Pencil, calculator, and magnifying glass in white toolbox on green background

SBA Loans: A Complete Guide (Rates, Requirements, and How to Qualify)

By Bryce Warnes on July 5, 2019

Small Business Association (SBA) loans are the crème de la crème of borrowing. Reasonable rates, long terms, and flexibility—what more could you want?

They’re also highly competitive, and applications come with their fair share of paperwork. Before you jump into the fray, it’s wise to know what’s on offer, and what you need to qualify.

Here’s everything you need to know about SBA loans before applying for one: Their strengths and weaknesses, the different types, and what you need to apply and get accepted.

What is an SBA loan?

Common misconception: The SBA lends small businesses money.

That’s now how it really works. When you get an SBA loan, you get money from a standard lending institution—usually a bank. The rates and terms are determined by that bank, and you make loan repayments directly to them.

So how does the SBA help put money in your hands? They guarantee part of your loan. For instance, they might guarantee 85% of a certain type of loan. Meaning, if you default on the loan, the SBA will pay the bank 85% of its value.

This substantially reduces the bank’s level of risk when they make loans. Which means they lend money to businesses they might not otherwise consider—because they’re too small, too new, or have spotty credit records.

The banks offer loans within parameters set by the SBA—so while interest rates, terms, and the rest vary by business, they’re standardized across all banks.

The benefit to you is that you get loan amounts, rates and terms that might not be available otherwise. Meaning more possibilities for the future of your business.

Pros and cons of SBA loans

SBA loans are no free lunch, however. Like any financial product, they come with benefits and drawbacks.

The pros of SBA loans

  • Long repayment terms. You’ll have longer to pay off a loan—meaning smaller loan payments—than you might get with a non-SBA option.

  • Affordable interest rates. The interest rates on SBA loans aren’t rock bottom by any means, but they’re pretty good, and often better than what you’d get otherwise.

  • Small down payments. You won’t need to pay as much up front for SBA loans than you would for other loans.

  • Adaptability. There’s a wide variety of loans available from the SBA, ranging from $500 to $5.5 million. And they can be used for a lot of different things: From hiring new employees, to buying heavy equipment and real estate, to making repairs after a natural disaster.

The cons of SBA loans

  • Long approval process. The underwriting process for an SBA loan can be slow. If you’re looking for fast cash, they aren’t a great option.

  • Lots of paperwork. You’ll need to provide plenty of information about both your personal and business history and finances when you apply for a loan. Depending on how organized your records are, that could take some digging.

  • Competition. Since SBA loans offer so many benefits, a lot of businesses apply. There’s only so much money to go around—so the more thorough and appealing your application, the better you’ll stand out from competitors.

How long does it take to get approved for an SBA loan?

It takes at least a month to get approved for an SBA loan. That can range upward to multiple months.

Some lenders will make extravagant claims—like saying they can secure you a loan in one week or less. Don’t buy it. There are no secret shortcuts to being approved, and you should expect to wait at least a month.

How do you apply for an SBA loan?

There are many, many lenders who offer SBA loans. Most are brick-and-mortar institutions, others are online-only banks. To find a lender that suits your needs, get in touch with your local SBA District Office.

For a quicker, automated approach, you can also use SBA Lender Match. After providing your contact info, you’ll describe your business and what you need from a loan. The SBA promises to match you with a lender in two days.

The four types of SBA loans

The SBA loan you apply for will depend on what your business needs and what you have planned for the future. There are many to choose from, but here are the four most common, along with the 2019 SBA loan rates for each.

Loan Amount 2019 Rate Term Suitable for
The 7(a):
General financing
Up to $5 million 7.75%–10.25% Up to 10 years (working capital loans) or 25 years (commercial real estate loans) Expanding your business; refinancing debt; purchasing commercial real estate
The CDC/504:
Major fixed asset financing
Up to $5.5 million 3.91%–4.25% Either 10 or 20 years Buying major fixed assets, like equipment or real estate; refinancing debts from purchasing major fixed assets
Microloans:
Smaller business purchases
Up to $50,000 8%–13% Up to six years Any investment in your business that costs less than $50,000. Good for covering relatively short-term needs.
Disaster loans:
Recovery from declared disasters
Up to $2 million 4%–8% Up to 30 years Covering the costs of recovering from disasters damaging your business

The 7(a) SBA loan program

What it’s for: General financing to expand your working capital.

