How Do SBA Loans Work?

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Understanding How SBA Loans Work

If you’re exploring financing options for your business, it’s very likely you’ve encountered a variety of solutions in your search process—traditional business loans, business lines of credit, and perhaps even SBA loans.

As far as loan products go, SBA loans are often considered the gold standard for small businesses—they’re a top alternative for qualified borrowers who can’t access a bank loan, with low-interest rates and long terms. Plus, there are multiple different SBA programs, each with specific loan products that might be a fit for your business.

So, with this in mind, you might be wondering: How do SBA loans work?

As you may have gathered by the “SBA” part of SBA loans, these loans involve the Small Business Administration, a government organization that advocates for small business success. In this way, SBA loans work quite differently than most other financing solutions.

This being said, there are a variety of pieces to consider when answering the question, “how do SBA loans work,” and therefore, we’ve compiled this guide.

Here, we’ll break down everything you need to know to understand how SBA loans work, including a basic overview, a program-by-program explanation, as well as how to qualify and apply for SBA loans.

Let’s get started.

The Ultimate Guide to How SBA Loans Work

The Basics of SBA Loans

In order to understand how SBA loans work, the first point we need to address is what role the Small Business Administration, or SBA for short, actually plays in the loan process.

For context, as we mentioned briefly above, the SBA is a government organization that supports small businesses. They provide educational and community resources, among other forms of assistance, but they’re probably best known for their loan program, which gives small businesses across the U.S. access to affordable funding.

This being said, perhaps the most essential point to understanding how SBA loans work is that despite the name, SBA loans do not actually come from the SBA. In fact, the SBA almost never provides direct funding.

Instead, the SBA has created loan programs, with specific guidelines and requirements, and the loans within these programs are issued by lending partners—such as banks, community development organizations, and micro-lending institutions. Through this system, the SBA guarantees a portion of the loans issued by their lending partners, meaning that in the case of a default by the borrower, the SBA will repay a certain amount of the loan to the lender. In this way, SBA loans not only provide affordable funding to small businesses, but do so by lessening the risk for traditional lenders.

Essentially then, when you apply for an SBA loan, you’re actually applying for a type of bank loan, but one that will be regulated by the guidelines outlined by the SBA. The SBA determines the basic eligibility requirements as well as the ranges for terms, amounts, and to some extent, interest rates on all of their loan programs.

See If You Qualify for SBA Loans

A Program-by-Program Breakdown of SBA Loans

Now that you have a basic understanding of how SBA loans work at a high level, let’s dive deeper into the different SBA loan programs. It will be important to learn how each program works so that you have a better sense of your options and what type of SBA loan may be the right solution for your business.

Overall, there are six different loan programs to review in order to fully answer the question: How do SBA loans work?

Although we’ll go into the details of each of these programs below, let’s begin with an overview of what you can expect:

  • SBA 7(a) Loan Program: Offers terms loans that are partially guaranteed by the SBA—but provided through an SBA-approved direct lender—for a variety of different uses.
  • SBA 504/CDC Loan Program: Provides commercial real estate loans that are made up of a bank loan and a loan from a local CDC (Certified Development Company), packaged together.
  • SBA Disaster Loan Program: These loans come in three forms that offer funding to small businesses who have suffered an economic disaster and have exhausted other financial resources available to them.
  • SBA CAPLine Program: Offers lines of credit that come in four varieties but are typically only available in conjunction with SBA 7(a) or SBA CDC/504 loans.
  • SBA Microloan Program: Consists of loans of up to $50,000 that the SBA lends to nonprofit intermediary lenders that, in turn, lend that capital to businesses in their communities.
  • SBA Export Loan Program: Provides working capital loans for U.S.-based enterprises to expand and support their international sales. For these loans, the SBA can provide a guarantee of up to 90%.

SBA 7(a) Loans

First, let’s break down the most popular of all the SBA loan programs, the SBA 7(a) loan.

