Quick Guide to SBA Loan Programs
Rates & Fees in this piece are accurate as of the date of publishing.
The U.S. Small Business Administration partners with lenders to provide small businesses with loans up to $5.5 million, making it easier for borrowers to secure the capital they need to succeed.
The agency doesn’t directly lend; instead it sets guidelines for specific types of small business loans that its partner lenders administer. The SBA reduces lenders’ risk, incentivizing them to loan to businesses that might have a hard time securing capital in other ways.
For-profit, small businesses that meet a certain size standard and do business inside the United States are eligible for SBA loans. Business owners must invest some of their own equity — such as money or time — into the business, and must have exhausted all options for getting financing from other lenders.
SBA loan funds generally can be used for the majority of business purposes, including long-term, fixed assets and operating capital. Some loan programs, however, come with restrictions on how you can use the funds. Borrowers should work closely with their lenders to ensure they are getting the most appropriate SBA loan product for their needs.
The three main SBA loan programs include the 7(a), CDC/504 and microloan. The 7(a) program is the most popular, providing loans up to $5 million for a wide range of business purposes. The 504 program partners with Certified Development Companies (CDCs) to help small businesses acquire fixed assets for expansion or modernization with loans of up to $5.5 million. The microloan program provides small loans of up to $50,000 to help businesses set up and expand.
|SBA loan programs: At a glance|
|SBA Loan Type||Loan Amount||Loan Term||Interest Rates||Fees||Best For|
|7(a)||Up to $5 million||Generally 7 to 25 years||Negotiated by lenders and borrowers, not to exceed the SBA maximum||Fee charged on guaranteed portion of loan only: $150,000 or less = 2% of guaranteed portion; $150,001-$700,000 = 3.0%; $700,001-$1,000,000 = 3.5% plus 3.75% on guaranteed portion over $1 million. Lender’s Annual Service Fee (SBA ongoing guarantee fee): set at time of approval (FY18 = 0.55% for all 7(a) loans)||A wide range of business purposes|
|CDC/504||No set limit (SBA portion limited to $5 million or $5 million for eligible energy-efficient projects or small manufacturers)||10, 20, or 25 years||Pegged to the current market rate for 5- and 10-year U.S. Treasury issues||0.5% fee on lender share, plus CDC might charge up to 1.5% processing fee on its share; CDC charges a monthly servicing fee of 0.625% to 1.5% on unpaid balance; ongoing guarantee fee is 0.642% of outstanding principal.||Fixed- asset purchases|
|Microloan||Up to $50,000||Up to 6 years||Cost of funds + 7.75 % to 8.50%||No guarantee fee||General business needs|
The 7(a) loan program
The general-purpose, 7(a) loan program is SBA’s most prominent and popular program. It provides them with up to $5 million for a wide variety of business uses, making it a good choice for a large range of borrowers. You can use a 7(a) loan for funding startup costs; purchasing equipment, supplies or land; refinancing existing debt; and purchasing or expanding an existing business.
Businesses that meet SBA’s size standards and are considered “small” within their industry can apply for 7(a) loans. In addition, the business must operate for profit and have reasonable equity to invest. The 7(a) loan program includes several specialized options: loans geared toward exporters, borrowers in underserved communities, the military community and small businesses owners in search of cyclical working capital.
How it works
SBA lending partners fund loans of up to $5 million to small business owners, with backing from the SBA for 75 percent to 90 percent of the loan in case the borrower defaults. Interest rates are negotiated between lenders and borrowers, but they can’t exceed the SBA maximum.
7(a) loans have longer terms and might have lower down payments than other financing options. In most cases, borrowers repay these loans with monthly payments of principal and interest. The partner-lenders are constrained by various SBA requirements for these loans, including a cap on interest rates and specific eligibility and collateral requirements that the SBA establishes.
Lenders of 7(a) loans don’t have to take collateral for loans below $25,000, but the SBA requires that they collateralize loans above $350,000 to the maximum extent possible. If a business’ fixed assets are insufficient, the lender might incorporate trading assets and must collateralize any available equity in the principal’s personal real estate.
