Here’s everything you need to know about SBA loans before applying for one: Their strengths and weaknesses, the different types, and what you need to apply and get accepted.
What is an SBA loan?
Common misconception: The SBA lends small businesses money.
That’s not how it really works. When you get an SBA loan, you get money from a standard lending institution—usually a bank. You make loan repayments directly to them.
So how does the SBA help put money in your hands? They guarantee part of your loan. For instance, the SBA guarantee might be 85% of a certain type of loan. Meaning, if you default on the loan, the SBA will pay the bank 85% of its value.
This substantially reduces the bank’s level of risk when they make loans. Which means they lend money to businesses they might not otherwise consider—because they’re too small, too new, or have spotty credit records.
These bank loans are set within parameters laid out by the SBA—so while interest rates, terms, and the rest vary by business, they’re standardized across all banks, based on the prime rate.
The benefit to you is that you get loan amounts, rates and terms that might not be available otherwise. Meaning more possibilities for the future of your business.
Pros and cons of SBA loans
SBA loans are no free lunch, however. Like any financial product, they come with benefits and drawbacks.
The pros of SBA loans
- Long repayment terms. You’ll have more time to pay off a loan—meaning smaller loan payments—than you might get with a non-SBA option.
- Affordable interest rates. The low interest rates on SBA loans aren’t rock bottom by any means, but they’re pretty good, and often better than what you’d get otherwise.
- Small down payments. You won’t need to pay as much up front for SBA loans than you would for other loans.
- Adaptable loan terms. There’s a wide variety of loans available from the SBA, ranging from $500 to $5.5 million. And they can be used for a lot of different things: From hiring new employees, to buying heavy equipment and real estate, to making repairs after a natural disaster.
The cons of SBA loans
- Long application process. The underwriting process for an SBA loan can be slow. If you’re looking for fast cash, they may not be a great option.
- Lots of paperwork. You’ll need to provide plenty of information about both your personal and business history and finances when you apply for a loan. Depending on how organized your records are, that could take some digging.
- Competition. Since SBA loans offer so many benefits, a lot of businesses apply. There’s only so much money to go around—so the more thorough and appealing your application, the better you’ll stand out from competitors.
How long does it take to get approved for an SBA loan?
It takes at least a month to get approved for an SBA loan. That can range upward to multiple months.
Some lenders will make extravagant claims—like saying they can secure you a loan in one week or less. Don’t buy it. There are no secret shortcuts to being approved, and you should expect to wait at least a month.
How do you apply for an SBA loan?
There are many, many lenders who offer SBA loans. Most are brick-and-mortar institutions, others are online-only banks. To find a lender that suits your needs, get in touch with your local SBA District Office.
For a quicker, automated approach, you can also use SBA Lender Match. After providing your contact info, you’ll describe your business and what you need from a loan. The SBA promises to match you with a lender in two days.
Finally, if your business finances and credit score are in excellent shape, the SBA Express program promises to respond to your loan application within 36 hours, and offers up to $350,000 in financing.
The four types of SBA loans
The SBA loan you apply for will depend on what your business needs and what you have planned for the future. There are many to choose from, but here are the four most common, along with the 2022 SBA loan rates for each.
The SBA 7(a) loan program
What it’s for: General financing to expand your working capital.
Amount: Up to $5 million
2022 Rate: 8.5-11.0%
Term: Up to 10 years (working capital loans) or 25 years (commercial real estate loans)
Think of the SBA 7(a) as the Swiss Army knife of loans. It covers just about any need a small business owner might have. That includes hiring new employees, investing in marketing, expanding to new locations, developing new products and services, making renovations, and more. It can also be used to refinance debt, so you make lower monthly debt payments.
The SBA 504 / Certified Development Company (CDC) loan program
What it’s for: Purchasing major fixed assets, like heavy equipment or commercial real estate; making improvements to real estate.
Amount: Up to $5.5 million
2022 Rate: 5.60%-6.46%
Term: Either 10 or 20 years
If you’re looking to make a big purchase with your SBA loan, the CDC/504 program offers lower rates and potentially longer terms than the 7(a) program. You can use it to buy real estate or buildings, or large depreciable assets like manufacturing equipment.
The SBA microloan program
What it’s for: General financing, for businesses that need relatively small, short term loans.
Amount: Up to $50,000
2022 Rate: 8%–13%
Term: Up to six years
Suitable businesses: Smaller, less-established businesses
SBA microloans are a good choice if your existing business is relatively small and new, and unlikely to qualify for a 7(a). They can give you more working capital when your business is young, so you can grow your income and eventually qualify for larger loans.
The SBA disaster loan program
What it’s for: Businesses recovering from declared disasters
Amount: Up to $2 million
2022 Rate: 4%–8%
Term: Up to 30 years
Suitable businesses: Any business that has suffered damages due to a declared disaster, whose insurance doesn’t fully cover those damages.
The SBA maintains an updated list of declared disasters. If your business has suffered from one of those disasters, and needs money to help with recovery, the SBA is able to provide it at a low rate over a long term.
Declared disasters can range from the immediately damaging—like violent weather—to the long-term—such as droughts or unseasonal rain that may damage crops.
Note: You don’t need to be a business to apply for an SBA disaster loan. Individuals, homeowners, and nonprofits can also apply.