There are actually a number of different types of SBA 7(a) loans within this program, but we’ll explain how this program works as a whole.

SBA 7(a) loans can be as large as $5 million with terms as long as 25 years. These loans are remarkably popular because of the wide variety of use-cases business owners can put them towards. With eligible uses as diverse as working capital and real estate purchases, SBA 7(a) loans work like the catch-all of the SBA loan programs.

So, how do SBA 7(a) loans work?

These loans are provided by SBA-approved lenders, namely banks. Therefore, if you’re applying for one of these loans, you’ll do so directly with an SBA-approved lender and if you’re approved, you’ll receive capital from this institution. The SBA, however, will provide a guarantee of 50% to 85% of the 7(a) loans.

As we mentioned above, as a result of this SBA guarantee, SBA 7(a) loans will mean less risk for lenders, which in turn will mean more desirable terms and rates for borrowers. Interest rates on these SBA loans can be as low as the market prime rate plus 2.25%.

SBA CDC/504 Loans

Next, commonly referred to as SBA real estate loans, SBA CDC/504 loans work quite differently from 7(a) loans.

Whereas SBA 7(a) loans can be used for virtually any purpose, CDC/504 loans are designed specifically for financing real estate, construction, renovation, and long-term machinery.

This being said, SBA CDC/504 loans will actually be a conglomeration of a few loans, sourced from multiple lenders. One portion of the loan will come from a Community Development Corporation—or a CDC, for short. This portion will typically be 40% of the loan, but the SBA will typically provide a 100% guarantee for the amount that the CDC contributes.

In most cases, another 50% of the loan will come from another SBA-approved lender, like a bank. These two parts of the SBA CDC/504 loan will carry varying interest rates. The last 10% of the loan, however, will come from you—it will be a down payment from your business, which, of course, you won’t have to pay interest towards.

Ultimately, SBA CDC/504 loans are probably the most complex to understand, however, the important thing to remember is that the bank and the CDC will work together to issue the loan. Altogether, these loans can range in amounts anywhere from $125,000 to $20 million, with terms of 10, 20, or 25 years.

Overall, this type of SBA loan is meant for financing larger, more costly real estate projects. And, although it may take some time to figure out how these SBA loans will work for your business, they could be very much worth it if you need significant capital for a big-ticket project.

SBA Disaster Loans

Like SBA CDC/504 loans, SBA disaster loans are a little more complex to understand in comparison to 7(a) loans.

To start, within this SBA loan program, the SBA offers four different types of disaster loans. This being said, however, one element that all of the disaster loans have in common is that they’re actually provided by the SBA. These loans are one of the few instances in which the SBA lends directly, and as such, the funding will come directly from the SBA and won’t involve any guarantees or intermediary lenders.

Additionally, as you may have gathered from the name, SBA disaster loans are designed specifically to help business owners recover after they’ve experienced a declared disaster. Because these loans are so focused, they’ll involve a much more extensive process and evaluation from the SBA to determine whether or not your business qualifies. Overall, you’ll need to submit an application, after which point an SBA inspector will come to inspect your damages and make a decision regarding your eligibility.

And of course, how these SBA loans work will determine on which of the four loans you’re applying for. These are the options:

  • Home and Personal Property Loans: These allow homeowners to access SBA disaster loans if their property was destroyed or damaged in a presidentially declared disaster. If your primary place of residence was affected, you could access up to $200,000 in funding.
  • Business Physical Loans: These loans help business owners cover the cost of replacing or repairing business property that was damaged in a declared disaster. Through these types of SBA Disaster Loans, you’ll be able to access up to $2 million in financial assistance.
  • Economic Injury Loans: With these SBA disaster loans, you can receive funding to cover the non-physical, more financial harm that declared disasters might have had on your business—like an evacuated or dormant customer base in the wake of a natural disaster, for example.
  • Military Reservists Economic Injury Loans: These are SBA disaster loans specifically for businesses that have essential employees leave for active military duty. These loans can be as large as $2 million, but they’ll only be available for businesses that fit the use-case and don’t have access to typical commercial funding or credit elsewhere.