This program is good for most business owners who are seeking SBA loans. Many borrowers will qualify for 7(a) loans, although there are some complex eligibility restrictions that do apply. Some subtypes of 7(a) loan programs carry restrictions on how borrowers can use the funding.
There are some hidden costs: The SBA charges lenders a guarantee fee of up to 3.75 percent and a servicing fee of 0.520 percent for each loan it approves and disburses. Lenders can pass the guarantee fee on to the borrower.These loans are subject to prepayment penalties in some circumstances.
There are some types of businesses that are ineligible for 7(a) loans, including those involved in loan packaging, speculation, multi-sales distribution, gambling, and investment or lending, to name some.
How to apply for a 7(a) loan
Many lenders around the country administer SBA 7(a) loans, from traditional banks like Wells Fargo and JPMorgan Chase to online lenders like Live Oak Bank and Celtic Bank.
Although the lender you work with administers the loan, its approval isn’t the only one you need to funding. The SBA reviews and approves the application as well, adding a second layer to the process that can slow down funding decisions considerably.
To speed up the process, have a good sense of the following before approaching lenders to apply:
- Your business plan
- The amount of funding you need
- What you’ll be doing with the funds
- Your credit history
- Financial projections
- Available collateral
The application process for a 7(a) loan requires extensive documentation, all of which is listed on the interactive submission checklist, which is designed to help lenders collect the information the SBA requires. Some of the most important documents you will need to submit include:
- SBA Form 1919: Borrower information form for each proprietor, general partner, officer, director, managing member of an LLC, etc.
- Personal financial statement for all owners of 20 percent or more of the business, spouses, and proposed guarantors
- Current income statement and balance sheet
- FYE income statements and balance sheets, or complete business tax returns for the most recent three, year-end periods
- Cash flow projection, month by month, for one year
Specialty loans under the 7(a) program
There is a number of specialty loan options within the 7(a) program, each with its own specifications.
7(a) Small Loan. A smaller, more-accessible version of the 7(a) loan with a maximum loan amount of $350,000 and a turnaround time between five and 10 business days.
SBA Express. An accelerated SBA applicaiton review, with a response within 36 hours of applying. The maximum loan amount is $350,000 and the SBA guarantees only a maximum of 50 percent of the loan. Lenders don’t need collateral for loans up to $25,000 and are permitted to use their existing collateral policy for loans over $25,000.
Export Express. This loan is aimed at providing exporters with SBA-backed financing for loans and lines of credit up to $500,000. Lenders can use their own credit decision processes and loan documentation standards, and the SBA promises a 24-hour response time.
Export Working Capital. For businesses that need extra funding to support export sales, this loan has a maximum amount of $5 million and a maximum SBA guarantee of 90 percent. Once a lender has approved an application, it submits the request to the U.S. Export Assistance Center location for the exporter’s region.
International Trade. This is long-term financing up to $5 million with a maximum SBA guarantee of 90 percent for loans of $350,000 or less and 75 percent for loans of more than $350,000. This loan is designed to help owners support business growth due to expanding export sales or help update operations to better meet foreign competition.
Veterans Advantage. This loan comes with reduced fees for veteran-owned businesses — and if a veteran’s current or widowed spouse owns and controls 51 percent of that business, he or she is eligible, too.
CAPLines. This umbrella program is designed to help small businesses obtain short-term and cyclical working capital to help with seasonal fluctuations and meet costs associated with assignable contracts and construction projects. It also provides an asset-based, revolving line of credit for borrowers who struggle to access long-term credit.
The CDC/504 loan program
The CDC/504 Loan Program offers long-term, fixed-rate financing to help small businesses expand or modernize. These loans are designed to be used to acquire fixed assets, such as existing buildings, land and land improvements, new facilities or facility renovations and long-term machinery — or refinance debt in connection with an expansion.
Benefits of the 504 program include 90 percent financing, lengthy loan amortizations and fixed-rate interest rates. This loan also helps secure a solid, growing economic base for communities by ensuring local institutions have the means to expand and update their operations. Since 2012, the SBA has backed more than $50 billion in 504 loans, creating more than 2 million jobs.
