SBA Loans: The Small Business Owner’s Comprehensive Guide
The U.S. Small Business Administration (SBA) is a government organization dedicated to helping small business owners launch and grow their businesses. One of the main ways they do this is through their loan programs.
With SBA loans, business owners don’t usually borrow from the SBA directly. Instead, the SBA typically guarantees part of the loan. In other words, they promise to pay the lender a portion (usually 50 percent to 85 percent) of the loan if the borrower ends up defaulting. This helps reduce risk and encourages these third party lenders—usually banks and credit unions—to lend, making it easier for entrepreneurs to get the money they need to start and/or maintain their business.
SBA loan financial incentives and COVID-19 relief
Why is it so important to understand SBA loans rules and regs right now? Well, due to the financial struggles many small business are facing in the wake of the COVID-19 pandemic the SBA has made a number of temporary changes to some of its loans to help businesses through COVID-19, including:
- Bigger loan limits, allowing businesses to borrow more
- Increased loan guarantees, giving lenders more incentive to lend
- Waived lender and borrower fees
- Extended repayment periods
- Increased lender maximums
- Principal and interest payments from the SBA
The fact that the SBA is covering principal and interest payments (for a period of time) could save your company thousands of dollars.
Here is what the SBA is offering for 7(a) and 504 loans:
- For loans approved before March 27, 2020: up to 9 months of principal and interest payments will be covered by the SBA; certain business in hardest-hit industries or who are owned by people from underserved communities may get an additional 3 months of principal and interest payment coverage
- For loans approved between February 1, 2021 and September 30, 2021: up to 6 months of principal and interest payments will be covered by the SBA.
This means you have until the end of summer to get a loan approved by the SBA that will be covered for 6 months. Get moving!
There’s a lot of fine print governing these changes, including caps on how much the SBA will contribute, which loans qualify, how long these changes will last, and more. We break down the details in our guide to the SBA loan COVID-19 relief package.
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Benefits and drawbacks of SBA loans
SBA loans are generally considered one of the best funding options for business owners, as they often come with low, business-friendly interest rates and long repayment terms, which can help keep monthly payments low. Plus, they usually come with low down payments, require little or no collateral, and can often be used for a variety of business purposes.
However, some SBA loans may not give you the amount you need, and many require personal guarantees, which means you’re personally responsible for the debt if your business isn’t able to repay it. Additionally, the application process can be quite lengthy—it can take weeks or even months to get funded—and the loans can be hard to qualify for because there’s a lot of competition for them.
SBA loan eligibility
While the SBA sets basic guidelines for the loans they guarantee, such as the maximum interest rate and fee amounts, loan terms, and minimum qualifications, the lender usually ultimately decides the specific terms and approves the loan. In general, the SBA may require that you:
- Meet the SBA’s small business size standards (this usually means you have 500 or fewer employees, though this maximum can vary by industry)
- Work in an eligible industry
- Operate for profit
- Do business (or are proposing to do business) in the U.S. or its territories
- Have invested time or money in the company
- Have used other financial resources, including personal assets, before turning to the SBA
- Need the loan and plan to use it for an approved purpose
- Aren’t delinquent on other debts to the U.S. government
- Are able to repay the loan on time (based on your projected operating cash flow, business plan, commitment, debt service coverage ratio, good character, and other aspects of your application)
In addition, many lenders require you to have good credit (a score of at least ~640, though the higher the better).
Note: Your cash flow is particularly important when lenders are evaluating whether you’ll be able to repay the loan on time. The SBA states that, “A Lender must analyze each application in a commercially reasonable manner, consistent with prudent lending standards. The cash flow of the Applicant is the primary source of repayment, not any expected recovery from the liquidation of collateral. If the Lender’s financial analysis demonstrates that the Applicant lacks reasonable assurance of repayment in a timely manner from the cash flow of the business, the loan request must be declined, regardless of the collateral available or outside sources of repayment.”
Taking on a business loan is always a serious commitment. With SBA loans in particular:
- You generally need to put down collateral for loans above $25k (though lenders don’t usually decline applications solely based on insufficient collateral).
