What You Should Know About Small Business Administration (SBA) Loans

What to Expect When Applying for an SBA Loan

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Loan programs are a critical resource provided by the Small Business Administration (SBA). The programs help small business owners—many of whom might have difficulty obtaining a loan on their own—gain access to capital.

The SBA typically doesn’t directly loan the money, but instead works with partner banks, credit unions, or other lenders to provide the loans, which are partially guaranteed by the federal government.

There are several different SBA loan programs to help meet a variety of needs, from starting a business to buying real estate.

What Is an SBA Loan?

The SBA partners with lenders, community development organizations, and micro-lending institutions to provide the loans. This reduces the risk for the lenders and also makes capital more accessible to them. This process also makes it simpler for small business owners to obtain loans.  

In an email to The Balance, an SBA spokesperson said that businesses should consider an SBA loan when they have trouble getting a traditional business loan. When a bank thinks a business is too risky to lend money to, the SBA can agree to guarantee the loan. That way, the bank has less risk and is more willing to give the business a loan.

SBA-guaranteed loans can be used for most business needs and can vary widely in amount. Some programs have limitations regarding how the funds can be used—an SBA-approved lender can pair you with the best loan for your needs. 

Find lenders with the SBA’s free online Lender Match tool.

Different lenders and loan programs will have varying requirements to qualify. Eligibility is determined by looking at what a business does for income, the character of ownership, and the business’s location. Usually, businesses must also meet size standards, have the ability to repay the loan, and have a sound business purpose.

According to the SBA, in order to be eligible for a program loan, small businesses must:

  • Operate for profit: It must be a registered and legal operation.
  • Be U.S. or U.S. territory-based: It must operate and be physically located domestically.
  • Have owner investment: The business owner must have invested their own equity, time, or money into the enterprise.
  • Have depleted financing options: The business must be unable to procure funding from any other lenders. 

What Types of SBA Loans Are Available?

The SBA offers a variety of loan programs for lots of different purposes. Three of its popular programs, which we’ll discuss below, are 7(a), CDC/504, and Microloan. 

7(a) Loans

The 7(a) loan program is the SBA’s primary loan program for small businesses. There are more than half a dozen different types of 7(a) loans designed to meet various business needs and to help small businesses obtain financing.  

7(a) programs include:

Loan Program Maximum Loan Amount Maximum SBA Guarantee SBA Turnaround Time Other Details
Standard 7(a) $5 million 85% for loans up to $150,000 and 75% for loans greater than $150,000 5-10 business days -Interest rate may not exceed SBA maximum
-Up to 10 years of revolving lines of credit (permitted only under CAPLines submission - see below)
7(a) Small Loan $350,000 85% for loans up to $150,000 and 75% for loans greater than $150,000 5-10 business days -Interest rate may not exceed SBA maximum
SBA Express $350,000 50% Within 36 hours -Interest rate may not exceed SBA maximum
-Up to seven years of revolving lines of credit, maturity extensions permitted at the outset
Export Express $500,000 90% for loans of $350,000 or less, 75% for loans more than $350,000 24 hours -Interest rate may not exceed SBA maximum
-No more than seven years of revolving lines of credit
Export Working Capital $5 million 90% 5-10 business days -Lenders and borrowers negotiate the interest rate
-No SBA maximum limit
-Terms of 12 months or less of revolving lines of credit
International Trade $5 million 90% 5-10 business days -Interest rate may not exceed SBA maximum
-Loan maturity of 10 years for permanent working capital, up to 10 years for machinery and equipment or the useful life of the equipment (no more than 15 years), and up to 25 years for real estate

The SBA also offers other 7(a) loan program options, including one catering to veterans and another to address short-term small business needs. 

  • Veterans Advantage: In order to qualify for the reduced loan fees available to veteran-owned businesses, a small business must be at least 51% owned and controlled by someone who meets the eligibility requirements set by the SBA.
  • CAPLines: CAPLines extends an ongoing line of credit, rather than acting as a lump-sum loan. It’s intended to meet short-term and cyclical working-capital needs of small businesses. All lines of credit covered by the program last for up to 10 years, with the exception of Builders CAPLine Loans, which only last for up to five years.
  • Seasonal CAPLine: Intended to finance seasonal needs, such as an influx of inventory, or payroll costs.
  • Contract CAPLine: Finances the direct labor and material costs related to contract work.
  • Builders CAPLine: Finance costs of direct labor and materials for a small general contractor or builder doing construction or renovation on commercial or residential buildings. 
  • Working CAPLine: Designed for businesses with cyclical growth or continuous short-term demands. Financing can be obtained to get short-term assets, when those assets are converted to cash the loan is repaid.

CDC/504

The CDC/504 loan program is a long-term financing tool meant to support a community’s economic development. It offers long-term, fixed-rate financing to acquire fixed assets for expansion or modernization, such as equipment or real estate. 

