and replacement costs to help you recover.
- SBA Community Advantage Loans – SBA Community Advantage loans are designed for underserved business owners. Loan amounts can go as high as $350,000. They can be used for working capital as well as fixed assets and equipment.
- SBA Export Working Capital Loans – SBA Export Working Capital loans provide support for businesses that make international sales. Loan amounts go up to $5 million, and they can be used for inventory, accounts receivables, and supplies necessary for international commerce.
- SBA Export Express Loans – Export Express loans from the SBA are also designed for companies selling outside the US, though loan amounts are smaller ($500,000), with shorter repayment terms of 12 months or less.
- SBA International Trade Loans – International Trade loans from the SBA are offered for amounts up to $5 million and can be used to fund international sales or purchases.
- SBA Line of Credit – An SBA line of credit (LOC) isn’t a traditional lump-sum loan. It works very much like a consumer credit card. Business owners can borrow up to a certain credit limit, then only pay interest on the amount they borrow. A line of credit provides a flexible, revolving source of funding for ongoing business needs.
Pros and Cons of SBA Loans
Before you apply for an SBA loan, it’s important to consider the pros and cons of this type of financing.
SBA loans are highly sought-after — and for good reason. These loans offer benefits that include:
- Competitive interest rates
- Low fees
- Flexible loan terms
- High loan amounts
If you’re a veteran, the SBA also offers incentives that can help you even if you have a lower credit score.
Despite these clear advantages, there are a few drawbacks to SBA loans:
- Qualification may be difficult.
- Lengthy funding process.
- Require a personal guarantee.
Some new business owners have trouble obtaining an SBA startup loan since they lack an extensive business credit history.
Current SBA Loan Rates and Terms
What is the interest rate on an SBA loan? SBA loan interest rates vary depending on the type, amount, and length of the loan.
SBA 7(a) Loan Interest Rates (2023)
The most common type of SBA loan is the SBA 7(a) loan, which may serve as an example of common SBA loan terms. If you pay the loan off within seven years, you can generally expect interest rates similar to the following, depending on the amount of your loan:
- $25,000 or less: 12%
- $25,000 to $50,000: 11%
- Over $50,000: 10%
⚠️ If your loan period exceeds seven years, your interest rates will rise by an additional 0.5% (e.g., 12.5% for loans of $25,000 or less). These are the most recent rates, and they are subject to change.
SBA Microloan Interest Rates
SBA microloans can be helpful for business owners who need a small influx of working capital. These loans are easier to get, though they offer only $50,000 or less. Microloan interest rates are flexible, ranging between 6% and 9%.
How to Qualify for an SBA Loan
While SBA loans are among the most sought-after forms of small business financing, they can also be the most challenging to obtain. The following is the basic process you’ll go through to apply for an SBA loan.
1. Use the SBA Eligibility Checklist
In order to qualify for an SBA loan, you’ll need to meet the standards of both the Small Business Administration and your lender. You must have invested your own time and money in the business, and the business must:
- Be a for-profit organization (nonprofit or religious organizations do not qualify)
- Meet the SBA’s definition of a small business
- Operate in the United States
- Have at least two years of business history
- Have strong business credit (usually around 690 or higher)
Some lenders can be flexible when it comes to your business history and credit score, giving startups a better chance at funding. Otherwise, if your business operates outside these criteria — or if you’re struggling — you’re unlikely to obtain financing through the SBA.
Also, note that certain organizations do not qualify for SBA loans. These include:
- Gambling businesses
- Lending firms
- Cannabis businesses
- Government-owned businesses
- Real estate investment firms
- Dealers of rare coins and collectibles
Businesses in other industries are eligible, provided they meet the SBA loan qualifications.
2. Find an SBA Lender
After confirming that you meet the SBA’s qualifications, your next step will be to find an SBA lender. If you’re not sure where to look, visit the SBA’s convenient online Lender Match tool to find approved SBA lenders.
Each lender may have additional SBA loan requirements for existing businesses, so it’s helpful to ask questions about the lender’s expectations. Additionally, make sure to ask about the lenders:
- SBA loan approval rate
- SBA repayment terms
- SBA loan max amount
- Track record and experience in handling SBA loans
The last question may be particularly important, as an experienced SBA lender can offer guidance to help you learn how to get SBA loan approval.
Remember that interest rates may vary since SBA loans are administered through private lenders. It helps to compare rates and SBA repayment terms from at least three lenders before making a final decision.
3. Gather Your Application Documents
Once you settle on a lender, it’s time to complete the application process. If you want to streamline the SBA lending process, you’ll need to stay organized. Most lenders expect to see the following documents:
- Personal information (e.g., contact details, Social Security number)
- Personal financial statements
- Personal income tax returns, usually from the last two years
- Business licenses
- Business tax returns
- Lease agreements (if applicable)
- Business plan, including a one-year cash flow projection
If you have business partners, your lender will want to obtain their information and learn more about their roles within your company.
4. Be Patient
The SBA loan process can be lengthy, even if you’ve remained organized. How long does it take to obtain an SBA loan? It depends on the loan type, but SBA 7(a) loans can take anywhere from 30 days to several months.
For this reason, some business owners prefer SBA Express loans. This program aims to provide approval within 36 hours. The loan amount is somewhat limited, but small businesses can still obtain as much as $500,000 in funding.
Alternatives to SBA Loans
Many businesses simply don’t meet the strict eligibility requirements of SBA loans. If that applies to your business, there are several alternative loan programs to consider. Each of these options offers distinct advantages for your small business:
- Traditional business loans
- Business lines of credit
- Equipment financing
- Merchant cash advances
- Business credit cards
For some borrowers, traditional business loans may offer an advantage over SBA loans. Some lenders offer lump-sum loans without the need for a personal guarantee. This means that you may not be held personally liable if your business should fail.
SBA Loans: The Gold Standard for the Small Business Community
While SBA loans can be difficult to get, their competitive rates and terms make them an incredible asset for the small business community. The right loan can help you improve your business model and provide the working capital you need to sustain your operations.