As you can see, the specifics of an SBA disaster loan will largely depend on which loan you’re talking about. On the whole, however, if the SBA determines you’re able to access credit elsewhere, the maximum interest rates on these loans will be 8%. On the other hand, if the SBA determines that you aren’t able to access credit elsewhere, then your SBA loan rate will be no more than 4%.

SBA CAPLines

Next, the SBA CAPLines program actually isn’t a loan program per se, but instead, it’s the SBA line of credit program.

Like the SBA disaster loan program, this program will involve four different versions, each with their own use cases, qualifications, rates, and terms.

On the whole, however, the options within the CAPLines program include both fixed and revolving lines of credit that are issued by partner banks and other direct SBA lenders. Unlike their disaster loans, the SBA does not provide the funding for their lines of credit. Instead, they typically guarantee 75% to 85% of the amount of the line of credit.

This being said, it’s also important to note that it’s often difficult to receive an SBA line of credit on its own—most of the CAPLines fund in tandem with 7(a) or CDC/504 loans.

With this in mind, let’s break down the four different versions of SBA CAPLines and how they work:

  • Seasonal lines of credit: These lines of credit will work for expenses like stocking up pre-season inventory, filling in gaps from accounts receivables, and covering higher labor costs when your busy season hits. These SBA lines of credit can have limits as high as $5 million.
  • Working capital lines of credit: Working capital lines of credit will address general business expenses, much like SBA 7(a) loans. As a result, they’ll carry similar terms and requirements as 7(a) loans.
  • Contract loan lines of credit: These business lines of credit best serve businesses who often need to access capital in order to purchase supplies and pay labor to fulfill contracts. SBA Contract Loan lines of credit can have limits as high as $5 million.
  • Builders’ lines of credit: Builders’ lines of credit, as per their name, are designed for small businesses that construct or renovate buildings for resale. These SBA lines of credit can come with limits as high as $5 million and can be used for expenses as diverse as labor, equipment rentals, and landscaping.

Overall, like SBA 7(a) loans, the interest rates on these lines of credit will depend on the lender, however, lenders must abide by the same maximums that the SBA sets for the 7(a) loans.

SBA Microloans

Through the SBA Microloan Program, the SBA provides community small businesses with capital by way of intermediary non-profit lenders.

Compared to the other loan programs, these loans are offered in smaller amounts and are designed for a variety of use cases. These are probably the most accessible type of SBA loan, and therefore, often a great option for new or startup businesses.

This being said, once again, this SBA loan program works differently than those we’ve discussed thus far. With these microloans, the SBA lends money, at a discounted rate, to the non-profit intermediary, who in turn, lends this capital to small business owners. These loans can range in amount from $500 to $50,000.

Repayment terms for SBA Microloans can never exceed six years, but other than that maximum, the intermediary lenders are able to dictate term length. As for rates, SBA Microloans typically carry interest rates ranging from 6.5% to 13%—in the 2019 fiscal year, however, the average SBA Microloan interest rate was 7.5%.

Ultimately, just as you must work with an SBA-approved lender to apply for a 7(a) loan, you’ll need to find a microloan intermediary in your community and apply for one of these loans with them.

SBA Export Loans

Finally, the last SBA loan program you’ll want to understand is the SBA Export Loan Program.

These loans will be available through the SBA’s network of SBA Senior International Credit Officers. You can find these officers located in U.S. Export Assistance Centers around the country, and they’ll be able to answer any questions you might have about this program.

This being said, this program is designed to provide working capital to businesses that export sales. Because banks are unlikely to provide working capital advances for these purposes, the SBA offers a 90% guarantee on export loans. With these loans, therefore, businesses can apply in advance of finalizing an export sale or contract. Once again, businesses have to work with a participating SBA lender to actually apply.

