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What Is an SBA Loan?
SBA loans are business loans guaranteed by the Small Business Administration. Via multiple SBA funding programs, this government agency provides SBA loan guarantees of up to 85% of the loan amount provided through an SBA-approved lender—typically banks.
The government guarantee lessens the risk for banks, allowing them to lend to small business owners who may not qualify for a traditional bank loan. The three main SBA loan programs let you borrow money for nearly any business purpose—including working capital, purchasing inventory or equipment, refinancing other debts, or buying real estate.
SBA loans offer low interest rates and long repayment terms, making them one of the most desirable types of business financing on the market. However, these government-guaranteed loans are generally slower to fund and require a lengthy application, so businesses will need to meet high requirements to qualify.
SBA 7(a) Loan Details
| Max. Loan Amount | Loan Term | Interest Rates | Speed |
|---|---|---|---|
| Up to $5M | Up to 25 years | Starting at 5.5% | As fast as 2 weeks |
Pros- Low down payments
- Long payment terms
- Reasonable interest rates
- Suitable for a wide range of business purposes
Cons- Lengthy paperwork
- Longer approval times
- May require collateral
Temporary SBA Loan Program Updates
As part of the latest legislation for coronavirus relief, Congress relaunched the Paycheck Protection Program, expanding eligibility and allowing certain businesses to apply for second-draw loans. This bill also included temporary updates for standard SBA loan programs to provide additional assistance to small businesses during the pandemic.
Here’s what you need to know:
- Fees: Lender and borrower fees are waived for both the 7(a) and 504 loan programs.
- Microloan terms: Extends the maximum terms on microloans from six years to eight years.
- Guarantee amounts: The SBA will guarantee up to 90% of the loan amount on 7(a) loans, including Community Advantage loans until Oct. 1, 2021. They will also guarantee up to 75% of the loan amount on Express loans for loans of $350,000 or less until Oct. 1, 2021. On that date, the guarantee amount will return to 50%.
- Express loan amounts: SBA Express loan amounts will increase from $350,000 to $1 million. On Oct. 1, 2021, they will fall and stay at $500,000.
- Covered payments: The SBA will make monthly payments of up to $9,000 for borrowers with eligible 7(a) or 504 loans. The number of covered payments ranges from two to six months and depends on when your loan was approved and disbursed, as well as the availability of funds.
SBA Loan Types
There are several different SBA loan programs out there, with the following three programs being the most popular:
The SBA loan program you’ll want to apply for depends on the size, age, and goals of your business.
Here’s a summary of all three options:
| Loan Type | Loan Amount | Interest Rates | Repayment term | Best For |
|---|---|---|---|---|
7(a) Program |
Up to $5 million |
Prime rate + 2.25% – 4.75% (depending on loan amount and repayment terms) |
10 – 25 years |
General business financing needs |
CDC/504 Program |
Up to $5.5 million |
5- to 10-year Treasury rate + 2.23% to 2.39% (depending on repayment terms) |
10 – 25 years |
Purchase of major fixed assets, like land, buildings, large equipment, and machinery |
Microloan Program |
Up to $50,000 |
8% – 13% |
1 – 6 years |
SBA 7(a) Loan Program
The SBA 7(a) loan program is the most popular of all SBA loan programs because the capital can be put toward a wide range of business purposes. SBA 7(a) loans are available in amounts up to $5 million and depending on what you need your loan for, how fast you need it, among other criteria, there are different subsets of the 7(a) program that you can apply for, including:
- Standard 7(a) Loan
- SBA 7(a) Small Loan
- SBA Express Loan
- Export Express Loan
- Export Working Capital
- International Trade Loans
- SBA CAPLines Line of Credit
Here are the details you need to know about the 7(a) program:
Interest Rates
SBA 7(a) loans come with interest rates in either fixed or variable (typically adjusted quarterly) varieties. Your bank lender determines which it will offer.
To protect borrowers, the SBA puts a ceiling on 7(a) loan rates by limiting the “spread” a bank is allowed to apply on top of the loan’s base interest rate.
In other words, the SBA restricts how much a bank can make off your SBA loan.