Who is eligible for an SBA loan?
While most small businesses can apply for an SBA loan, there are some limits to eligibility.
First of all, your business needs to be based in the USA. Second of all, it needs to be for-profit (only a few select types of non-profits can apply).
Also, your business is ineligible if it:
- Mostly earns revenue by lending money
- Is primarily engaged in politics or lobbying
- Is a life insurance company
- Earns most of its revenue through gambling activities
- Is speculative—its assets are mostly tied up in investments with uncertain returns (ie. medical research, real estate investment)
- Mainly earns passive income
Also, individual lending institutions may have their own rules about who they’ll lend to and who they won’t. Make sure you’re aware of these before you go to the trouble of applying.
If you’re not sure whether you make the grade, take the SBA’s eligibility questionnaire.
What do you need to apply for an SBA loan?
There’s a lot of paperwork that goes into applying for an SBA loan.
When you’re applying, you should be ready to provide:
- An SBA borrower information form
- A personal history statement
- A personal financial statement
- Personal income tax returns for up to three prior years
- Business tax returns for up to three prior years
- A copy of your business certificate or license
- A copy of your business lease, if you have one
- A history of previous loan applications
For help keeping track of all these documents, use the SBA’s loan application checklist.
How to qualify for an SBA loan
Since SBA loans are so competitive, you need to do more to meet the minimum application requirements in order to get one. Here’s how to qualify for an SBA loan—from long-term preparation (like letting your business get established) to near-term efforts (like preparing a solid business plan).
Wait until your business is established
Your chances of qualifying for an SBA loan go up considerably if your business has been around for two years or longer. Fundera did an analysis of their clients, and found that most who qualified for an SBA loan were four years old.
If it’s your first year in business and you’re considering a hefty loan from the SBA, crunch the numbers and see if you can wait a year or two. Is a smaller, non-SBA loan enough to tide you over until then? Are there alternative funding options available, like investors? It could be worth delaying your application in order to improve your chances.
Prove you have the cash flow to cover loan payments
Later on, we’ll look at the most common SBA loan amounts, terms, and rates. Once you’ve checked those out, crunch the numbers, and figure out what your potential monthly payments might look like.
You should be ready to prove in your application that you’ll be able to make your payments should you be approved. For that, you’ll need financial statements covering the history of your business. If you already have income statements and balance sheets in your arsenal, go back and retroactively produce cash flow statements.
Provide a solid personal history
The SBA wants to see where you’ve lived in the past, as well as your citizenship record. The more info you can provide, the better.
They’ll also do a criminal record check. If you have a criminal record, you’re not automatically disqualified from an SBA loan. However, you face a higher chance of being denied one if your record includes crimes of “moral turpitude”—ones involving violence or deception.
Write a great business plan
Lenders want to see that your business will be successful, so you can pay them back. When you provide a comprehensive business plan, you prove to them that you’ve got your eyes set on the future, and any loan you’re approved for will be put to good work.
Any good business plan needs to include:
- An explanation of your product or service, as well as your value proposition
- A thorough analysis of your competition
- An outline of your marketing strategy
- Three to five years of financial projections
- A detailed explanation of how you plan to use your loan, should you be approved
- Why is your business unique?
- What makes your business important?
- Where do you see yourself growing?
- What’s the most exciting thing about your business?
The business plan is your chance to show off to lenders. The better you can communicate your value, the more likely you are to be approved.
Maintain a good credit score
A credit check comes standard with any SBA loan application. Maintain good personal and business credit, and you’re more likely to be approved. When Fundera analyzed their customers, most business owners who applied for SBA loans had credit scores of 680 or better.
Turn a profit
Your business could be a unicorn in the making, but if you aren’t turning a profit yet, lenders are unlikely to approve you for an SBA loan.
Bottom line: Lenders want you to pay off your debt, with interest. They see the same profits whether you’re wildly successful, or just scraping by. So they want to make sure you’re profitable now, not five years down the road.
If you’re a startup that doesn’t plan on becoming profitable for a while, you’re better off looking for investors rather than lenders. On the other hand, if you expect to start making a profit soon, wait until you’re in the black before you apply for an SBA loan. Your chances will improve significantly.
Not every SBA loan requires you to provide collateral. But you should still be able to offer some.
The SBA requires all its lenders to acquire collateral when it’s available. In order to meet that requirement, lenders are on the lookout for businesses that can come to them with collateral in hand.
Collateral is also important if your business is high risk. If your revenue tends to fluctuate or you have a spotty credit report, lenders are more likely to ask for collateral. Examples include vehicles, real estate, or equipment that you own. Business inventory also qualifies.
Personal guarantees for business loans
Even if your business structure—like an LLC—typically shields you from liability, you will likely need to put your personal assets on the line if you qualify for an SBA loan.
If you’re approved for a loan, and you control 20% or more of your business, you’ll need to sign a guaranty. In the event that you’re unable to make loan payments, you become personally liable.
Not sure an SBA loan is right for you? There’s a variety of small business loans you can apply for—as well as alternative financing options, like lines of credit and merchant cash advances. Make the right choice for your business with our guide to getting a small business loan.
Further reading: The Very Best Small Business Loans (2023)