The program offers a maximum loan amount of $5 million to $5.5 million depending on the business or project. The loans are commonly structured with the SBA covering 40% of total project costs, a lender providing up to 50%, and the borrower contributing 10%. 

Microloan

The Microloan program provides loans of up to $50,000 to fund the startup or expansion of small businesses and certain not-for-profit child care centers. The average microloan is $13,000 and the maximum microloan repayment term is six years. The SBA funds nonprofit community-based organizations that act as intermediary lenders which provide the loans to eligible borrowers. 

Funding from a microloan can be used for working capital, inventory or supplies, furniture or fixtures, or machinery and equipment. It cannot be used to pay existing debts or to buy real estate. 

If you’re a small business owner struggling from the ongoing public health and economic crisis, the SBA offers guidance and loan resources.

The SBA is currently accepting Economic Injury Disaster Loan (EIDL) applications from all eligible small businesses, private non-profits, and U.S. agricultural businesses. Apply on the SBA website. For loans approved starting the week of April 6, 2021, recipients can get up to $500,000 in assistance over 24 months. Loans approved prior to that will be eligible for an increase.

What Are SBA Loan Interest Rates?

Terms for EIDL loans are a fixed 3.75% for businesses and 2.75% for nonprofits over 30 years with no pre-payment penalty or fees.

The 7(a) loan program interest rates are determined by negotiations between the borrower and lender. Most of these rates are subject to maximums determined by the SBA, and they may be fixed or variable. Variable-rate loans may be pegged to the lowest prime rate, the LIBOR Rate, or the SBA optional peg rate.

Interest rates for variable rate loans:

Loan amount Rate max,
maturity<7 years
Rate max,
maturity>7 years
$25,000 or less Base rate plus 4.25% Base rate plus 4.75%
$25,000 to $50,000 Base rate plus 3.25% Base rate plus 3.75%
$50,000 or more  Base rate plus 2.25% Base rate plus 2.75%

Interest rates for fixed-rate loans:

Amount of loan Prime rate in effect on first business day of the month, plus
$25,000 or less 6% (600 basis points) plus the 2% (200 basis points) permitted by 13 Code of Federal Regulations (CFR) 120.215
$25,000 to $50,000 6% (600 basis points) plus the 1% (100 basis points) permitted by 13 CFR 120.215
$50,000 to $250,000 6% (600 basis points)
$250,000 or more  5% (500 basis points)

The CDC/504 loan program interest rates are dependent on the current market rates for 5- and 10-year U.S. Treasury issues. Meanwhile, the Microloan program interest rates vary, and are generally between 8% and 13%. These rates are dependent on the intermediary lender and costs from the U.S. Treasury to the intermediary.

What to Expect During Your Loan Process

The application process, requirements, turnaround time, and eligibility for SBA Loans will vary depending on which type of loan you are seeking. We’ll review the basic steps involved, and what you can expect during the process of getting an SBA Loan.

Small business owners should know that they can get free counseling from SBA resource partners at any time during the lending process. 

  1. The small business owner puts together a business plan and meets with a potential lender.
  2. The owner completes the loan application. The lender then reviews the application and performs credit analysis.
  3. The lender decides whether or not to approve the loan. Delegated lenders can approve loans without the SBA reviewing the application. If an SBA loan guarantee is desired and the lender is not SBA-delegated, then the lender must submit the application to the SBA. 
  4. The SBA looks at the loan application and pulls a credit report in order to determine, among other things, the ability of the small business to repay the loan. The SBA makes a decision on eligibility of the SBA guarantee.
  5. The SBA informs the lender of the decision. An SBA loan authorization is prepared—this is an agreement between the SBA and the lender regarding the terms and conditions of the loan guarantee.
  6. The lender takes care of the loan underwriting and obtains and reviews the necessary appraisals, etc. Loan documents such as the note, collateral documents, personal guarantees, etc. are prepared. The loan is closed after all the terms and conditions of its authorization are satisfied. 
  7. The lender will then service the loan, making sure that its funding and collection of payments, monitoring of performance, etc. are taking place as determined in the loan authorization. 
  8. After the loan is paid in full, the note will be marked as paid, and all liens on collateral will be released. 

Key Takeaways

  • When a business has trouble getting a traditional business loan, it should consider an SBA loan. The SBA reduces risk for lenders and makes it easier for them to access capital, which makes it simpler for small businesses to get loans.
  • Any small business owner seeking an SBA loan should first connect with SBA resource partners, which can help develop business plans, give guidance on starting and growing your business, and assist with funding options.
  • The SBA doesn’t typically lend money directly to small business owners, but instead sets guidelines for loans made by its lending partners, community development organizations, and micro-lending institutions.
  • The SBA offers a variety of different loan programs intended to meet unique business needs, including 7(a), CDC/504, and Microloans.