SBA loans are small business loans partially guaranteed by the U.S. Small Business Administration and made through partner lenders. They come with comparatively low interest rates, but eligibility requirements are strict.
An SBA loan is a financing option for business owners who need to fund various business expenses, from general operating costs to fixed assets like commercial real estate and equipment. The U.S. Small Business Administration partners with financial institutions across the country to guarantee loans made to eligible small businesses. With an SBA guaranty, partner lenders take on less risk when lending to borrowers who wouldn’t otherwise qualify for funding.
The SBA typically works with banks, though you may find SBA loans from online business lenders and nonprofit lenders. The SBA limits the amount of interest these partner lenders may charge. The SBA may guarantee up to 75% to 90% of loans, depending on details like loan amount and type.
There are three main SBA loan programs that may appeal to small business owners: the popular 7(a) program for general business funding, the CDC/504 program for major fixed assets and the microloan program for smaller expenses.
|Amount||Terms||Interest Rates||Fees||Best For|
|7(a) loans||Up to $5 million||Up to 25 years||Variable: Prime rate plus 2.25% to 4.75%
Fixed: Prime rate plus 5% to 8%
|0% to 3.75%||General business needs|
|CDC/504 loans||Up to $5 million or $5.5 million||10 to 25 years||Based on the current market rate||Up to 4.368%||Usually commercial real estate or heavy equipment purchases|
|Microloans||Up to $50,000||Up to 6 years||Typically between 7% and 9%||No fees||General business expenses|
The 7(a) loan program is the SBA’s primary financing program for small business owners. Loan amounts may be as high as $5 million. The SBA would guarantee up to 85% of loans up to $150,000 and up to 75% of loans greater than $150,000. Collateral may be required for loans exceeding $350,000. The length of a 7(a) loan term would depend on the use of funds:
Interest rates may either be fixed or variable and are based on the federal Prime rate. The Prime rate is 7.50% as of Dec. 15, 2022. The maximum variable rate for 7(a) loans is as follows:
Loans less than seven years:
Loans seven years or longer:
Fixed rates for 7(a) loans would be dependent on loan amount and based on the Prime rate plus 5% to 8%. Borrowers must also pay a guaranty fee, which would be a percentage of the loan amount. Fees range from 0% for veterans to up to 3.75% for other borrowers.
The SBA 504 loan program combines funds from the SBA and Certified Development Companies (CDCs). CDC/504 loans can be used to purchase fixed assets such as commercial land, buildings and fixed assets like machinery, and to finance construction projects related to commercial property.
Typically, the SBA provides 40% of the loan amount and the CDC provides 50%, leaving you to contribute the final 10%. In some situations, you may have to contribute 20%.
The maximum loan size is $5 million, though certain energy-related projects may qualify for $5.5 million. Repayment terms may be 10 or 20 years. Interest rates for CDC/504 loans are based on the market rate and could range from 2.85% to 4.00%. Fees charged may also be up to 4.368% of the loan amount.
Microloans are issued to small businesses and nonprofit childcare facilities through nonprofit lenders and community based organizations. These loans are available up to $50,000 with maximum repayment terms of six years.
Rates range from 7% to 9%. The SBA microloan program primarily serves new or early stage businesses in underserved markets.
Eligible borrowers include business owners with little to no credit history, low-income business owners, women and entrepreneurs of color.
Disaster loans differ from other SBA loans because the SBA provides disaster funds instead of guaranteeing loans made through intermediary lenders.
The SBA offers low-interest disaster loans to businesses, homeowners and renters in areas where a federally declared disaster occurs. Most disaster loans are available up to $2 million.
Business owners can use disaster loans for working capital expenses related to the coronavirus crisis or any other disaster-related business losses that insurance does not cover.
Only loans made through the SBA’s Paycheck Protection Program (PPP) are eligible for forgiveness. PPP loans were available for businesses struggling to keep workers employed because of circumstances related to the COVID-19 pandemic. The program closed Aug. 8 and PPP loans are no longer offered.
Forgiveness is based on borrowers maintaining payroll and salary levels with their loan funds. The SBA provides several resources to help business owners calculate how much of their PPP loan may be forgiven.
The SBA’s Lender Match tool connects prospective borrowers with SBA-approved lenders in their area. The tool could provide a starting point when searching for lenders, though you’re not guaranteed to get matched. But if you do receive interest from various banks, be sure to ask about their specific rates, terms and fees, as banks can set their own costs within the SBA’s limits.
Before speaking with lenders, you should have an idea of how much you’d like to borrow and how you would use the money. It would also be best to determine ahead of time if you have any assets you could use to collateralize your loan, if needed.
Your choice of SBA loan would depend on what you need to do with the funds. If you plan to purchase or renovate commercial real estate, a CDC/504 loan may be best for you. If you need to cover general operating expenses, a 7(a) loan could be the right choice. And there are several types of 7(a) loans to fit more specific needs.
For instance, a 7(a) Small Loan may be good for small purchases, as the maximum amount is $350,000. And an SBA Express Loan has an application turnaround time of 36 hours, which may be ideal for business owners in a hurry. The maximum amount for Express loans is also $350,000. Be sure to talk with your lender about the various SBA loans available to you.
The SBA application requires a number of forms and documents. The exact requirements may vary by lender and loan type.
If you are seeking an SBA loan to purchase an existing business, you’ll also need to submit financial information for that business, as well as the terms of the sale.
Once your application is complete, your lender would send it off to the SBA. You may need approval from both your lender and the SBA before the bank can complete the underwriting process.
The overall process could take about two months, though you may receive funds sooner or later than that, depending on your circumstances.
Documents needed to apply:
Make sure your business is eligible: Eligible small businesses must meet the SBA’s size standards, which are based on annual receipts or number of employees, depending on industry. The SBA also has four basic requirements that borrowers need to meet:
You also would likely need a personal credit score of at least 680 to have a higher chance of qualifying for an SBA loan.
Remember, you would be personally responsible for the debt: If your business defaults on an SBA loan, you would personally be on the hook to repay it if you own at least 20% of the business. And if you pledged any collateral, your lender could seize and liquidate those assets and apply the value to your remaining balance.
Seek assistance when you need it: If you need help navigating the application process and requirements, you can turn to a Small Business Development Center (SBDC) in your area. The national network of SBDCs operate in partnership with the SBA to provide no- or low-cost assistance to small business owners.