SBA Loans Explained: Everything You Need To Know

If you’ve heard about Small Business Administration loans, you might be wondering how does an SBA loan work? If so, you’re in the right place.

The Small Business Administration is an indispensable resource for business owners in need of financing. In partnership with banks, credit unions, and other financial institutions, the SBA offers low-cost government-backed business loans. SBA loans can be used for most business uses, such as working capital, inventory, equipment, refinancing, and real estate.

SBA loan borrower requirements are difficult to meet, and the application process can be time-consuming. However, for most borrowers, the effort is worth the access to low-cost loans they couldn’t get elsewhere.

Are you eligible for an SBA loan? And which type of loan is right for your business? Keep reading to find out!

What Is An SBA Loan?

The SBA offers a variety of loan programs that vary according to business needs. Its flagship program is the 7(a) loan program, which offers loans for most general business purposes. However, it also offers special programs such as microloans and disaster loans.

Below is a summary of the types of loans offered by the SBA:

Between its four main loan programs, SBA loan products can be used for most purposes. Borrowers can use loans for working capital, fixed assets like equipment, machinery, or real estate, inventory purchasing, refinancing, exports, or even startup costs.

Contrary to popular belief, the SBA does not originate business loans. Instead, the agency guarantees a portion of loans offered by partner banks, credit unions, non-profits, and other financial institutions. In the event the borrower defaults, the lender can collect their lost funds from the SBA. Because loans backed by the SBA are lower risk, banks and other partners are able to offer low rates and fees. SBA loans generally carry the best rates and terms you’ll come across.

That said, government-backed loans are not without their downsides. Because they involve a joint effort between multiple institutions (one of which is the US government), SBA loans tend to have long application processes with a lot of paperwork (and a fair amount of waiting). And some small business owners, especially those with poor credit, might not qualify for an SBA loan. While some SBA partners, such as SmartBiz, have found ways to speed up the process, you will still have to have a fairly strong borrower profile and be willing (and able) to wait a few weeks to get your funds.

Borrower requirements: • In business at least 2 years • Owner’s personal credit score is 650 or above • Business credit score is 150 or above

Visit the SmartBiz website Read our full review

For many businesses, however, expending a little extra effort is worth it to get a low-cost, government-backed business loan.

What Interest Rates Can I Expect From An SBA Loan?

The SBA sets limits on the rates their partners are able to charge on a loan. Head over to our article on SBA loan interest rates to see the current rates.

Rates for microloans, 504 loans, and disaster loans are fixed, but 7(a) loans generally carry variable interest rates. For 7(a) loans, your interest rate is determined by a base rate (normally the WSJ prime rate) plus a markup. Your interest rate will change when the prime rate (or other base rate) changes. Consequently, your monthly payments and total borrowing amount might change while you are repaying the loan.

Your interest rate might also vary according to how much you are borrowing. For example, here are the base rates and markups for standard 7(a) loans:

Along with interest rates, you might be charged other fees by the SBA and its partners, such as guarantee fees, processing fees, and packaging fees.

What Repayment Terms Can I Expect?

Along with interest rates and fees, the SBA sets limits on term lengths and repayment terms.

SBA loans usually carry the longest term lengths you’ll come across. For general 7(a) loans, you can expect a term length of 10 or 25 years:

• 10 years for equipment, working capital, or inventory
• 25 years for real estate

504 loans carry similar term lengths:

• 10 years for equipment and machinery
• 20 years for land

Microloans and some specialized 7(a) loans have shorter term lengths. For example, the maximum term length for microloans is six years.

Generally, SBA loans are repaid on a monthly basis.

Do I Need A Down Payment Or Collateral To Get An SBA Loan?

A big appeal of SBA loans is that the agency guarantees a portion of your loan. Consequently, borrowers have more flexibility about what, and how much, collateral they have to supply. But that doesn’t mean you’re completely off the hook.

The SBA requires that all business owners sign a personal guarantee — an agreement stating that you are personally responsible for repaying the loan if your business no longer can.

In most cases, the lender will still require as much collateral from your business as possible. In some cases, the equipment or real estate you are purchasing can be used as collateral. In other cases, you will have to put up assets that you already have. While you usually still have to put up collateral, you might not have to put up as much, and the lender might be more flexible about what they’re willing to accept as collateral.

In some cases, you will also have to pay a down payment. For example, 7(a) 504 loans require that you pay a small amount (usually 10%) of the cost of the project you are undertaking.

Who Can Get An SBA Loan?

As stated above, you must have a strong borrower profile and credit score to get an SBA loan.

To receive a loan, you’ll have to meet the requirements of the SBA as well as its partners. You’ll have to be able to prove that you’re able and willing to meet the repayments, by showing that your business is (or will be) financially capable of repaying and that you have been a responsible borrower in the past.

To prove that your business is able to repay the loan, you’ll have to submit financial documents from your business, as well as information about the way you want to use the funds. If your business cannot currently repay, perhaps because you are still starting it up, you will have to prove that it will be able to in the future by providing information such as business plans and industry experience.