- If you’ve been in business for less than a year, you may need to put down at least 10% of the total project costs.
- Individuals who own 20% or more of the business generally need to provide a personal guarantee. Guarantee fees are generally due to the SBA within 90 days of being approved.
What are the main types of SBA loans?
There are many types of SBA loans. The best option for your business can depend on multiple factors, such as how much you want to borrow, when you need the money, and what you want to use the funds for. We’ll give you a brief overview of the main types, though you should also do your own research and make sure you understand the terms and conditions before applying.
- Standard 7(a) Loan
- 7(a) Small Loan
- 7(a) Express Loan
- Community Advantage (CA) Loan
- Economic Injury Disaster Loan (EIDL)
- CDC/504 Loan
Loans in the 7(a) program
The SBA 7(a) Loan Program is the SBA’s most common loan program and their primary way of helping businesses financially.
Many small business owners like 7(a) loans because they’re extremely flexible—they can be used for a variety of business expenses, such as working capital, inventory, and purchasing equipment, though the SBA says 7(a) loans are “the best option when real estate is part of a business purchase.”
However, in addition to the SBA’s general eligibility requirements mentioned above, to qualify for a 7(a) loan, you need sufficient equity in your company: new businesses should have $1 of cash or business assets for every $3 of the loan, and established businesses should have at least $1 for every $4 of the loan.
Also, some specific types of businesses aren’t eligible for 7(a) loans, including financial institutions that lend, life insurance companies, real estate investment firms, consumer marketing cooperatives, speculative businesses, firms engaged in pyramid sale distribution plans, businesses that make more than one-third of their gross annual revenue from legal gambling activities, and businesses that promote or partake in illegal activities.
7(a) loan rates can vary, as they’re determined by the daily prime rate plus a lender spread. While lenders ultimately get to decide the final rate, the rate can’t exceed the SBA maximums.
There are many types of 7(a) loans. Below, we break down some of the most popular options.
SBA Standard 7(a) Loan
Standard 7(a) Loans allow eligible small businesses to borrow up to $5 million for a variety of purposes, including working capital, purchasing land, refinancing certain types of debt, and buying equipment or supplies.
A Standard (7a) Loan might be a good option for your business if you need to borrow a significant amount of money for a variety of business purposes.
To learn more and apply, use the SBA’s 7(a) lender match tool.
SBA 7(a) Small Loan
SBA 7(a) Small Loans allow eligible small businesses to borrow up to $350,000 for a variety of purposes, including working capital and purchasing inventory, buildings, or equipment.
One advantage of 7(a) Small Loans is the application process may be faster and easier than the standard SBA loan application if you pass the SBA’s credit prescreen, which is based on your personal credit, business credit, and business financials. If you don’t pass, it doesn’t necessarily mean you won’t be approved for the loan—you just need to go through the standard 7(a) underwriting process, which is much more thorough and time-consuming.
A (7a) Small Loan might be a good option for your business if you don’t need a ton of money and have good credit.
To learn more and apply, use the SBA’s 7(a) lender match tool.
SBA 7(a) Express Loan
While SBA loans are known for their long turnaround times, as the name implies, SBA 7(a) Express Loans come with less paperwork and a faster approval time than other SBA loans: 36 hours. (Keep in mind this is just for approval on the SBA’s end, though—you probably won’t get lender approval and the actual funds within that time frame.)
Another thing that sets 7(a) Express Loans apart is in addition to the usual allowable use of proceeds, such as working capital and operational expenses, businesses can also use them as a revolving line of credit for up to 7 years.
Until recently, small businesses could only borrow up to $350,000 with a 7(a) Express Loan. This limit was increased to $1 million until October 1, 2021, at which point it’ll drop to $500,000.
A 7(a) Express Loan might be a good option for your business if you can’t wait the SBA’s usual turnaround time. However, it’s important to note that these loans can come with higher interest rates than other 7(a) loans—since the underwriting process isn’t as thorough, it’s riskier to lend. Additionally, the SBA only guarantees 50% of the loaned amount, so the lender has more jurisdiction over most of the terms, like who’s eligible and what interest rate and fees you might need to pay.