You can apply for SBA Export Loans in amounts as high as $5 million. Unlike some of their other programs, the SBA does not have any regulations for interest rates on these loans—instead, you must negotiate your rates directly with your lender.

Who Qualifies for SBA Loans?

As you can see, answering the question, “How do SBA loans work,” isn’t always cut-and-dry.

Although there is an overarching principle governing SBA loans, the involvement of the SBA, the specific program will largely dictate how any particular loan works. At this point then, you may be wondering how qualifications fit into the way SBA loans work. After all, if you’re interested in an SBA loan for your business, you’ll need to know if you can qualify.

Once again, due to the nature of the different SBA loan programs, some of the qualification requirements will depend on the lender you’re working with and the program you’re applying for. Nevertheless, there are a few general SBA loan requirements that you can keep in mind to see if your business might be eligible for one of these programs:

  • You should have a U.S. based, for-profit business in an eligible industry.
  • You should be a “small business” based on the SBA definition.
  • You should have invested your own time or money into your business.
  • You should have exhausted your other financing options.

On top of these basic requirements, you’ll also need to have great personal credit and strong business financials. Although SBA loans are more accessible than traditional bank loans, they are not the easiest loans to qualify for.

How to Apply for an SBA Loan

Now that you know the basic requirements that will be involved in qualifying for an SBA loan, you’re likely wondering about the application process.

After all, the actual application is an integral part of how SBA loans work.

Once again, just like the qualifications you’ll need, the application process will largely be dependent on the loan program and the lender. This being said, however, on the whole, you can expect your SBA loan application to require significant documentation, paperwork, and of course, time. SBA loans are notorious for the time and effort it takes to complete the application process and actually get to funding.

With this in mind, you should expect to provide (at least) the following:

  • Basic business information
  • Loan request
  • Personal background and character information
  • Resumes
  • Business plan
  • Personal and business credit reports
  • Personal and business tax returns
  • Financial statements
  • Collateral or a personal guarantee
  • Legal documents

How long does it take for an SBA loan to get approved?

When talking about how SBA loans work, this is a question business owners often have. After all, if your business needs funding, it only makes sense to want to know how long it will actually take to get that funding.

This being said, compared to many other loan products on the market, SBA loans are known for their long process (as we mentioned), which includes a slow time to fund.

On the whole, the SBA loan process generally takes about 60 to 90 days. Overall, the longest individual piece of the SBA loan timeline is usually the first part—where you gather your documentation and actually apply for the loan. If you’re prepared, this step could take no time at all, typically, however, it takes up to 30 days.

After the lender underwrites your loan (which can take from 10-14 days), the specific approval part of the timeline typically can take 10 to 21 days. The last step, closing, can take anywhere from seven to 14 days.

SBA Loan Alternatives

Whether you’re not sure that you’ll qualify for an SBA loan, or you’re simply overwhelmed with everything involved in understanding how SBA loans work, it’s always worth considering alternatives.

Although SBA loans tend to offer access to some of the very best terms on the market for small businesses, they also have strict requirements, are slow to fund, and can involve significant time and effort.

Therefore, if you’re looking for business funding that’s a bit more straightforward than any of the six SBA loan programs, you might turn to alternative lenders that offer term loans. Though their rates, repayment lengths, and loan amounts might not be as ideal as those of SBA loans, these alternative lenders will offer products that are easier to qualify for and have much simpler application processes.

Even better—these alternative lenders will take much less time to fund your business loan application than SBA lenders will. So, if you’re looking for capital that you can access right away, these might be better funding options for you. This being said, here are three options you might consider:

Fundation

The alternative lender Fundation offers small business term loans and lines of credit that can range in size from $20,000 to $500,000 (depending on the product) with repayment terms that can be as long as four years but no shorter than a year. Fundation loans and lines of credit will carry APRs ranging from 8% to 30%.