To prove that you have been a responsible borrower in the past, the SBA and your lender will evaluate your credit history and score. Unfortunately, business owners with bad credit will have a hard time qualifying for an SBA loan. Most eligible SBA loan borrowers have a credit score in the high 600s or higher. Don’t meet that requirement? Check our tips to improve your credit score or our favorite loans for merchants with poor credit scores.

Which Industries Get Approved For SBA Loans Most Often?

In 2021, the SBA provided $44.8 billion through over 61,000 small business loans. A wide variety of industries have taken advantage of these loans, from convenience stores and restaurants to doctor’s offices and daycare centers. Based on data from 2010 to 2019, there are a few specific industries that have been approved and funded through the SBA at higher rates than other industries. The top industries include:

• Full-Service Restaurants: Full-service restaurant owners received 28,680 SBA loans totaling $10,671,876,233.
• Limited-Service Restaurants: Limited-service restaurants also received a large number of SBA loans. From 2010 to 2019, this industry was given 19,141 loans that added up to $6,513,491,798.
• Dental Offices: Dental offices also received a high amount of SBA loan dollars with $6,061,534,124 across 10,699 loans.
• Long-Distance Freight Trucking: 8,959 loans worth $1,229,924,828 were approved in this industry.
• Hotels & Motels: Non-casino hotels and motels received 8,618 SBA loans totaling $16,335,235,993.

Is An SBA Loan My Best Option?

SBA loans carry the best term lengths and interest rates you’ll come across — so why would anybody want to apply for anything else?

The SBA might not be your best option if you need a loan quickly, or you cannot qualify for a loan. Fortunately, if you fall into either of those camps, you have other options. Some independent lenders, usually called “alternative lenders,” or “online lenders,” offer loans to businesses that don’t qualify for a loan from the SBA or banks. Many of these lenders have lower credit score requirements and shorter applications than SBA loans.

Head over to our Small Business Loan Comparison Chart to learn about some of our favorite online lenders.

How Do I Apply For An SBA Loan?

To receive an SBA loan, you’ll have to demonstrate that you are willing and able to repay your loan. To do so, you’ll have to fill out a fair amount of paperwork and wait a fair amount of time for the SBA and its partners to process your application.

You can start by applying directly to the SBA’s partner lenders. If you don’t know which lender to apply for, the SBA offers a Lender Match platform, which matches borrowers up with the lenders best suited for their business.

The documents required will vary according to your business and the loan you are applying for, but you can expect to have to submit documents and fill out forms such as:

• Federal business tax forms
• Federal personal tax forms
• Balance sheets
• Profit & loss statements
• AR / AP agings
• Business debt schedule
• Forms about your business and its history
• Project-specific information
• Statement of personal history
• Your resume or CV

You might also have to submit information on the real estate or business you are trying to purchase, the debt you want to refinance, a business plan and projected income statement, or other documents.

The SBA and the bank (or other partner lender) will process this information and decide if you’re eligible for a loan. During this phase, they might ask for additional paperwork. They will also look at your credit history to evaluate your creditworthiness.

If you are approved by all parties, the funder will send your loan and you’ll be able to start using your new funds.

My Loan Application Was Declined. What Are My Options?

Unfortunately, not every business is qualified for an SBA loan. To qualify, you need a strong credit history and strong financials (or a strong business plan).

If you can’t currently get an SBA loan, your best bet is to apply to an online lender. Although the rates and fees will be higher, online lenders have fewer requirements (and shorter application processes) than an SBA loan.

How Long Does It Take To Get An SBA Loan?

Obtaining an SBA loan generally takes a couple of months.

In addition to requiring a lot of paperwork and documentation, your loan application has to be processed by the SBA and your lenders before your application is approved or denied. These institutions all tend to take a while to process and disburse your loan.

Borrowers looking for $350,000 or less have a couple of options to speed up the process: SBA Express Loans and SmartBiz.

Express Loans are 7(a) loans in which the SBA offers an expedited turnaround time. Instead of taking a couple weeks to process your loan, they’ll process it in 36 hours or less. However, these loans can still take a long time because the partners still have to process the loan. Additionally, interest rates are higher than standard 7(a) loans.

Another option is SmartBiz, an SBA loan intermediary that offers standard 7(a) loans. This funder uses technology to speed up the application process. The SmartBiz loan application process generally only takes a couple weeks.

Borrower requirements: • In business at least 2 years • Owner’s personal credit score is 650 or above • Business credit score is 150 or above

Visit the SmartBiz website Read our full review

SBA Loans Explained Further

Final Thoughts

Businesses in need of financing can hardly do better than a government-backed SBA loan. Although they have an extensive application process, loans from the Small Business Administration carry low interest rates and long repayment terms.

Our favorite SBA funder for general 7(a) loans is SmartBiz. This funding intermediary, which works with banks and the SBA, eliminates the bulk of the waiting time by using technology to speed up the application process. While you’ll still have to gather a lot of paperwork, the SmartBiz application process generally only takes a couple of weeks.

Head over to SmartBiz to check your eligibility, or to the SBA’s Lender Match platform to find other funders you might be eligible for.

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