Table of Contents

  • How Do SBA Loans Work?
  • Pros and Cons of SBA Loans
  • Types of SBA Loans
  • What Are the Characteristics of Successful SBA Loan Applicants?
  • Finding an SBA Loan That Works for You

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An SBA loan is offered through lenders and partially guaranteed by the Small Business Administration (SBA) in case of borrower default. While it’s notoriously difficult for small business owners to get approved for a long term loan, SBA loans are among some of the most accessible and affordable forms of financing for entrepreneurs of small to medium-sized businesses.

Overview of SBA Loan Programs

An SBA loan program makes the SBA one of your closest allies. By partnering with lenders, including banks, community development organizations, credit unions and alternative online lenders, the SBA makes it more attainable for small business owners to obtain loans.

It’s a common misconception that the SBA provides loans and financing. Rather, the SBA doesn’t issue loans at all. Instead, they provide an SBA guarantee to preferred lenders (like local banks and credit unions) who issue loans in accordance with the SBA’s requirements.

How Do SBA Loans Work?

SBA business loans work by offsetting the risk lenders face loaning funds to small businesses. Lenders collaborate with the SBA to secure each loan. The SBA does this by providing a guarantee to lenders that the money lent will be paid back.

That is, the SBA will provide the capital for the lender to recoup the losses incurred after a borrower defaults.

Lenders need to protect their investments. Otherwise, they can go out of business if the loans they issue are too risky. The truth is that every small business loan presents a risk to creditors since they can be defaulted on, which has harsh consequences for their bottom line and can involve lengthy legal battles.

What Is an SBA Loan Guarantee?

An SBA loan guarantee serves as federally funded security for small business loans offered by partner lenders. This means if a borrower isn’t able to repay a loan, the SBA will step in and pay the lender a portion of the total loan amount.

The SBA guarantees up to a certain percentage of each loan. The percentage of the guarantee varies depending on the loan type and amount. For example, the SBA will guarantee 50% of SBA Express loans and 75% or 85% of SBA 7a loans, depending on the loan amount.

SBA Loans vs Business Loans

SBA-backed loans are unlike conventional business loans offered by banks and credit unions. This is because up to 85% of the loan amount provided through an SBA-approved lender is secured by the U.S. Small Business Administration. 

In contrast, conventional business loans do not have the benefit of SBA guarantees. As a result, conventional bank loans are usually more difficult to qualify for than SBA loan programs. Additionally, because conventional bank loans aren’t secured by the SBA, loan amounts are typically lower than what you’d find with SBA loans.

Pros and Cons of SBA Loans

Pros and cons of SBA loans range from low interest rates and long repayment terms on the positive end to lien requirements on the negative. Let’s take a look at the pros and cons of SBA loans in a bit more detail.

Pros of SBA Loans

If you’re wondering “Is an SBA loan a good idea?” read on. Some of the main advantages of SBA loans include:

  • Lower down payment requirements
  • Annual percentage rate (APR) limits
  • Generous repayment terms (10+ years)
  • Provides financing for 75% to 90% of project costs
  • Counseling and business education offered by SBA

Cons of SBA Loans

SBA loans aren’t for every small business owner. Below, we’ve listed some of the main criticisms and drawbacks associated with SBA loans:

  • Applicants must put a lien on personal assets
  • Liens can negatively impact liquidity
  • Applicants can only apply through SBA-preferred lenders

Let’s unpack these criticisms a bit. First, if you have personal assets that can be used to help secure the loan (think home equity, personal vehicles or any other asset of value), then you will be required to put a lien on these assets. In other words, you need to provide a legal filing that permits the lender to recoup these assets if you default on the loan.

Plus, your liquidity can be negatively affected if you put a lien on these assets, since you won’t be able to sell them or transfer ownership until the loan has been repaid.

It’s important to note, though, that these criticisms shouldn’t rule out SBA business loans as a potential financing option. If you repay the loan, you won’t have any problems with your SBA loan affecting your personal assets or financial security.

Types of SBA Loans

There are several kinds of SBA business loans you can choose from depending on your needs. You can apply for SBA loan programs through preferred partner lenders. Types of SBA loans include:

Small Business Tip: If you’re wondering “What is an SBA 7a loan?” or “How can I apply for an SBA Express loan?” check out our loan types page for more SBA loan information.

What Can an SBA Loan Be Used For?

SBA loans support a variety of business needs in virtually any industry. Use funds to grow your business by expanding to new locations, modernizing your company headquarters, upgrading technology and more.

Depending on the SBA loan type, you could use funds for the following:

  • Fixed asset purchases or leases
  • Land purchases or leases
  • Building purchases
  • Construction projects
  • Working capital
  • Renovation projects
  • Site improvements
  • Equipment purchases
  • Inventory purchases

What Are the Characteristics of Successful SBA Loan Applicants?

Per the SBA website, there are several rather lenient qualification standards for SBA loans. Standard SBA loans cannot be issued to prospective borrowers unless all the following minimum requirements are met:

  • The business is physically located and operates in the United States or its territories
  • The owner has invested equity into the business
  • The business cannot qualify for funding by other means
  • The business is a legal, for-profit enterprise

While the above requirements are relatively lenient, applicants should be aware that the lending institutions you borrow from may make it more difficult to get approved. Depending on the lender, you may find that you cannot apply with a FICO credit rating of less than 580. In other cases, the minimum credit score for applicants can be as high as 680.

Finding an SBA Loan That Works for You

Now that you understand the definition of an SBA loan, it’s also important to understand that not all SBA loans are the same, and not all SBA lenders are the same either. It’s crucial that every prospective borrower do their homework before they apply for an SBA loan to compare rates, terms and eligibility requirements. Just because you qualify for a loan from one institution says nothing about your suitability for any other.

To find an SBA lender that satisfies your business’s needs, you can leverage the official SBA Lender Match tool. SBA’s Lender Match system is a free online referral service that can set you up with an SBA-preferred lender that you qualify for. Alternatively, you can use a loan broker or online lending marketplace to assist with your loan search and help you gather more SBA loan information.

You can expect more and more small business owners to migrate to online lenders to secure SBA loans. If you want to be part of this burgeoning trend, we recommend shopping around for the best online business loans to help you save time and start building the business of your dreams.

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