To learn more and apply, use the SBA’s 7(a) lender match tool.
SBA Community Advantage (CA) Loan
The SBA Community Advantage program allows for-profit small businesses in underserved or low-income areas to borrow up to $250,000 to launch or grow their business. According to the SBA, borrowers are typically “entrepreneurs in underserved markets who are considering expansion or need working capital or inventory. They have been in business for less than three years and do not qualify for traditional financing elsewhere.”
SBA loans typically come with a ton of eligibility requirements, but the CA program is more flexible:
- You may not need at least two years in business if you can submit a thorough business plan and prove you have relevant experience that’ll help your business succeed.
- You may not need a strong balance sheet if your business plan shows promising financial projections.
- You may not need excellent credit to qualify—the SBA allows CA lenders to submit applicants with credit scores as low as 140.
These flexible eligibility requirements make CA loans ideal for startups, businesses in risky industries, and business owners who may face barriers getting traditional funding. However, keep in mind:
- CA Loans are a pilot program within the 7(a) program, so they may not be around for forever. However, this program began in 2011 and was recently extended until at least September 2022.
- CA lenders must meet specific qualifications—they must be “mission-oriented lenders, primarily nonprofit financial intermediaries focused on economic development”—so you may have trouble finding one.
- You can’t use CA loans as a revolving line of credit.
To apply, find an approved SBA Community Advantage lender using SBA’s Loan Center map or our list of CDFIs.
|Standard 7(a) Loan||7(a) Small Loan||7(a) Express Loan||Community Advantage (CA) Loan|
|Maximum loan amount||$5 million||$350,000||$1 million until Oct 1, 2021, then $500,000||$250,000|
|Maximum interest rate||Up to prime + 4.75% (varies based on the lender, loan size, and maturity date)||Loans $50,000 or less: up to prime + 6.5%|
Loans over $50,000: up to prime + 4.5%
|Up to prime + 6%|
|What it can be used for||Most legal business purposes, including working capital, purchasing real estate or equipment, renovations, refinancing certain types of debt, and more. Cannot be used for purposes specifically prohibited by the SBA, such as reimbursing the owner for personal investments, repaying delinquent withholding taxes, and anything that wouldn’t have a positive impact on the business.|
|How long it takes to process and receive funds||SBA turnaround time: 5 to 10 days|
Approval and funding: varies by lender
|SBA turnaround time: within 36 hours|
Approval and funding: within 90 days
|SBA turnaround time: 5 to 10 days|
Approval and funding: 30 to 90 days (or longer)
|Time to pay back||Up to 25 years for real estate|
5 to 10 years for equipment, working capital, or inventory
|Up to 7 years for lines of credit|
Up to 25 years for real estate
5 to 10 years for other purposes
|Up to 25 years for real estate|
Up to 10 years for equipment, working capital, or inventory
Disaster loans are the SBA’s primary way of helping businesses in declared disaster areas or contiguous counties and are the only loan type not limited to small businesses. Unlike most SBA loans, disaster loans are usually direct loans, which means the SBA processes the loans and funds come directly from the U.S. Treasury rather than through third-party lenders.
Most recently, the COVID-19 Express Bridge Loan provided expedited interim loans of up to $25,000 for businesses affected by COVID-19. However, this pilot loan program expired March 13, 2021, and right now, the main way the SBA helps small businesses is through Economic Injury Disaster Loans (EIDLs).
SBA Economic Injury Disaster Loan (EIDL)
The SBA Economic Injury Disaster Loan (EIDL) lets businesses in a declared disaster area that have suffered substantial economic injury borrow up to $2 million for “business operating expenses that could have been met had the disaster not occured,” such as payroll, accounts payable, and other bills. (For property damage, small business owners can apply for a Business Physical Disaster Loan.)
Since EIDLs are meant to help business owners especially in need, they usually have more flexible qualifications and terms than other SBA loans. For example:
- You may not need excellent credit if you have a history of on-time payments.
