SBA Loans: What They Work & How To Get One

SBA loans are loans that are partially guaranteed by the U.S. Small Business Administration and are designed to assist small businesses with better accessibility to funding. Getting an SBA loan requires meeting eligibility criteria, crafting a comprehensive business plan, and navigating the application process with an SBA-approved lender. 

In this guide, we’ll explore what SBA loans are, how they work, and how they can help small businesses finance their growth and operations.

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What is an SBA Loan

An SBA loan is a low-interest small business loan partially guaranteed by the U.S. Small Business Administration (SBA). These loans are offered by participating lenders – typically banks and community development organizations. The SBA doesn’t lend money directly to small business owners. Instead, it sets guidelines for loans made by its partnering lenders. The SBA guarantees part of the loan, minimizing the risk for lenders and encouraging them to offer funds to businesses they might not otherwise lend to.

SBA loans work by providing a safety net to lenders. If the business defaults on the loan, the SBA will cover a portion of the owed amount. This assurance empowers lenders to offer loans with lower interest rates and more flexible terms, making capital more accessible to small businesses. However, these loans do come with rigorous application requirements. Businesses must meet specific eligibility criteria, provide financial statements and a detailed business plan, and demonstrate an ability to repay the loan.

Types of SBA Loans

There are several types of SBA loans, each designed to serve a specific business need. Understanding the different loan types can help you decide which one is most suited to your business. Below are a few different types of SBA loans, their intended purposes, eligibility criteria, and benefits.

SBA 7(a) Loans

SBA 7(a) loans are the most common and flexible type of SBA loan. They can be used for a variety of purposes, including working capital, refinancing debt, or purchasing a business, real estate, or equipment. The primary benefit of this loan type is its flexibility, making it an excellent choice for startups and small businesses that need a safety net for a range of business expenses.

SBA 7(a) loans offer up to $5 million in funds, with the SBA guaranteeing 85% of loans up to $150,000 and 75% of loans larger than that. Interest rates are typically based on the prime rate plus a markup, which varies depending on loan terms and borrower qualifications. Repayment terms generally range between five years and 25 years.

SBA 504 Loans

SBA 504 loans can help small businesses purchase major fixed assets such as real estate or equipment. These loans are provided by Certified Development Companies (CDCs), nonprofit corporations promoting economic development in their local areas. SBA 504 loans are typically structured with the SBA providing 40% of the total project costs, a participating lender covering up to 50%, and the borrower contributing 10% as a down payment.

SBA 504 loans can provide up to $5.5 million in funding and are commonly used for purchasing land, improving existing buildings, or buying long-term machinery. Interest rates are generally below market rates. As with SBA 7(a) loans, repayment terms for SBA 504 loans can range from 10 to 20 years.

SBA Microloans

SBA Microloans are small, short-term loans for small businesses and certain types of not-for-profits. The SBA lends funds to intermediary nonprofit lenders that, in turn, lend amounts up to $50,000 to eligible borrowers. These loans are ideal for small businesses needing small amounts of funding. They are particularly useful for startups, businesses in their early stages, or businesses that need working capital, inventory or supplies, furniture, or fixtures.

Microloan funds can’t be used to purchase real estate or refinance existing debt. These loans have terms of up to six years, and the interest rate typically falls between 8% and 13%. 

How To Get an SBA Loan

Securing an SBA loan is a multi-step process that requires careful planning and preparation. Here’s a step-by-step guide to help you navigate the process:

1. Determine Your Eligibility

The SBA has established specific eligibility requirements for its loan programs. These requirements include being a for-profit business that operates in the United States, needing the loan proceeds, and using funds for a sound business purpose. Additionally, you must demonstrate that you have invested your own time or money into the business and that you’ve utilized other financial resources before seeking a loan. For this reason, the SBA is sometimes called a “lender of last resort.”

2. Review Your Credit History

Before applying, review both your personal and business credit histories. Lenders will consider both when evaluating your loan application, as any person who owns 20% or more of your business must sign a personal guarantee for the loan. If there are any errors on your credit report, resolve them before applying to ensure that lenders have the most accurate reflection of your financial responsibility.

3. Prepare a Detailed Business Plan

SBA loans typically require a detailed description of how you intend to use the loan and generate revenue. Your business plan should include a detailed description of your business, market analysis, organizational structure, product line or services, marketing and sales strategies, and financial projections.

4. Assemble Your Documentation

Necessary documentation typically includes personal and business information like financial statements, tax returns, bank statements, and legal documents such as business licenses and incorporation paperwork. Accurate and complete documentation of your business’s financial history and current standing is critical for lenders to assess your loan application.

5. Apply Through a Lender

The SBA doesn’t lend money directly. So, once you decide on a loan type and gather all the necessary documentation, you need to find an SBA-approved lender. This can be a traditional bank, credit union, or Community Development Financial Institution (CDFI).

6. Complete Your Loan Application

You’ll need to work with your chosen lender to complete a full loan application and submit all required documentation. Be prepared to provide additional information about your business and how you plan to use the loan funds.

7. Await Loan Approval

Once you submit your application, you’ll need to wait for approval. Your lender will review your application and make a decision. This process can take a few weeks to several months, depending on the loan’s complexity, the lender’s efficiency, and the additional documentation needed to finish underwriting your loan.

The loan application process can vary slightly based on the lender you work with, the type of SBA loan you’re applying for, and your circumstances. If you have questions about the process, contact a loan officer or loan broker to get more specifics. Or, you can check out BusinessLoans.com to get matched with a loan offer for your business.