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 by definition is a type of financing that’s offered through lenders and partially guaranteed by the Small Business Administration (SBA) in case of borrower default. SBA loans can take a while to get, but they’re among the most accessible and affordable forms of financing for entrepreneurs of small to midsize businesses.

Overview of SBA Loan Programs

SBA loan programs make the government one of your closest allies. By partnering with lenders, including banks, community development organizations, credit unions and alternative online lenders, the SBA makes it much easier for small business owners to obtain loans.

It’s a common misconception that the SBA provides loans and financing directly. The SBA actually doesn’t issue loans at all. Instead, the SBA provides a guaranty to preferred lenders (such as 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 reducing 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 guaranty to lenders that the money lent will be paid back.

If a business owner defaults, the SBA will provide the capital for the lender to recoup part of their losses on the loan.

Lenders need to protect their investments. Otherwise, they can go out of business if the loans they issue default. The truth is that every small business loan presents a risk to creditors since they can be defaulted on, which has harsh consequences for the lender’s bottom line. 

What Is an SBA Loan Guaranty?

An SBA loan guaranty 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 guaranty 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 7(a) 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 SBA. 

In contrast, conventional business loans don’t have the benefit of an SBA guaranty. As a result, conventional bank loans usually are 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 (meaning less financing available to bolster your business).

Pros and Cons of SBA Loans

Pros:

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

Cons:

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

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 to qualify for an SBA loan. You need to provide a legal filing that permits the lender to recoup these assets if you default on the loan.

These liens also can negatively impact your finances because you won’t be able to sell the underlying assets or transfer ownership until the loan has been repaid and the liens have been released.

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: Wondering, “What is an SBA 7a loan?” or “How can I apply for an SBA Express loan?” Check out our SBA loan page for more information.

What Can an SBA Loan Be Used For?

SBA loans support a variety of business needs in virtually any industry. You can use funds to grow your business by expanding to new locations, modernize your company headquarters, upgrade 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?

The criteria necessary to qualify for an SBA loan are relatively lenient. SBA loans can’t be issued to prospective borrowers unless all the following minimum requirements are met:

  • The business is physically located and operates in the U.S. or its territories
  • The owner has invested equity in the business
  • The business can’t qualify for funding by other means
  • The business is a legal, for-profit enterprise

While the above requirements are fairly straightforward, 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 can’t 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.

Applicants also should be aware that even though the SBA is guaranteeing a part of their loan, they will still be subjected to a lender’s full underwriting process. In addition to personal credit checks, this will typically entail a formal review of a business plan, appraisal of collateral and background and credit checks for any partners in the business.

Finding an SBA Loan That Works for You

Not all SBA loans are the same, and nor are all SBA lenders. It’s crucial for prospective borrowers to do their homework before they apply for an SBA loan to compare rates, terms and eligibility requirements. Keep in mind different lenders may require different qualifications. 

To find an SBA lender that satisfies your company’s needs, use 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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