- You don’t need to put down a personal guarantee or collateral for EIDL loans under $200k.
- You can apply even if you have other SBA loans, and you may be able to defer payments.
- EIDLs come with low, fixed interest rates (3.75% for businesses or 2.75% for nonprofits) and long repayment terms (up to 30 years).
However, the SBA stresses that “EIDL assistance is available only to small businesses when the SBA determines they are unable to obtain credit elsewhere.” (Note: this requirement is currently temporarily removed under the CARES Act.)
The SBA also currently offers COVID-19 EIDLs, which allow businesses and nonprofit organizations to borrow up to $500,000 for working capital and normal operating expenses, such as rent, utilities, and debt payments. The application deadline and covered period lasts through December 31, 2021.
Additionally, the SBA is reaching out to small businesses who qualify for a Targeted EIDL Advance, which is a grant of up to $10,000 for applicants in low-income communities who can demonstrate a reduction in revenue of more than 30% during an eight-week period beginning March 2, 2020 or later—and who already received a partial EIDL Advance or applied but did not receive funding.
An EIDL might be a good option for your business if you’re unable to meet your financial obligations and pay for necessary operational expenses because of a declared disaster. However, keep in mind:
- Since your loan amount is based on your financial need, the SBA will send an inspector to estimate the cost of the damage—you don’t need to submit a specific loan amount with your application.
- You can’t use an EIDL to refinance long term debt.
- This loan is not forgivable.
You can apply for a regular EIDL online, at a Disaster Recovery Center, or by mail. To apply for a COVID-19 EIDL, visit the SBA’s disaster loan assistance page.
|Economic Injury Disaster Loan (EIDL)|
|Maximum loan amount||$2 million|
|Maximum interest rate||Up to 4% (Usually 3.75% for for-profit businesses and 2.7% for nonprofits)|
|What it can be used for||Fixed debt, payroll, accounts payable, and some bills that could have been paid if the disaster hadn’t occurred|
|How long it takes to process and receive funds||Around 2 to 3 weeks for the SBA to make a decision, around 5 days to get funds after signing the Loan Closing Documents|
|Time to pay back||Up to 30 years|
Other SBA loans
These loans don’t fall into a specific bucket, but they can be excellent options in certain situations.
Banks don’t typically service loans under a certain amount, which can be inconvenient if you don’t need to borrow much. The SBA Microloan program allows for-profit small businesses and nonprofit daycares to borrow up to $50,000 to start or expand their business. Like 7(a) loans, Microloans can be used for a variety of purposes, such as working capital, equipment, and inventory, but they can’t be used to pay existing debts or purchase real estate. While the rates can vary depending on the lender and the strength of the application, in 2020, the average was 6.5%.
In the past, small businesses only had up to six years to pay Microloans back. However, the CARES Act increased the maturity date to eight years. The maximum repayment term is scheduled to drop to seven years on October 1, 2021, though yours could vary based on the amount you borrow, use of proceeds, financial needs, and lender.
Unlike other SBA loans, with Microloans, the SBA lends money to specially designated intermediary lenders—usually non-profit community-based organizations—at a discounted rate instead of guaranteeing part of the loan. These lenders then set the eligibility requirements and loan terms and actually lend the money.
Microloans come with a few advantages. First, some lenders provide free business training and technical assistance. In other words, they help teach you how to expand and grow your business by offering classes and mentoring around various topics, such as marketing and management. Secondly, the Microloan program was designed for business owners who may not be able to qualify for loans elsewhere, so you likely won’t need perfect credit as long as other areas of your application are strong. Finally, many lenders are willing to help you with the application.
A Microloan might be a good option for your business if you don’t need to borrow much and don’t have perfect credit. However, there are a few things you should know before applying:
- While the max loan amount is $50,000, the SBA requires each lender’s portfolio to average $15,000, so you may not be approved for the full $50,000. In 2020, the average loan size was $14,434.
- If you want to borrow more than $20,000, you need to prove you couldn’t get financing from a non-government agency.
