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An SBA loan is a business loan that is partially guaranteed by the U.S. Small Business Administration and issued by participating financial institutions, usually banks. These loans have strict lending criteria, but if you qualify for an SBA loan, their flexible terms and low interest rates make them one of the best small business loans.
Here is an overview of how SBA loans work, the types of SBA loans available, what each loan type is used for, and how to get an SBA loan for your small business.
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SBA loans are small business loans that help cover start-up costs, working capital needs, business expansion, real estate purchases, etc. This type of loan is issued by private lenders but is guaranteed by the federal government, specifically the Small Business Administration.
More than $11 billion in SBA 7(a) loans have been approved so far in fiscal year 2024. [0]You apply for an SBA loan through a lending institution, such as a bank or credit union. That lending institution then applies to the SBA for a loan guarantee, which means that if you default on your SBA loan, the government will pay the lending institution the guaranteed amount.
The SBA requires an unconditional personal guarantee from everyone who owns 20% or more of the company, which makes you and your personal assets responsible for payments if the company is unable to make payments.
Both government and personal guarantees reduce the lender's risk and increase their willingness to do business with SMEs.
Once you're approved for an SBA loan, the lender is responsible for closing the loan and distributing the loan funds. You typically make monthly payments directly to the lender.
Here's an overview of the most common types of SBA loans:
Working capital, expansion and equipment purchases.
Fast financing for working capital, expansion, and real estate and equipment purchases.
Up to $5 million (up to $5.5 million for some projects).
Purchase long-term fixed assets such as land, machinery and equipment.
program
Loan amount
the purpose
Up to $50,000.
Working capital, inventory, supplies, equipment and machinery.
Up to $2 million.
Repair physical damage caused by declared disasters and cover operating costs.
SBA Export Working Capital Loan
Up to $5 million.
Working capital to support export sales.
SBA Export Express Loan
Up to $500,000.
Rapid financing to enhance companies' export development.
SBA International Trade Loan
Up to $5 million.
Long-term funds to expand export sales or modernize to compete with foreign competitors.
Competitive rates
Pursuant to federal regulations, participating financial institutions base interest rates on SBA loans on the prime rate plus a markup percentage called a spread.
Keep in mind that the annual percentage rate on a loan is different from the interest rate: APR is a percentage that includes interest plus all loan fees.
APRs vary widely between SBA and non-SBA lenders. For example, online lenders that specialize in SBA loans charge APRs of around
15
%, but major online small business lenders that don't offer SBA loans have APRs as high as 99%. Use NerdWallet's SBA loan calculator to estimate your monthly payments and find out how much you'll pay in interest based on different interest rates.
Low Fees
Fees for SBA loans generally consist of an upfront guarantee fee based on the loan amount and loan maturity date, and an annual servicing fee based on the guaranteed portion of the outstanding balance. The SBA reviews its fee structure annually. Through September 2024, there are no upfront guarantee fees or annual servicing fees for SBA 7(a) loans of $1 million or less.[0].
Longer Periods
Another benefit of SBA loans is that they have longer repayment terms, freeing up more funds for other business needs. The term of your loan depends on how you use the funds. The current maximum maturities are:
Large loans
The amount of funding you receive depends on the type of SBA loan and your business's qualifications, but SBA loans generally offer large loan limits. For example, 7(a) loans offer loan amounts up to $5 million.[0]Similarly, the 504/CDC program offers loan amounts up to $5 million, but up to $5.5 million for small manufacturers and eligible energy public policy projects.[0]U.S. Small Business Administration. 504 Loans. Accessed March 14, 2024.
These are much larger amounts than the loan amounts typically offered by online lenders and banks, which are typically up to $500,000 and $1 million, respectively.
It's hard to qualify
Although government guarantees reduce the risk lenders face when lending to small businesses, you still must meet strict eligibility criteria to receive an SBA loan. Typically, you need several years of business experience, strong business financials, and a good credit history to qualify.
