Some small business loans take more time than others—both in terms of application paperwork and time to funding. SBA loans have a long timeline for both, so it’s a reasonable thing to wonder if the advantages of SBA loans are that significant that the extra time and effort is really worth it.
If you’re thinking about applying for an SBA loan, you’re looking into the best small business loan product on the market. There are lots of different types of loans for small business owners that allow different paths for how quickly you can get cash in hand, what you can use that cash for, and more. And although these types of loans are great for many business owners, the advantages of SBA loans trump most all of them.
If you can qualify, you’ll find SBA loans come with heaps of advantages over another type of small business loan: lower interest rates, longer repayment terms, as well as manageable fees. More, too.
But even if you think the advantages of SBA loans could be right for your business, you might not totally sure what that could mean for your small business loan application process. And, of course, you’ll need to make sure that you and your business qualify before you can benefit from the advantages of SBA loans.
We’ll go through all of this, plus the distinct advantages of SBA loans, and what you need in order to qualify for one.
SBA loans wouldn’t be possible without the U.S. Small Business Administration (SBA). The SBA’s mission is to further the growth and development of small businesses throughout the country. They’ve established lots of programs, including educational support for small business owners, and by guaranteeing bank loans for small businesses. Hence, SBA loans.
And that’s very possibly how you know the SBA’s name. The SBA helps small businesses get access to capital by backing loans executed through a nationwide network of lenders. The SBA guarantees a certain percentage of each loan, lowering the risk for these banks to work with qualified entrepreneurs. They don’t actually lend money themselves. The administration leaves that up to banks and other financial services companies, preferring to make the loans safer for lenders to give out instead.
An SBA loan isn’t just a burlap sack with a dollar sign on it, filled with money for your next groundbreaking business idea. If only. There are actually three different kinds of SBA loan programs, each with their own terms, conditions, and advantages:
Each of these three loans are designed to accomplish different business goals, such as general financing and major fixed-asset purchases, so choose wisely.
The SBA 7(a) loan, as you might expect, is the most common and desirable, as it’s the most flexible. It’s essentially what you think of when you think of a business loan—a traditional term loan product.
The advantages of SBA loans manifest in a few key areas: how expensive the loan is and what you need to get it, what you can do with the cash, and how you set yourself up to repay it. And all of these have to do with how your business grows—which the SBA helps with, too. Above all, the advantages of SBA loans set up businesses to do what the Small Business Administration sets out to do as a government agency: succeed.
We do have to acknowledge one thing first, though. Not every small business loan is a fit for every small business owner. That includes SBA loans, as absolutely fantastic as they are. Some business owners need cash faster than SBA loans can allow for, and others can’t provide all of the paperwork these intensive applications require. In these cases, that’s a-okay. You can always work on building your business history and credit, and hopefully graduate into an SBA loan later to participate in all of its advantages down the line.
When you take out a small business loan, you’ll always be worried about how much that loan is going to cost you in the long run. And that’s why interest rates are a high big concern—and low interest rates are a big advantage.
Interest rates for SBA loans are essentially as low as they get. Your interest rate will depend on your own creditworthiness and the qualifications you bring to the table, but the interest rate advantage of an SBA loan means that you could be looking at rates as low as 6.75% on an SBA 7(a) loan. (CDC/504 loans and microloans are slightly different, but equally inexpensive.) And, unlike other types of term loans, you won’t see interest rates climbing into the double digits—or well past. That’s a huge advantage of an SBA loan.
Of course, other loans are more expensive for certain reasons. Non-SBA loans will charge you higher interest rates for myriad reasons—maybe they’re making the money available to you ASAP, or they’re taking a bigger risk on you with little or no credit history. But, for a long-term loan, capital doesn’t get any cheaper than an SBA loan.
You’re likely the last person we have to tell that accessing small business capital can sometimes feel like hiking Everest. (Hi. We can help.) And, since the recession, banks have only become more reticent to lend out even small wads of cash to Main Street businesses. “Risk” is a bank’s least favorite word.
This puts small business owners in a really tough place. You still have ways to access lots of business financing—the emergence of alternative lenders has opened up a world of options of non-bank business loans that are easier to qualify for. That said, for business owners who want that gigantic check to make something, well, gigantic happen and can’t do it through a traditional financial institution… what now?
An unbeatable advantage of SBA loans is the access to capital they’ll allow you. You can borrow up to $5.5 million through the 7(a) loan program, which means that borrowing a huge sum of capital really is possible.
Because the SBA works with lenders—mostly banks—to guarantee up to 85% of loans that they issue in case of borrower default, banks feel more comfortable extending you that multimillion dollar loan than if you were flying solo when seeking out financing. With an SBA loan, “risk” isn’t such a dirty word to the bank. And that means more capital available for you.
