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

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.