Small Business Administration (SBA) loans are a key source of funding for businesses across the country. The SBA doesn’t actually lend directly to businesses. Instead, it makes it easier for businesses to access loans by guaranteeing a portion of each SBA-backed loan approved by a third-party lender.
Learn more about SBA loans, and how to qualify for one.
How to Qualify for an SBA Loan
To qualify for an SBA loan, you must:
- Meet various SBA requirements, such as that your business is physically located and operates in the U.S. or its territories
- Be unable to nail down business financing from traditional sources
- Generally have a credit score in the 600s, depending on the lender and type of loan
- Usually have a clean criminal record
- Typically must not owe money to the federal government
- Provide collateral in some cases
When Is It a Good Idea to Get an SBA Loan?
Generally, an SBA loan is best suited for meeting long-term rather than short-term business needs. This is particularly true for entrepreneurs who aren’t able to get approved for traditional lending products and want to avoid higher-interest options, such as credit cards. Fortunately, not every borrower must have a fantastic credit score in order to qualify for an SBA loan.
Pros
SBA-imposed cap on interest rates
Interest rates below national average for credit cards
Potential to borrow up to $5.5 million
Repayment terms up to 25 years
SBA guarantee of at least 50% of loan if borrower defaults
Cons
Generally rigorous application process
Inconsistent requirements among SBA lenders
Rejection of most SBA loan applications
Potential collateral requirement
Possible requirement for personal guarantee of loan
Be sure to shop around to get the best deal on an SBA loan. You may be able to negotiate a loan’s interest rate, payoff period, and fees. To find an SBA-approved lender, use the agency’s Lender Match tool.
What You Need to Qualify for an SBA Loan
Generally, you must meet the following requirements to qualify for an SBA loan:
- Your business must be a for-profit venture.
- Your business must be physically located and operate in the U.S. or its territories.
- You must have invested your own time or money in the business.
- You’re unable to get money from another lender.
SBA Loan Types
Standard 7(a) Loan
Standard 7(a) loans can be used for an array of purposes, such as expanding a business, buying real estate, refinancing debt, or purchasing equipment. Lenders tout loan features such as attractive interest rates and low down payments.
The maximum amount for a standard 7(a) loan is $5 million. SBA guarantees a standard 7(a) loan at 85% for amounts up to $150,000 and 75% for amounts greater than $150,000.
7(a) Small Loan
The 7(a) small loan is a sibling of the standard 7(a) loan. The primary difference with a 7(a) small loan is that the maximum amount you can borrow is $350,000. Proceeds can be earmarked for the same purposes as a standard (7a) loan.
SBA guarantees a 7(a) small loan at 85% for amounts up to $150,000 and 75% for amounts greater than $150,000.
SBA Express
SBA Express loans, part of the SBA’s 7(a) loan program, offer the easiest application process and the fastest approval times among all SBA loans. These loans, with payoff periods as long as 25 years, are designed for purposes such as refinancing debt, buying equipment, or improving real estate. The loan also can be used as a line of credit.
The maximum amount for an SBA Express loan is $500,000. SBA guarantees 50% of an Express loan.
SBA Microloans
SBA microloans are designed to help small businesses and some nonprofit childcare centers rebuild, reopen, repair or improve their operations. They’re geared toward entrepreneurs such as veterans, women, minorities, and startup founders, and those with lower credit scores. Proceeds can be put toward items such as working capital, supplies, furniture, and equipment.
The maximum amount for a microloan is $50,000. The average microloan amount is around $13,000. Interest rates generally are 8% to 13%.
504 Loans
504 loans are provided through SBA-licensed certified development corporations (CDCs). The maximum amount available is either $5 million or $5.5 million, depending on the type of business or project.
Proceeds from a 504 loan can go toward real estate, heavy equipment, and other fixed assets.
A business can borrow anywhere from $500 to $5.5 million through an SBA loan. Depending on the type of loan, proceeds can be used for purposes such as working capital, business expansion, equipment acquisition, furniture purchases, and debt refinancing.
Choosing a Lender and Applying for an SBA Loan
To find SBA lenders, use the agency’s Lender Match tool. To narrow down the possibilities:
- Consider using an SBA Preferred Lender. Lenders in this program enjoy more authority to process, close, and service than lenders without this status do, which speeds up the process.