Just like any alternative lender out there, Fundation won’t be able to offer rates, terms, or loan amounts as ideal as those found with the SBA loan programs. This being said, Fundation out-competes SBA loan programs when it comes to funding speed and accessibility.

If you’re working with at least $100,000 in annual revenue, a personal credit score of at least 660, and at least a year in business, then you’ll be eligible for financing from Fundation. Plus, if you’re applying for funding of $100,000 or less, all the documentation you’ll have to provide for your Fundation application will be three months of business bank statements. To top it off, Fundation can fund qualifying businesses as quickly as one day.

Lending Club

If you’re looking for smaller loan amounts or lower interest rates than Fundation can offer, then you might consider Lending Club as your go-to SBA loan alternative. Lending Club offers business loans ranging from $5,000 to $500,000 with repayment terms from six months to five years long. Interest rates for these loans can start as low as 4.99%.

With Lending Club, however, it’s important to note that when you apply for a loan, you’ll actually be working with one of their partners, Opportunity Fund or Funding Circle. As of April 2019, Lending Club does not originate business loans, but instead directs you to one of their partners once you fill out their application.

Nevertheless, the minimum eligibility requirements for working with either of these partners will be much easier to fulfill than those associated with SBA loans. You’ll simply need to make at least $50,000 in annual revenue and have at least a year in business to qualify for one of these loans. Either of the Lending Club partners will check your credit, however, there is no minimum credit score required for qualification.

This being said, Lending Club’s partners don’t have the fastest funding times out there, but they will offer funding much quicker, on average, than SBA loans. Funding Circle typically takes three days to fund applications and Opportunity Fund usually takes eight to 10 days.

Balboa Capital

If you’re looking for affordable equipment financing, but don’t want to go through the hassle of figuring out the SBA CDC/504 loan, you might consider working with Balboa Capital.

Balboa Capital offers equipment loans of $3,000 to $1 million with repayment terms of two to five years long and competitive interest rates.

Equipment financing from Balboa will actually act as a mix of equipment leasing and financing. To explain, when you qualify for this financing from Balboa, you’ll be leasing the equipment from them, and then once you’ve reached the end of your payment schedule, you’ll buy it from them. This means that Balboa will technically own the equipment as you pay it down and once your equipment financing reaches maturity, you’ll then be able to buy it for a smaller amount.

To be eligible for Balboa Capital, you’ll need to have at least $300,000 in annual revenue and at least a year in business. There is no minimum credit score requirement for working with this lender, so it may be a good option if you need equipment and can’t qualify for other financing options.

The Bottom Line

At the end of the day, it’s not always easy to understand how SBA loans work. However, as you’ve seen through our guide, if your break down SBA loans into their different programs, you can get a better sense of the SBA loan options in order to think about which one might be right for your business.

This being said, although SBA loans often require a lengthy application process and slow funding times, if you qualify, you’ll have access to one of the most competitive loan products on the market. With SBA loans, you’ll have access to low-interest rates, long terms, and high loan amounts—second only to traditional bank business loans.

Therefore, it’s worth taking the time to sort through each of the SBA loan programs to see if any of them is the right fit for your financial needs—and of course, to determine if you can qualify. If you think an SBA loan is the best solution for your business, then you’ll want to take the next steps: Find a lender and start working on your application.

 

See If You Qualify for an SBA Loan

Frequently Asked Questions

Do you still have questions regarding how SBA loans work?

Check out the infographic below for answers to the questions that Fundera’s SBA loan experts hear the most.

how do sba loans work

Senior Contributing Writer at Fundera

Priyanka Prakash, JD

Priyanka Prakash is a senior contributing writer at Fundera.

Priyanka specializes in small business finance, credit, law, and insurance, helping businesses owners navigate complicated concepts and decisions. Since earning her law degree from the University of Washington, Priyanka has spent half a decade writing on small business financial and legal concerns. Prior to joining Fundera, Priyanka was managing editor at a small business resource site and in-house counsel at a Y Combinator tech startup.

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