If your loan amount is more than $50,000 and the term is less than seven years, your rate will be set by the prime rate and the maximum spread will be at most 2.25 percentage points (prime rate + 2.25%). For SBA loans of more than $50,000 and seven years or longer, your rate will still be determined by the prime rate, but that spread increases to 2.75 percentage points (prime rate + 2.75%).
Like all types of loans, the interest rate you end up paying depends on your credit score and the length of your repayment term. And finally, when you get your offer, be sure to calculate your APR. The APR will be different than your interest rate, incorporating any guarantee fees or origination fees you’re charged to get the true cost of the SBA loan.
See all current SBA loan rates here.
Repayment Term
What would an SBA 7(a) loan mean for your business’s cash flow? You can expect monthly payments for 25 years for real estate and up to 10 years for equipment and working capital.
Keep in mind: these are the longest terms you’ll find, giving you plenty of time to figure out how to make each payment and spreading those large, long-term loans over many years.
Fees
The SBA charges a guarantee fee for the service of guaranteeing the loan. The lender originally pays the guarantee fee, but it also can just pass that expense on to the borrower.
The guarantee fee on 7(a) loans ranges from 0.25% of the guaranteed portion of the loan to 3.5% of the guaranteed portion up to $1 million, plus 3.75% of the guaranteed portion over $1 million. Be aware that your guarantee fee might be included in the total cost of the loan.
Some partnered banks might also charge an origination fee or a loan packaging fee, depending on which banks you’re working with.
SBA CDC/504 Loan Program
An SBA 504 loan is a type of SBA loan that is used specifically for the purchase of fixed assets, to upgrade existing assets, or to purchase real estate.
Typically with a 504 loan, a bank extends half the total loan amount, SBA-approved certified development companies (CDC) extend 40% of the loan amount, and the borrower puts down a down payment to cover the rest.
These loans are available in amounts of up to $5.5 million.
Interest Rates
Of all the different types of SBA loans, CDC/504 loans have the most complicated interest rates. That’s because the 504 loan program involves two individual loans—one from a bank and one facilitated by a certified development company.
The rates on the CDC portion of the loan are subject to SBA rules — and you can expect to receive a rate equal to the 5- to 10-year Treasury rate + 2.23% to 2.39% (depending on repayment the terms of your loan).
The bank portion of the loan, on the other hand, is not subject to SBA-regulation, so you’ll receive a rate based on your business’s qualifications and you’ll be able to negotiate your rate with the bank you work with.
Repayment Term
Similar to other types of SBA business loans, CDC/504 loans come with either a 10-, 20-, or 25-year term.
SBA Microloan Program
An SBA microloan is a loan of up to $50,000 from an intermediary nonprofit to the owner of a small business or startup. The money originates from the SBA, which initially lends the money at a discounted rate to the intermediary.
Businesses can use SBA microloans for a range of purposes, including working capital or buying equipment, machinery, or supplies.
Interest Rates
Microloans are administered by partnering financial institutions. The institution you work with is the one that sets the interest rate on the microloan, depending on your creditworthiness and the specifics of your small business. Rates, however, typically range between 8% to 13% for the microloan program.
Repayment Term
Loan repayment terms depend on the loan amount, use of funding, and other criteria, but the maximum repayment term allowed for an SBA microloan is six years.
Fees
There are no fees associated with microloans.
Who Qualifies for an SBA Loan?
Pros and Cons of SBA Loans
Is an SBA loan the right type of financing for your small business?
Here are some pros and cons to consider:
Pros
Cons
How to Apply for an SBA Loan
If you think an SBA loan is right for your business, you’ll want to decide what type of SBA loan you want to apply for, evaluate your qualifications, and find a lender to work with.
As we mentioned, the SBA loan process can be lengthy and complicated. You’ll need to provide documents like financial statements, information on your collateral, a description of your business, and a statement of how you’ll use the loan proceeds, among others. The complete list of loan documents you may need are as follows:
- Driver’s license
- Voided business check
- Bank statements
- Balance sheet
- Profit & loss statements
- Business tax returns
- Personal tax returns
- Business plan
- Business debt schedule
The participating bank will look for applicants with good credit, a solid business plan, profitable businesses (most of the time, not always), and a demonstrated ability to repay the loan.
Your borrowing history is especially important to the bank you’re working with for an SBA loan.
For more information on how to apply for an SBA loan, check out our resources below.