- Find out whether your current bank or credit union offers SBA loans.
- Compare interest rates that a lender charges.
- Look at a lender’s SBA loan fees.
- Ask about a lender’s experience with SBA loans.
Documents you need to provide for an SBA loan application include:
- Personal financial statement
- Statement covering your personal history
- Business overview and history
- Profit-and-loss statements for the past three years
- Income tax returns for the past three years
- Business certificate or license
- Records showing previous loan activity
Key Terms
- 7(a): 7(a) refers to the SBA’s most popular loan program.
- Collateral: Collateral refers to something of value, such as business assets, that a lender can seize if a borrower fails to repay a loan.
- Guarantee: An SBA guarantee protects a lender, up to a certain percentage of an SBA loan, if a borrower defaults on a loan. A personal guarantee from the borrower means the borrower is promising to repay the loan using their own assets, if necessary.
- Maturity: Maturity refers to the date a debt is due, or the amount of time a borrower is given to pay off a loan.
- Working capital: Working capital is the difference between a business’ short-term assets and short-term liabilities. Working capital loans allow businesses to bridge the gap when cash is in short supply.
What's Negotiable
A borrower often can negotiate with a lender regarding the interest rate, payoff period, and fees for an SBA loan.
Compare the Best SBA Loans for Startups
| Lender | Average Loan Amount | Number of Loans in 2022 | Maximum Repayment Terms |
|---|---|---|---|
| Huntington Bank | $175,818 | 5,675 | 25 years |
| Live Oak Bank | $1,469,634 | 588 | 25 years |
| Wells Fargo | $176,448 | 1,165 | 25 years |
| Funding Circle | Not disclosed | Not disclosed | 20 years |
| TD Bank | $115,969 | 1,741 | 25 years |
Alternatives to an SBA Loan
The SBA provides access to an array of loans. But SBA loans aren’t the only source of funding for a business. Among the alternatives are traditional loans, grants, and credit cards.
Business Loans From Banks or Credit Unions
SBA loans tend to come with lower interest rates, lower credit score requirements, and better payoff terms than traditional business loans do. However, a bank or credit union might provide different types of business loans, such as those solely for buying equipment or real estate. A loan from a bank or credit union might be appealing if you already have a relationship with a financial institution and have a solid credit record.
One of the benefits of a traditional loan is that it may be approved faster than an SBA loan.
Business Grants
Aside from business loans, the SBA offers small business grants. For instance, grants are available to small businesses that engage in scientific research and development, and to businesses involved in exporting goods or services. A number of other government agencies provide business grants, as do corporations and nonprofit organizations.
The biggest advantage of business grants is that the money doesn’t need to be paid back.
Business Credit Cards
Unlike a personal credit card, a business credit card is—as the name suggests—taken out in the name of a business.
A business credit card is aimed at helping separate business expenses from personal expenses. The credit limit for a business credit card typically is higher than the credit limit for a personal credit card. However, business credit cards tend to charge higher interest rates than SBA loans and traditional business loans do.
Business credit cards generally are a better option than a business loan when it comes to meeting short-term financial needs. In addition, a business card might be preferable if you can score a low- or no-interest promotional interest rate and you want to take advantage of various credit card perks.
What Disqualifies You From Getting an SBA Loan?
Generally, you’re disqualified from getting an SBA loan if your business is involved in illegal activities, speculative ventures, multilevel marketing, gambling, investing, or lending, or if the owner is on parole.
What Credit Score Is Needed for an SBA Loan?
The SBA itself does not set credit score requirements. However, an SBA lender might insist that a borrower have a minimum credit score. The minimum score differs based on the lender and the type of SBA loan.
How Much Collateral Does the SBA Require?
In some cases, no collateral is required for an SBA loan. But in other situations, collateral is required. For example, if a business borrows more than $350,000 through a standard 7(a) loan, a lender must have collateral worth as much as the amount of the loan.
How Fast Do SBA Loans Get Approved?
In general, SBA loans are approved in 30 to 90 days—and up to six months—depending on the lender and the type of loan. SBA Express loans can be approved within 36 hours.
Article Sources
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Small Business Administration. “7(a) Loan Application Checklist.”
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U.S. Chamber of Commerce. “48 Grants, Loans, and Programs to Benefit Your Small Business.”