Amount: Up to $5 million

2019 Rate: 7.75%–10.25%

Term: Up to 10 years (working capital loans) or 25 years (commercial real estate loans)

Think of the 7(a) as the Swiss Army knife of loans. It covers just about any need your business might have. That includes hiring new employees, investing in marketing, expanding to new locations, developing new products and services, making renovations, and more. It can also be used to refinance debt, so you make lower monthly debt payments.

The CDC/504 SBA loan program

What it’s for: Purchasing major fixed assets, like heavy equipment or commercial real estate; making improvements to real estate; or (in some cases) refinancing debt.

Amount: Up to $5.5 million

2019 Rate: 3.91%–4.25%

Term: Either 10 or 20 years

If you’re looking to make a big purchase with your SBA loan, the CDC/504 program offers lower rates and potentially longer terms than the 7(a) program. You can use it to buy real estate or buildings, or large depreciable assets like manufacturing equipment.

Also, you can use CDC/504 to refinance debt—so long as 85% or more of that debt was incurred to purchase a fixed asset. The debt needs to be at least two years old, and in good standing.

The SBA microloan program

What it’s for: General financing, for businesses that need relatively small, short term loans.

Amount: Up to $50,000

2019 Rate: 8%–13%

Term: Up to six years

Suitable businesses: Smaller, less-established businesses

SBA microloans are a good choice if your business is relatively small and new, and unlikely to qualify for a 7(a). They can give you more working capital when your business is young, so you can grow your income and eventually qualify for larger loans.

The SBA disaster loan program

What it’s for: Businesses recovering from declared disasters

Amount: Up to $2 million

2019 Rate: 4%–8%

Term: Up to 30 years

Suitable businesses: Any business that has suffered damages due to a declared disaster, whose insurance doesn’t fully cover those damages.

The SBA maintains a constantly updated list of declared disasters. If your business has suffered from one of those disasters, and needs money to help with recovery, the SBA is able to provide it at a low rate over a long term.

Declared disasters can range from the immediately damaging—like violent weather—to the long-term—such as droughts or unseasonal rain that may damage crops.

Note: You don’t need to be a business to apply for an SBA disaster loan. Individuals, homeowners, and nonprofits can also apply.

Accounting 101: Set Your Finances up the Right Way

Learn the fundamentals of small business accounting, and set your finances up for success with this free guide.

Who is eligible for an SBA loan?

While most small businesses can apply for an SBA loan, there are some limits to eligibility.

First of all, your business needs to be based in the USA. Second of all, it needs to be for-profit (non-profits can’t apply).

Also, your business is ineligible if it:

  • Mostly earns revenue by lending money
  • Is primarily engaged in politics or lobbying
  • Is a life insurance company
  • Earns most of its revenue through gambling activities
  • Is speculative—its assets are mostly tied up in investments with uncertain returns (ie. medical research, real estate investment)
  • Mainly earns passive income

Also, individual lending institutions may have their own rules about who they’ll lend to and who they won’t. Make sure you’re aware of these before you go to the trouble of applying.

If you’re not sure whether you make the grade, take the SBA’s eligibility questionnaire.

What do you need to apply for an SBA loan?

There’s a lot of paperwork that goes into applying for an SBA loan.

When you’re applying, you should be ready to provide:

For help keeping track of all these documents, use the SBA’s loan application checklist.

How to qualify for an SBA loan

Since SBA loans are so competitive, you need to do more to meet the minimum application requirements in order to get one. Here’s how to qualify for an SBA loan—from long-term preparation (like letting your business get established) to near-term efforts (like preparing a solid business plan).

Wait until your business is established

Your chances of qualifying for an SBA loan go up considerably if your business has been around for two years or longer. Fundera did an analysis of their clients, and found that most who qualified for an SBA loan were four years old.

