This article is part of a larger series on Business Financing.
The Small Business Administration (SBA) guarantees business loans issued by approved lenders. Though difficult to qualify for, SBA loans carry relatively low interest rates with terms up to 25 years.
The six types of SBA loans are:
- SBA 7(a) Loans: Working capital up to $5 million
- SBA CDC/504 Loans: For purchasing owner-occupied commercial real estate
- SBA CAPLines: A line of credit that can be used again
- SBA Export Loans: Financing for exporters to bolster their export activity
- SBA Microloans: Working capital loans of up to $50,000
- SBA Disaster Loans: Loans for businesses that have been impacted by a declared natural or economic disaster.
1. SBA 7(a) Loans
SBA 7(a) loans are the most common type of SBA financing. These loans are offered in amounts up to $5 million and can be used for working capital, refinancing debt, or purchasing a business, real estate, or equipment. Two popular loans, the SBA Express Loan and SBA Advantage Loan, are also part of the 7(a) loan program. SBA 7(a) loans are popular due to their long repayment terms and low interest rates, which make them one of the most affordable working capital solutions available to small businesses.
While the SBA doesn’t set a minimum loan amount, most lenders won’t fund loans that are less than $30,000. If you’re curious about how affordable an SBA 7(a) loan would be for your business, our SBA loan calculator can estimate what your monthly payments would be, based on the loan amount and repayment term you’re targeting.
Startup businesses will need to meet the above requirements for an SBA 7(a) loan and also have:
- Demonstrated experience: Startups need to show the lender they have sufficient industry or business management experience and a strong business plan.
- Larger down payments: Most SBA lenders will require an equity injection or down payment of at least 20% to 30% of your total project costs, or $20 to $30 for every $100 you want to borrow.
- Excellent credit: In our experience, it’s very difficult for anyone other than highly qualified borrowers―credit score of at least 700, higher net worth, and real estate with sufficient equity―to get approved for SBA financing as a startup.
Guidant Financial can help startups put together their SBA loan applications and find the lenders most likely to work with them. Additionally, if you have retirement savings in a 401(k) or IRA, Guidant can assist you with a Rollover for Business Startup (ROBS) that can be used to meet the down payment requirements. The process starts with a free startup loan consultation.
How To Apply for an SBA 7(a) Loan
Applying for an SBA loan can be a complicated and time-consuming process. It’s critical to take time before applying to ensure you qualify for an SBA loan and that the lender you use is well-versed in working with the SBA. Generally, an SBA loan can take 90 days or more before possible approval and subsequent funding; however, SBA preferred lenders may be able to approve and fund loans in less time.
SBA Express Loan Program
The SBA offers an expedited processing service for smaller loans called the SBA Express Loan. The SBA Express Loan generally follows the same guidelines as the standard SBA 7(a) loan, but the maximum loan amount is limited to $350,000, and only select lenders are qualified to participate. The SBA guarantees a maximum of 50% for SBA Express loans, which means the interest rates on an SBA Express loan tend to be higher than other 7(a) loans.
If you need an SBA Express Loan, SmartBiz can help you get the funds you need in as quickly as 30 days, faster than many lenders. You can prequalify through a simple online application that takes only a few minutes to complete.
SBA 7(a) Community Advantage Loans
SBA Community Advantage Loans are designed to help businesses in underserved communities gain access to financing. These programs are available to borrowers who meet the SBA eligibility criteria but cannot qualify for standard SBA 7(a) loans because of low revenues, low collateral, or other reasons.
Under the Community Advantage Program, the SBA offers the same expedited application and approval process that comes with an SBA Express loan, but they’ll guarantee 85% of loans up to $250,000. This further reduces the risk to lenders and gives them more motivation to provide these loans over the SBA Express program.
2. CDC/SBA 504 Loans
The CDC/SBA 504 loan program provides SBA loans to small businesses looking to purchase or build owner-occupied commercial real estate. The program pairs two lenders together to fund these projects: a bank or traditional lender and a community development corporation (CDC). The bank lends up to 50%, the CDC lends up to 40%, and the remainder of the project’s costs come from the borrower, typically in the form of a cash down payment.
CDC/SBA 504 loans require that the business occupy at least 51% of the commercial space. While this is a great opportunity to rent out 49% of your new building to tenants, this type of SBA loan is best suited for companies that expect to occupy the space themselves.
How To Apply for a CDC/SBA 504 Loan
The application process for SBA 504 loans is similar to that of SBA 7(a) loans with regard to the amount of paperwork and time it takes to get funded. Additionally, you’ll also have to provide paperwork on the property you’re funding.
3. SBA CAPLines Loan Program
The SBA CAPLines program offers four SBA loan or line of credit products that are designed to provide up to $5 million to help small businesses meet their short-term and cyclical working capital needs. SBA CAPLines are best for businesses that need a revolving line of credit to make recurring payments or to prepare for unexpected expenses.
