What Is an SBA Loan?

Woman business owner working from home on the computer

Small Business Administration (SBA) loans are offered through financial institutions approved by the SBA and are guaranteed in part by the U.S. Small Business Administration.

The SBA doesn’t directly provide the business loan, except in the case of its disaster loan program. Instead, the SBA guarantees that they’ll repay a percentage of the loan to the lender if a business defaults on the loan payments.

How do SBA loans work?

The SBA collaborates with select commercial lenders that agree to meet SBA guidelines for small business loans. Essentially, the SBA acts as a co-signer for small businesses that may not have the credit history or collateral to qualify for conventional loans.

By reducing the risk for lenders, the SBA helps encourage financial institutions to lend to small businesses. The SBA also gives small business owners and start-up businesses peace of mind with business financing options, ultimately resulting in extra capital and cash flow.

Do SBA loans require collateral?

Collateral requirements for SBA loans vary based on the lender and the loan itself. In some cases, the SBA does not require lenders to take collateral for a business loan that is less than $25,000. SBA loans between $25,000 and $350,000 often allow lenders to use their own collateral policies. When an SBA loan is above $350,000, the SBA requires lenders to maximize collateral as much as possible.

Certain types of SBA loans, like those for working capital, may use the assets purchased with the loan as collateral, such as inventory or a building project.

What are the interest rates on SBA loans?

SBA loan rates vary by lender and may be fixed or variable. The SBA allows lenders to negotiate interest rates with borrowers, but the rate cannot exceed the SBA maximum interest rate, which can factor in:

The daily prime rate, based on Federal Reserve actions.
The London Inter-Bank Offered Rate, or LIBOR.
The SBA optional peg rate, which is an average of rates the federal government pays for similar loans.

The SBA maximum interest rate is determined by one of these base rates, plus an additional percentage, which varies by the length and size of the loan.

Do you have to pay back SBA loans?

Businesses must repay SBA loans. Even though the SBA backs them, the debt belongs to the borrower. When a small business borrower fails to pay, the lender can seize collateral, including personal assets, in accordance with the loan terms.

Lenders turn to the SBA only if a borrower’s assets are not sufficient to cover the defaulted debt. After the SBA repays the lender for the guaranteed portion of the loan, the U.S. Small Business Administration attempts to recover the loan from the borrower itself. If the borrower still cannot pay, the SBA transfers the debt to the U.S. Treasury Department, where borrowers may attempt to settle their debt.

Types of SBA loans

The SBA offers several loan programs designed for small businesses that may not qualify for traditional bank or conventional loans. The most common SBA loan is the 7(a) General Business Loan Guaranty Program, which provides up to $5 million in working capital and is designed to help entrepreneurs or start-up businesses launch or expand their businesses.

The SBA also offers these loans to help small businesses:

SBA export loans are used to finance fixed assets and working capital for businesses that plan to start or continue exporting.
CAPLine financing covers seasonal working capital.
SBA 504 loans provide funding for assets like new equipment or real estate.
SBA disaster loans are available to repair or replace items that have been damaged or destroyed in a declared disaster.
Economic Injury Disaster Loans (EIDL) provide economic relief to businesses and non-profit organizations currently experiencing a temporary loss of revenue.
The SBA Microloan Program, the smallest loan program, provides loans up to $50,000 to help small businesses start up and expand.
SBA Express loans are a simple way to receive expedited, amortized government-guaranteed financing for your small business. Borrowers can receive up to $350,000 of capital through either a term loan or a line of credit.
The Preferred Lender Program (PLP) allows certain SBA-“Preferred Lenders” to approve SBA loans unilaterally. The SBA generally provides a loan guarantee to these lenders within 24 hours of their request.

Requirements for an SBA loan

SBA financing programs vary depending on a borrower’s needs. You will need to collect personal and business information for your SBA loan application before visiting a participating lending institution.

The lender will require borrowers to provide extensive documentation in the loan package, including:

Personal background and financial statements
Resumes for each principal
Business financial statements
Profit and loss statements
Income tax returns
Loan application history
Projected financial statements
Ownership and affiliations
Business certificate/license
Business overview and history
Business lease

How hard is it to get a loan from the SBA?

SBA loans may be designed to offer easier qualifications than conventional loans. But small businesses must still meet certain requirements to qualify. These include having a strong credit score and the necessary collateral or down payment required by certain SBA loans.

Some eligibility requirements are unique to SBA loans. If small business owners have access to alternative financial resources, including personal assets, they do not qualify for an SBA loan. The same is true for applicants who have defaulted on a government loan in the past. A criminal record can also disqualify—and likely delay—an application, depending on the circumstances.

Is an SBA loan the right fit for my business?

SBA backing increases the likelihood that small business owners can receive funding from traditional lenders. However, the SBA loan program requires extensive time and documentation to receive approval. Not including the time needed to track down the required materials, the application and approval process can take up to three months.