Practice Management Small Business

SBA Loans 101: What Are They and How Do You Get One?

Written by Jared Hecht

SBA Loan ProgramNearly every business owner looking for small business financing is interested in finding out more about SBA loans. These long-term, low-interest small business loans are partially guaranteed by the government, and are considered among the most favorable business loans available.

If you’re curious about the finer details of SBA loans, you’ll have to know quite a bit in order to find exactly what you need. But you won’t be surprised to discover that, as a government-backed product, the essentials of SBA loans are buried in a lot of information. Like any small business owner, though, you don’t have the time to comb every corner of the internet.

If you want to participate in the U.S. Small Business Administration’s SBA Loan program, you’ll need a solid foundation of knowledge on what the SBA has to offer. There are several products available to small businesses, and unless you know the differences, you won’t understand which will best suit you, or how (even whether) you can qualify.

Here’s a primer on these highly coveted small business loans.

What Are SBA Loans, and Why Do They Matter to Small Business Owners?

The most important thing to know—and biggest mix up around SBA loans—is that the Small Business Administration itself doesn’t lend money to anyone. Instead, the government agency works with lenders (mostly banks), guaranteeing up to 85% of the money they lend to small business owners. This means that, in case a borrower defaults on the loan, the SBA guarantees the lending institution will get a portion of their money back, no matter what.

The SBA’s guarantee eases up some of the risk for the banks, allowing these institutions to offer financing that they otherwise might not. Lenders can take on more risky borrowers, and open up borrowing opportunities to a huge portion of entrepreneurs, startups, and growing small businesses.

Why Are SBA Loans So Coveted?

First and foremost, SBA loans have the lowest down payments of any loan and the longest repayment terms (anywhere from 7 years up to 25 years on its most overwhelmingly popular loan product, 7(a) loans). But because SBA loans are guaranteed by the government, and are lower risk for the lending institutions, they come with lower interest rates and lower regular payments.

All of this means that an SBA loan provides business owners the financing they need to support their businesses, and also free up any extra cash to maintain other day-to-day need.

The 3 Types of SBA Loans

Business owners can apply for three different types of SBA loans, each with a specific intended use. Here’s what you should know about the three SBA loan programs:

1. SBA 7(a) Loans

This is the SBA’s flagship program. In 2017, the SBA approvedmore than $25.4 billion of 7(a) loans to a combined 62,430 small businesses.

You can use this loan, which is structured like a traditional term loan or line of credit, for most business purposes. And you can also score the most capital from this type of loan.

SBA 7(a) loans can offer you:

  • Loans up to $5 million
  • Loan repayment periods between 7 to 25 years
  • Financing for projects requiring working capital

2. SBA 504/CDC Loans

Although in a distant second place ($5 billion of loans in FY2017), the SBA 504/CDC loan program is the other most popular SBA loan. And, with loan terms newly extended to 25 years as of April 2018, these loans for fixed assets are becoming even more desirable.

SBA 504/CDC loans are intended exclusively for purchases like commercial real estate, land, or machinery (in other words, notworking capital). However, there are other requirements that you’ll have to meet with your business plan, regarding job creation and public policy—that’s the CDC (“community development corporation”) part.

SBA 504/CDC loans can offer you:

  • Loans with no maximum
  • Loan repayment periods between 10 to 25 years
  • Financing to purchase fixed assets

3. SBA Microloans

Most startup businesses will need more time in business before they can apply for SBA loans. The one exception: SBA microloans. And here’s one more exception you should note about SBA microloans—these small loans areactually doled out by the SBA, one of other factors that makes them different than 7(a) and 504 loans. They’re also all less than $50,000.

Businesses at all different stages can get microloans, which can be put toward all types of business expenses. The feature these borrowers have in common is a strong personal credit score.

SBA microloans loans can offer you:

  • Loans up to $50,000
  • Loan repayment periods up to 6 years
  • Financing for projects requiring general working capital, excluding real estate

Who Qualifies for SBA Loans?

The downside of such a fantastic loan product? Everyone wants it, of course. And this competition for SBA loans means lenders can be picky. In turn, requirements for SBA loans are more stringent compared to other loan types.

The SBA has some hard requirements before you apply:

  • Your business must be for-profit
  • Your business must be owned and operated in the U.S. (it’s a government loan, after all)
  • You must have invested your own time and money (aka equity) into your business

The SBA doesn’t have strict rules around credit score, revenue, or time in business. But many of the most qualified applicants do also present strong credit scores, a couple of years in business, and solid revenue as well.

How to Apply for an SBA Loan

First, make sure you know which of the three SBA loan programs you’ll be applying to. Then, prepare your financial and legal documents way ahead of time.

Don’t be surprised: the SBA requires a lot of information about the business and the business owner. The paperwork and application process is lengthy, but worth it—especially once your first offer comes through. Documentation includes business financial statements, licensure, loan application history, a business plan, information on all business owners, and more. You can look at the SBA loan application requirements to see everything itemized.

If you’re purchasing an existing business, SBA requires some additional information, too. Luckily, the SBA has a helpful checklist so business owners can keep track.

Applying for an SBA Loan Is a Worthwhile EndeavorSBA Loan Program

The process is long, and there’s a lot of information to go through. But if you can get approved for a government-guaranteed SBA loan, the work will be worth it. An SBA loan of any stripe can be a huge break for your business.

An excellent resource to tap into when seeking an SBA loan is your local SBA District Office, which provides free counseling, information, and any additional financial assistance that’s helpful to any business owner at any stage of their business’s growth. Take advantage of their resources during the application process—and afterwards as well.

About the author

Jared Hecht

Jared Hecht is the CEO of Fundera, an online marketplace for small business loans. Prior to Fundera, Jared co-founded GroupMe, a group messaging service that was acquired by Skype in August 2011, and subsequently acquired by Microsoft in October 2011. Jared currently serves on the Advisory Board of the Columbia University Entrepreneurship Organization and is an investor and advisor to startups such as Codecademy, SmartThings, and TransferWise.

2 Comments

  • Hi Jared,

    Thanks for providing such a detailed and well-structured article on the SBA loans.

    The SBA loans offer lower down payments and longer repayment terms in comparison to a standard bank loan and that’s why its a perfect choice for small businesses who have budget constraints.

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