If it’s your first year in business and you’re considering a hefty loan from the SBA, crunch the numbers and see if you can wait a year or two. Is a smaller, non-SBA loan enough to tide you over until then? Are there alternative funding options available, like investors? It could be worth delaying your application in order to improve your chances.

Prove you have the cash flow to cover loan payments

Later on, we’ll look at the most common SBA loan amounts, terms, and rates. Once you’ve checked those out, crunch the numbers, and figure out what your potential monthly payments might look like.

You should be ready to prove in your application that you’ll be able to make your payments should you be approved. For that, you’ll need financial statements covering the history of your business. If you already have income statements and balance sheets in your arsenal, go back and retroactively produce cash flow statements.

Provide a solid personal history

The SBA wants to see where you’ve lived in the past, as well as your citizenship record. The more info you can provide, the better.

They’ll also do a criminal record check. If you have a criminal record, you’re not automatically disqualified from an SBA loan. However, you face a higher chance of being denied one if your record includes crimes of “moral turpitude”—ones involving violence or deception.

Write a great business plan

Lenders want to see that your business will be successful, so you can pay them back. When you provide a comprehensive business plan, you prove to them that you’ve got your eyes set on the future, and any loan you’re approved for will be put to good work.

Any good business plan needs to include:

  • An explanation of your product or service, as well as your value proposition
  • A thorough analysis of your competition
  • An outline of your marketing strategy
  • Three to five years of financial projections
  • A detailed explanation of how you plan to use your loan, should you be approved

Ask yourself:

  • Why is your business unique?
  • What makes your business important?
  • Where do you see yourself growing?
  • What’s the most exciting thing about your business?

The business plan is your chance to show off to lenders. The better you can communicate your value, the more likely you are to be approved.

Maintain a good credit score

A credit check comes standard with any SBA loan application. Maintain good personal and business credit, and you’re more likely to be approved. When Fundera analyzed their customers, most business owners who applied for SBA loans had credit scores of 680 or better.

Turn a profit

Your business could be a unicorn in the making, but if you aren’t turning a profit yet, lenders are unlikely to approve you for an SBA loan.

Bottom line: Lenders want you to pay off your debt, with interest. They see the same profits whether you’re wildly successful, or just scraping by. So they want to make sure you’re profitable here and now, not five years down the road.

If you’re a startup that doesn’t plan on becoming profitable for a while, you’re better off looking for investors rather than lenders. On the other hand, if you expect to start making a profit soon, wait until you’re in the black before you apply for an SBA loan. Your chances will improve significantly.

Further reading: Small Business Loans

Offer collateral

Not every SBA loan requires you to provide collateral. But you should still be able to offer some.

The SBA requires all its lenders to acquire collateral when it’s available. In order to meet that requirement, lenders are on the lookout for businesses that can come to them with collateral in hand.

Collateral is also important if your business is high risk. If your revenue tends to fluctuate or you have a spotty credit report, lenders are more likely to ask for collateral. Examples include vehicles, real estate, or equipment that you own. Business inventory also qualifies.

Personal guarantees for SBA loans

Even if your business structure—like an LLC—typically shields you from liability, you will likely need to put your personal assets on the line if you qualify for an SBA loan.

If you’re approved for a loan, and you control 20% or more of your business, you’ll need to sign a personal guarantee. In the event that you’re unable to make loan payments, you become personally liable.

Not sure an SBA loan is right for you? There’s a variety of small business loans you can apply for—as well as alternative financing options, like lines of credit and merchant cash advances. Make the right choice for your business with our guide to getting a small business loan.

Bookkeeper

Don't want to think about bookkeeping anymore?

Try a free trial with Bench. We'll take bookkeeping off your hands, pairing you with your own bookkeeper, and simple software to track your finances.


This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

Friends don’t let friends do their own bookkeeping. Share this article.

Want a free month of bookkeeping?

Sign up for a trial of Bench. We’ll do one month of your bookkeeping and prepare a set of financial statements for you to keep. No pressure, no credit card required.

Decorative patterns