A small business loan isn’t the helpful tool it’s supposed to be if the repayment timeline makes you more stressed than you were pre-financing. That’s why it’s crucial to not only make sure that you find the right product for what you’re looking to do with the money, but also be 100% certain that the terms of your loan are a fit for your business’s cash flow.
One key advantage to SBA loans is their terms: longest repayment terms, and a payment schedule that shouldn’t put financial strain on your business.
Most small business loans require much shorter payment terms. For instance, short-term loans require repayment in as few as three months, with daily or weekly payments. Even other, non-bank term loans really only give you about five years to repay principal.
SBA loans, on the other hand, give a lot more cushion: monthly payments for 25 years for real estate, 10 years for equipment, and generally up to seven years for working capital. This kind of flexibility really allows you to figure out how to fit your loan payments into your business’s plans as you grow.
Depending on the type of financing you’re looking for, your lender will sometimes ask for a down payment. Down payments for small business loans mostly come down to the amount of money you’re borrowing, the purpose of the loan and what kind it is, and your own financial profile. (The relationship between poor credit and a high down payment is almost always direct.)
Although an SBA loan is among the types of business loans that most often requires a down payment, it’s generally lower than many other types of loans. That’s one of the great advantages of SBA loans—you’ll only need a 10%-20% down payment for an SBA 7(a) loan or a CDC/504 loan. An SBA microloan doesn’t require a down payment at all.
Other types of loans might require you put down up to 30%. In that case, if you have an opportunity to access a loan that requires less of a down payment, it’s certainly worth pursuing.
Not all, but some types of business loans, come with certain strings attached in terms of how you can use the funds. That’s not a bad thing at all—of course, if you apply to equipment financing or invoice financing, you’re quite obviously looking to finance that hyper-specific need.
But sometimes business owners just need money. You should always have a detailed plan for what you intend to do with your small business loan—and, for an SBA loan specifically, you won’t get approved without one—but things do come up, or don’t always go as planned. And flexibility sure can be nice.
It’s worth nothing here that the CDC/504 loans are quite a bit less flexible, as these are specifically not working capital loans—they’re for fixed assets including real estate and equipment only. SBA microloans also do have specific requirements around their use, too.
Regardless, SBA loans still do win the advantage here.
The SBA doesn’t dole out loans at all—they’re a government administration. So, although their SBA loan initiative certainly lessens the risk for lenders, their main goals really lie with the business owners themselves. That’s you. They want to help you grow your business as easily as possible through access to capital—and education.
Some SBA loans come with access to a network affiliated with the Small Business Administration for absolutely invaluable training and mentorship opportunities. These departments and associations include SCORE, Office of Women’s Business Ownership, Office of Native American Affairs, and more.
The nice thing is that, even if you’re not among borrowers approved for an SBA loan, you can still take advantage of resources. The SBA hosts programs nationwide to give small business owners the tools they need to succeed. State- and local-level SBA offices across the country hold seminars, courses, and networking events to help connect small businesses owners.
→Too Long; Didn’t Read (TL;DR): Among other things, SBA loans offer competitive rates, longer repayment terms, access to high amounts of capital, and a great network of resources through the SBA to support small business owners.
With all of these perks, who wouldn’t want an SBA loan? Well, that’s one of the very reasons they’re among the hardest small business loans to qualify for. As a highly coveted product, they’re competitive, and generally awarded only to the most eligible and creditworthy candidates.
The SBA doesn’t have hard-and-fast requirements around credit scores and revenue, but a general profile for qualification can look like this:
The SBA will, however, definitely be looking for other non-negotiables:
A heads up that certain qualifications and requirements will vary among these three SBA loan programs, so once you figure out which of the options you’re interested in, you can do some more research, or work with a loan specialist who can help explain the details.
There’s a lot of paperwork involved in preparing an SBA loan application package. So much so that we’ve written about it a lot to help, and prepped a bunch of resources for you if you’re going to go forward with it. You’ll generally need to include:
This will take time, so make sure you do allow yourself to get bogged down in the details.
→Too Long; Didn’t Read (TL;DR): These are among the hardest loans to get. You’ll have to have a strong business history and good credit standing, but also show investment in your business here in the US. And get ready to do paperwork.
Yes, it’s hard to get an SBA loan, and the application process it time consuming.
But here’s what you should remember:
If you think you’re ready, apply for an SBA loan and get the ball rolling.
Meredith Turits is a contributing writer for Fundera.
Meredith has worked as a writer and editor for more than a decade. Drawing on her background in small business and startups, she writes on lending, business finance, and entrepreneurship for Fundera. Her writing has also appeared in the New Republic, BBC, Time Inc, The Paris Review Daily, JPMorgan Chase, and more.