Funding is slow
Depending on the lending institution and the type of SBA loan you apply for, it may take one to three months before your funds are available. Additionally, the application process for an SBA loan is detailed and requires extensive paperwork.
Requires some sort of collateral
SBA loans typically require an unlimited personal guarantee from anyone who owns 20% or more of the business. Lenders may also require limited or unlimited personal guarantees from other business owners. Depending on the loan and your business's qualifications, you may also need to provide physical collateral or come up with a down payment. For example, SBA 504 loans require a down payment of at least 10%.
What do I need to qualify for an SBA loan?
While SBA loan requirements vary by lender and the specific loan program, you typically need several years of business experience and a good credit history to qualify. Additional SBA criteria include:
You must be conducting a commercial business in the United States
Business owners need to invest their own capital, such as their own time and money, into their business.
You must demonstrate your need for funding and state the business purpose for which you will use the funds.
You need to be creditworthy, meaning you can prove that your company has the means to repay the loan.
Before taking out an SBA loan, you’ve likely tried to secure financing from sources other than the government.
If your business is relatively new or small, an SBA microloan may offer an SBA loan option that is easier to qualify for.
1. Make sure your business is eligible
To qualify for an SBA loan, lenders typically require at least two years of business history, high annual revenue, and a good credit score starting at around 690.
If your business is struggling, you probably can't get an SBA loan, and if it falls into an ineligible category, like gambling or political lobbying, you shouldn't apply.
2. Choose a lender
The SBA offers a convenient Lender Match tool that matches potential borrowers with lenders within two days.
If you apply through a traditional bank, it helps to work with a bank that has experience processing SBA loans. Ask the following questions of the banks you are considering lending to:
How many SBA loans do you offer?
How frequently are SBA loans funded?
How experienced is your staff with this process?
What is the loan amount range?
Generally, banks with several years of experience with the SBA will be able to give you better advice, including letting you know your chances of being approved. Although banks follow the SBA guidelines, they use their own screening criteria to evaluate your loan application.
For example, Florida-based NewTech Bank is the most active SBA 7(a) lender in the U.S. in terms of loan volume so far in FY24. [0].
Newtek is also an SBA Preferred Lender, which allows preferred lenders to make a final credit decision without sending the loan application to the SBA, thus expediting the loan review process.
3. Gather your documents
Applying for an SBA loan varies depending on the type of loan, but your lender should be able to help you prepare the paperwork.
Some of the documents required are listed below:
SBA Borrower Information Form.
Writing personal history.
Personal financial statements.
Corporate financial statements.
Personal income tax return.
Business tax return.
Business license.
Loan application history.
Business owner's resume.
Lease agreement, if applicable.
1 year cash flow forecast.
4. Submit your application and wait
If you're pressed for time, you can choose an SBA Express Loan, which can get you funds faster than other options. The maximum amount for this type of loan is $500,000, and the maximum amount guaranteed by the SBA is 50%.
For more information on obtaining an SBA loan, see below.
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FAQ
How hard is an SBA loan to get? Generally, SBA loans are not as difficult to obtain as business bank loans. Because they are backed by the U.S. government, they are less risky for banks than issuing loans on their own. However, SBA loans are typically harder to obtain than online business loans, and they may be lent to borrowers who have been in business for a shorter time and who have lower credit scores. What does SBA mean?
SBA stands for Small Business Administration. It is a federal agency dedicated to helping small businesses in the United States through counseling, access to government contracts and loans, and more.
Do I have to pay back my SBA loan?
Yes, SBA loans must be paid back, but the terms of the loan (the period over which you have to pay the lender back) tend to be longer than other types of business loans.
How much can I borrow from an SBA loan?
Loan limits vary by SBA loan type. SBA 7(a) loans are available for up to $5 million. CDC/504 loans are available for up to $5 million, with up to $5.5 million available for certain projects. SBA Express loans are available for up to $500,000, and Microloans are available for up to $50,000.