:max_bytes(150000):strip_icc():format(jpeg)/businessownertalliesreceipts-c8c8134d700b49af89ee6c437b6a526e.jpg)
An SBA loan is a business loan that is guaranteed by the U.S. Small Business Administration (SBA). These loans can be used by businesses to cover startup costs, expansions, real estate purchases, and a wide range of other expenses. They are not issued directly by the government but by banks and other financial institutions.
Key Takeaways
- An SBA loan is a business loan that is guaranteed by the U.S. Small Business Administration (SBA).
- You can take out this kind of loan at a bank or other financial institution.
- If you fail to pay back an SBA loan, the SBA will repay the lender and you will be required to pay the SBA.
- SBA loans have fairly strict eligibility requirements, but if you qualify, they have competitive interest rates and fees.
- SBA loans can also offer high maximum loan amounts and long repayment schedules.
How SBA Loans Work
SBA loans are used by thousands of businesses each year to borrow capital. Though they are called SBA loans after the U.S. Small Business Administration, this agency doesn’t actually do the lending. Instead, the SBA works with a network of approved financial institutions that lend money to small businesses, and the SBA partially guarantees the loans.
The loan guarantee means that if the borrower is unable to pay back the loan to the lender, the SBA will step in and pay. This significantly reduces lenders’ risks, which makes them more willing to lend to small businesses.
To reduce its own risk, the SBA requires an unconditional personal guarantee from everyone with at least 20% ownership in the company. This means that they are personally responsible for repaying the SBA if the business fails to make the payments.
SBA loans are almost always secured by some form of collateral.
Interest Rates on SBA Loans
There are several types of SBA loans. The most common, the standard 7(a) loan, allows businesses to borrow up to $5 million. The interest rate you’ll pay is the prime rate plus a spread. The prime rate is a benchmark rate based on the federal funds target rate, and it changes based in part on Federal Reserve Board decisions.
The size of the loan spread—that is, how much more the lender can charge you above the benchmark rate—is subject to maximums set by the SBA. It’s determined by the size of your loan, your loan term, and your loan type (whether it is a fixed-rate loan or a variable-rate loan).
For example, the most a lender could charge for a variable-rate SBA loan of $50,000 or less in early September 2024 was the base rate plus 6.5%, while the maximum on loans of $350,000 or more was the base rate plus 3.0%.
On fixed-rate loans, interest rates can range from the prime rate plus 5% to 8%, depending on the size of the loan.
Eligibility Requirements for SBA Loans
The rules for getting an SBA loan are relatively strict. Among other requirements, you must prove that your business is a small business as defined by the SBA and that you have sought and failed to obtain other forms of financing before applying for an SBA loan.
You must be able to provide collateral for loans larger than $25,000. You’ll also need a personal credit score that meets the lender’s criteria, typically at least 640, and solid annual revenue from your business.
SBA Loans vs. Traditional Business Loans
| Key Differences | |
|---|---|
| SBA loans | Traditional business loans |
| Can make funding available to businesses turned down for traditional loans for financial reasons | May have more stringent financial requirements |
| Borrowers must meet SBA size and business type requirements | No particular size or business type requirements |
| Competitive interest rates that are capped by the SBA | Rates could be higher or lower depending on the lender and your business |
| Fees competitive with non-guaranteed loans | Potentially higher fees, but again, this depends on your lender |
| Can provide as much as $5 million in funding | Often limited to smaller amounts |
| Approval process can take one to three months | Can be quicker to approve and fund, sometimes in as little as one business day |
| Personal guarantee required, putting your personal finances at risk if your business can’t repay the loan | Personal guarantee not necessarily required, though some lenders may ask for one or for you to put up collateral |
Types of SBA Loans
There are several different types of SBA loans, though some are only used in very specific circumstances. The most common types are:
SBA 7(a) Loans
- Loan limit: $5 million
- Interest rate range: Capped at the prime rate plus 3.0% to 6.5% for variable-rate loans and the prime rate plus 5% to 8% for fixed-rate loans
- Purpose: General business expenses or to fund purchases and expansion
SBA Express Loans
- Loan limit: $500,000
- Interest rate range: Capped at the prime rate plus 3.0% to 6.5% for variable-rate loans and the prime rate plus 5% to 8% for fixed-rate loans
- Purpose: Faster funding for working capital, expansion, and real estate and equipment purchases
SBA 504 Loans
- Loan limit: $5.5 million
- Interest rate: Pegged to an increment above the current market rate for 10-year U.S. Treasury issues
- Purpose: Purchase of long-term, fixed assets like land, machinery, and facilities
Pros and Cons of SBA 7(a) Loans
As with any financial product, SBA loans have both advantages and disadvantages.
-
Competitive rates
-
Low fees
-
Long terms
-
Large loan amounts
Pros Explained
- Competitive rates: SBA loan interest rates are calculated using the prime rate, on top of which the lender can add an extra percentage known as the spread. The SBA imposes a maximum limit on what lenders can charge for SBA loans, depending on the type and size of the loan.
- Low fees: SBA loans for $1 million or less have no upfront or annual fees. Loans over that amount do have fees.
- Long terms: If you use your SBA loan for working capital, inventory, or equipment, you’ll have 10 years to pay it back. Use it for real estate, and you’ll have up to 25 years.
- Large loan amounts: Commercial lenders normally cap their maximum loan amounts at $500,000 or $1 million. SBA loans can be much larger—up to $5 million for a 7(a) loan.
Cons Explained
- Strict eligibility requirements: To qualify, your business needs to meet a list of SBA requirements in terms of its size, type of business, and other factors.
- Slow to fund: The SBA loan application process requires quite a lot of documentation, and it can take one to three months for the funds to be released if you’re approved.
- Personal guarantee required: The personal guarantee means that if your business can’t make the loan payments, you’ll be personally liable to repay the SBA.
How to Apply for an SBA Loan
- Check your eligibility: Make sure your business is eligible by checking the SBA requirements on its website.
- Choose a lender: The SBA offers a Lender Match tool to match potential borrowers with lenders within two days. You should look for a lender with extensive SBA experience.
- Gather your documentation: SBA loan applications can require a great deal of paperwork, but your lender will be able to help you gather the necessary documents.
- Submit your application: You’ll send your application to your lender, who will forward it to the SBA for approval.
- Wait: For a 7(a) loan, you might have to wait three months for the loan to be approved and funded. An SBA Express loan has lower limits, and you will pay an interest rate premium, but it is faster to fund, requiring no SBA approval.
Is It Hard to Get an SBA Loan?
It can be difficult to get an SBA loan because eligibility requirements are relatively strict. Among other things, you’ll have to prove that your business has been generating revenue for a few years and that you have good credit.
How Long Does It Take to Get an SBA Loan?
It can take one to three months to get a standard SBA 7(a) loan. An SBA Express loan is processed much more quickly.
What Is the Most Common Type of SBA Loan?
The SBA 7(a) loan is the most common type of SBA loan. It has a maximum loan amount of $5 million, and it can be used for a wide variety of business expenses.
What Is the Easiest SBA Loan to Get Approved For?
SBA Express loans have slightly less strict eligibility requirements than standard 7(a) loans, but they have a smaller maximum amount as well. SBA Express loans are a type of 7(a) loan.
What Is the Smallest SBA Loan Amount?
Technically, there is no lower limit for an SBA loan.
The Bottom Line
If your business meets the requirements for an SBA loan, and if you can provide collateral and a personal guarantee, then this type of loan can be a good alternative to a traditional business loan—especially if you have tried and failed to obtain one. SBA loans have competitive interest rates and fees and fairly long repayment schedules.