How it works
All 504 loans are administered by Certified Development Companies (CDCs), nonprofit organizations dedicated to community economic development. CDCs are the SBA’s community-based partners, and the SBA certifies and regulates them.
The SBA typically provides 40 percent of the total project costs for a 504 loan, the lending CDC provides up to 50 percent and the borrower contributes 10 percent (under certain circumstances, up to 20 percent).
The assets the borrower uses the funding to buy usually serve as collateral on the loan as well. Owners are also required to provide a personal guarantee of 20 percent or more.
To qualify, your business must meet SBA’s size standards, be operated for profit, have a tangible net worth of $15 million or less and an average net income of $5 million or less — after federal income taxes — for the last two years.
Most recipients of a 504 loan must create or retain one job for every $65,000 the SBA guarantees, but small manufacturers are required to create or retain one job for every $100,000. If you are unable to meet this requirement for job creation or retention, you might qualify if your business meets a specific community development or public policy goal as determined by the lending CDC. Such goals could include:
- Diversifying or stabilizing the local economy
- Stimulating economic development
- Expanding small businesses owned and controlled by women
- Aiding rural development
CDC/504 loans are good for businesses whose expansion or modernization will benefit their local community or the position of various communities underrepresented in small business. Nonprofits and companies engaged in passive or speculative activities are not eligible. Businesses seeking funding for activities other than procuring fixed assets for expansion or modernization are not good candidates for these loans.
How to apply for a CDC/504 loan
More than 220 CDCs serve communities around the nation, each with a defined area of operation. Contact your SBA District Office to find a CDC in your area.
The microloan program
The SBA started the microloan program after recognizing that the biggest unmet need for small business funding was for small loan amounts that could be obtained with a less-burdensome application process. The SBA microloan program provides loans up to $50,000 to help small businesses set up and expand, with a loan term that maxes out at six years. The average microloan is about $13,000.
SBA microloans are specifically designed to help women, low-income, veteran, and minority entrepreneurs who aren’t as well-served by traditional lending products, though any qualifying small business owner can apply for a microloan.
In 2017, intermediary lenders distributed $69.3 million in microloans to small businesses, more than a 50 percent increase in microloan funding since 2010. These microloans are most commonly used to provide working capital and to purchase new equipment, inventory, and supplies.
How it works?
SBA microloans are administered by nonprofit community-based organizations that the agency has tapped as intermediary lenders. To smooth the funding process, the SBA does not enforce its own lending and credit requirements on intermediaries and does not assess or underwrite loans.
However, the SBA does enforce some restrictions: Intermediary lenders must not charge more than a certain percentage of their costs on mircoloans (7.75 percent of costs on loans of more than $10,000 and 8.50 percent on microloans of $10,000 or less).
Pros and cons of the microloan program
Each intermediary lender has its own standards and is responsible for approving applicants for loans and underwriting the loans. These lenders usually require some form of collateral and the personal guarantee of the business owner. Potential borrowers may have to fulfill training or planning requirements before applying. Applicants seeking a loan of more than $20,000 must prove that they haven’t been able to secure this funding from other, non-federal sources.
These small loans are good for businesses who need minor amounts for a specific purchase or upgrade. They can be used for a variety of business purposes, including as working capital or to purchase inventory, supplies, furniture, or equipment. The funding cannot be used to pay existing debts or to purchase real estate.
Companies who would like to borrow larger amounts or want a longer term, and who have the time and capacity to apply for other loans programs should consider other options besides microloans. Some companies are ineligible, such as nonprofit organizations, life insurance companies, and companies located outside the United States. For a full list of ineligible companies, see section 3.F.3. of the Microloan Program’s Standard Operating Procedure.
How to apply for an SBA microloan
Borrowers can apply for an SBA microloan via a lender intermediary that works with SBA to maintain a fund for these loans. Check this list of approved SBA microloan lenders, listed by state, or contact your SBA District Office to ask which lenders near you are approved. Since the SBA gives intermediaries wide latitude in administering microloans, each will have its own application procedures and requirements.