SBA Loans Explained: Types, Requirements and How to Apply

SBA loans are some of the most talked-about financing options for small businesses, and for good reason. They can offer competitive interest rates, longer repayment terms and access to capital for businesses that might struggle to qualify for conventional bank loans. But they also come with requirements and paperwork. Here’s what SBA loans are, how they work and how to apply.

How SBA loans work

The U.S. Small Business Administration generally doesn’t lend money directly to businesses. Instead, it guarantees a portion of loans made by approved banks, credit unions and other lenders. If a borrower defaults, the SBA repays the lender a portion of the loss.

That guarantee lowers the lender’s risk, which can make lenders more willing to approve loans for small businesses, including newer businesses or those with limited collateral, and to offer more favorable terms. The SBA sets guidelines for these loans, including maximum interest rates and fees in many cases, while lenders handle the application, approval and servicing.

The main SBA loan programs

7(a) loans are the SBA’s primary and most popular loan program. They’re flexible and can be used for a wide range of purposes, including working capital, purchasing equipment, buying inventory, refinancing existing business debt, purchasing real estate and buying an existing business. The maximum loan amount for a standard 7(a) loan is $5 million. Terms vary depending on how the money is used, with longer terms available for real estate.

504 loans provide long-term, fixed-rate financing for major fixed assets that promote business growth and job creation, such as buildings, land and long-lasting equipment. These loans are structured as a partnership between a private lender and a Certified Development Company, a nonprofit organization that promotes economic development. Borrowers typically make a down payment, with the remaining financing split between the lender and the Certified Development Company. 504 loans generally can’t be used for working capital or inventory.

Microloans provide loans of up to $50,000 made through nonprofit intermediary lenders. They’re often used by newer or smaller businesses for working capital, inventory, supplies, equipment and furniture. Many microlenders also offer business training and technical assistance. Microloans can be a good option for startups and businesses that need smaller amounts of capital.

The SBA also offers disaster loans, made directly by the SBA, to help businesses and homeowners recover from declared disasters.

Common requirements

Requirements vary by program and lender, but lenders commonly look at several factors.

Your business generally must operate for profit, be located and operate in the United States and meet the SBA’s size standards for a small business, which vary by industry. It should also have reasonably tried other financing options before seeking SBA assistance. Some types of businesses aren’t eligible.

Lenders review your personal and business credit history and evaluate whether your business can repay the loan from its cash flow. Strong credit and a track record of revenue improve your chances.

Expect to provide a business plan and financial statements, including profit and loss statements, balance sheets and cash flow projections. Lenders want to understand how your business makes money and how you’ll use the loan.

Depending on the loan, lenders may require collateral, such as business assets or real estate. Owners with significant ownership stakes are typically required to provide personal guarantees, meaning they’re personally responsible for repaying the loan if the business can’t.

Pros and cons of SBA loans

SBA loans can offer competitive interest rates and longer repayment terms than many conventional business loans, which can result in lower monthly payments. They may be accessible to businesses that don’t qualify for traditional financing.

On the other hand, the application process can be lengthy and paperwork-intensive, and approval can take weeks or longer. Personal guarantees put your personal assets at risk, and some loans come with fees.

How to get started

The SBA’s Lender Match tool on sba.gov can connect you with participating lenders based on your needs. You fill out a short form, and interested lenders can contact you. You can also approach banks, credit unions and online lenders that participate in SBA programs directly.

Before applying, gather the documents lenders typically request, such as business and personal tax returns, financial statements, a business plan, business licenses, legal documents like articles of incorporation and leases, and information about how you plan to use the funds. Being organized can speed up the process.

Check your personal and business credit reports and address any errors before applying.

Get free help

Small Business Development Centers and SCORE mentors can help you prepare a loan application, develop a business plan and financial projections, and understand your financing options at no or low cost. Their guidance can improve your chances of approval and help you choose the right type of financing for your business.

Be cautious of anyone charging upfront fees to guarantee approval for an SBA loan. Legitimate SBA resource partners provide guidance free or at low cost.