- Most Microloan lenders only serve a specific geographic area, so you may have difficulty finding funding if you don’t live near a qualifying lender.
- You may be required to complete a training before getting approved.
If you’re interested in applying for an SBA Microloan, contact one of the SBA’s approved intermediary lenders
SBA CDC/504 Loans
Also called CDC (Certified Development Company) loans, 504 loans let eligible small business owners borrow up to $5 million at below-market, fixed rates to purchase or improve major fixed assets “that promote business growth and job creation,” such as land, facilities, or long-term equipment.
CDC loans are unique in that they’re financed by multiple parties: usually around 50% by a bank or third-party lender, up to 40% by a CDC (an SBA-approved community-based partner that regulates nonprofits and promotes economic development within its community), and at least 10% by the small business—or up to 20% for new businesses and special-purpose properties. The bank and CDC work together to issue the loan, and the SBA regulates the CDC component of the loan. This means the borrower makes two payments each time: one to the CDC, which has a fixed interest rate, and one to the bank or third-party lender, which may set its own eligibility requirements, terms, and rate.
In addition to the standard SBA requirements, 504 Loans come with their own requirements:
- Your business must have a tangible net worth of less than $15 million and an average net income of less than $5 million after taxes over the past two years.
- Your business can’t fall under any of these types of businesses: those engaged in legal gambling, pyramid schemes, life insurance companies, lobbying or speculative businesses, apartment buildings, or mobile home parks.
- You must meet at least one economic development objective, such as job creation or retention, as the program is aimed at promoting growth and job creation.
- You must occupy 51% or more of the property if you’re acquiring an existing building. For new construction, this percent increases to 60%, and you have to work up to 80% occupancy over 10 years.
- You can use the assets you’re buying with the loan as collateral, but every business owner of 20% or more needs to put down a personal guarantee.
- You have to put down at least 10% of the cost of the project—maybe more if you’re a new business or are using the loan for a special purpose property—as a down payment. However, the good news is this is about half of what banks typically require for down payments.
- Every owner with at least 20% ownership needs a background check, and some criminal records can disqualify the application.
The COVID-19 relief package that passed in December 2020 also granted the SBA authority to establish a 504 Express Loan Program, which allows the most experienced and successful lenders to expedite 504 loans less than $500,000, giving these borrowers access to funds sooner.
A CDC loan might be a good option for your business if you’re looking to buy or improve property, buildings, or major equipment. But before applying, keep in mind:
- Your approved loan amount depends on the size of the project.
- CDC loans are less flexible than 7(a) loans— you generally can’t use them for working capital, inventory, or refinancing.
- Special considerations apply to certain types of businesses and individuals.
- Since there are so many additional requirements, the qualification process can be much more complex (and take longer) than that of other SBA loans.
To apply, ask your bank if they offer SBA 504 loans or reach out to a Certified Development Company using the SBA’s CDC finder tool.
|SBA Microloan||504 Loan|
|Maximum loan amount||$50,000||Generally $5 million, but up to $5.5 million for specific businesses. (This is only the SBA loan limit, so your total loan amount could be higher.)|
|Maximum interest rate||Usually 6% to 9%||Varies, but often around 3%|
|What it can be used for||Working capital|
Inventory or supplies
Furniture or fixtures
Machinery or equipment
|Buying or improving land, buildings, or major equipment|
|How long it takes to process and receive funds||Depends on the lender, but up to 30 days||30 to 90 days|
|Time to pay back||Up to 8 years (until October 1, 2021, then up to 7 years)||Up to 10 years for machinery/equipment|
Up to 20 to 25 years for land/buildings
SBA loans can be a great way to get the funding you need to start or grow your business. While the application process can be complicated and lengthy, it could be worth it, as SBA loans tend to have some of the most competitive rates out there. Before applying, be sure to compare the various types to determine which is best for your situation, and make sure you understand all the requirements, terms, and conditions.
*The interest rates mentioned in this piece are accurate as of June 4, 2021. Keep in mind your interest rate is different from your APR, which is your annual cost of the loan, including fees.