“The SBA CAPLines Program addresses the short-term and cyclical working capital needs of a business. Companies requiring upfront expenditures for an extended period of time before receiving payment are ideal candidates. Firms with significant fluctuations in cash flow over the course of the business cycle can benefit as well.” ― Terri Dennison, Georgia District Director, SBA
The SBA CAPLines program has interest rates that mirror the SBA loan rates for the 7(a) program. Remember that with a line of credit, you only have to pay interest on what you borrow and you’re not required to advance funds you don’t need. This makes it a great option for businesses with fluctuating cash flow needs.
Ongoing servicing fees for an SBA line of credit through the CAPLines program will be higher than with an SBA 7(a) loan. This is because the lines of credit are extended based on short-term assets like invoices and contracts, which require continuous verification. For most CAPLines, the servicing fee is capped at 2%, though it can be higher for working capital CAPLines.
How To Apply for an SBA CAPLine Line of Credit
The application process for an SBA line of credit through the CAPLine program is similar to that of an SBA 7(a) loan. Traditional lenders that participate in the SBA 7(a) program, such as banks and credit unions, are likely to also participate in the CAPLines program.
Well-qualified borrowers or those businesses that have the potential to bring in a great deal of other business to a bank may be able to find a lender willing to issue a stand-alone SBA CAPLines line of credit. However, CAPLines are typically offered to borrowers in conjunction with a traditional SBA 7(a) loan or a CDC/SBA 504 loan.
4. SBA Export Loans
SBA Export Loans provide up to $5 million in funding to help American small businesses expand their export activities, engage in international transactions, and enter new foreign markets. These loans are aimed at businesses that are engaging in international business and growing their businesses in those areas.
The SBA offers three types of export loans that provide businesses with export working capital and international trade financing. With SBA export financing, businesses can get funding that may not otherwise be available from a traditional loan or other sources. The three SBA export loan programs are Export Express, Export Working Capital, and International Trade.
The eligibility and qualifications generally mirror those of the SBA 7(a) loan program. If you have specific questions about the SBA Export Loan program, the SBA has international trade specialists available to assist.
How To Apply for an SBA Export Loan
You can apply for an SBA Export Loan with most SBA-approved 7(a) lenders. Finding a good lender is an important part of the application process. To make this process easier, we’ve provided a list of the top SBA lenders.
5. SBA Microloan Program
The SBA Microloan program provides SBA loans to nonprofit intermediary lenders that subsequently lend amounts under $50,000 to for-profit small businesses and nonprofit childcare centers. The SBA doesn’t guarantee any portion of the loans made under the SBA Microloan program. Microloans have terms up to six years, and the average loan amount is roughly $13,000.
According to Dennison:
“The SBA Microloan program is ideal for home-based businesses, the self-employed, and others whose capital needs are smaller than what the conventional business loan calls for. Microlenders also provide the training and technical assistance crucial to longer-term business success.”
Nonprofit intermediaries can borrow up to $750,000 from the SBA in their first year and up to $1.25 million each year after that, with no more than $5 million borrowed at any one time. The SBA Microloan program has averaged about $37 million in approvals annually during the past five years.
SBA Microloan Rates, Terms, and Qualifications
6% to 9%
Up to $50,000
Up to six years
Use of Loan Proceeds
Some will be required; amount varies by lender
Nonprofit intermediaries set their own interest rates according to the creditworthiness of the borrower and the specifics of the startup or small business. Nonprofit intermediary lenders in the SBA Microloan program have more flexibility in determining your creditworthiness than traditional and larger lenders. However, the nonprofit lender will still need to feel extremely confident in your ability to repay the loan.
The rates and terms of SBA Microloans are similar to those offered by peer-to-peer lenders. However, peer-to-peer loans can be approved in minutes without much paperwork, whereas SBA Microloans can sometimes take months to get approved and require extensive documentation.
How To Apply for an SBA Microloan
To apply for an SBA Microloan, you must work with an SBA-approved intermediary in your area. While SBA Microloans are smaller in size, approval and funding can take 90 days or longer.
6. SBA Disaster Loans
SBA disaster loans are used for recovery from a declared physical or economic disaster. Each disaster loan can be used differently, and you can apply for multiple types of loans at the same time to meet your needs. These are best for businesses that have been negatively impacted by a disaster and those that can provide evidence of negative impact.
Businesses of all sizes and most private nonprofit organizations meeting basic qualifications, such as acceptable credit and an ability to repay, are eligible to apply for disaster loans.
SBA Disaster Loan Types
Working capital loans to help eligible businesses that have suffered significant economic injury as a result of a disaster and are unable to meet their normal operational expenses
Working capital loans to help businesses that lose an essential employee due to being called up for active military service and the loss of the employee results in an inability to meet normal operating expenses
Long-term, low-rate loans designed to help eligible businesses, which suffered physical losses and damages due to a declared disaster, to replace or repair that property not covered by insurance
SBA Disaster Loan Rates, Terms, and Qualifications
Up to $2 million
Up to 30 years
Use of Loan Proceeds
How To Apply for an SBA Disaster Loan
If disaster strikes and you need funds to cover gaps in insurance coverage, operating expenses, or other assistance, you can apply for assistance directly from the SBA. Check out our article on SBA disaster loans for step-by-step instructions on the application and approval process.
How SBA Loans Work
Other than the Disaster Loan program, SBA loans are actually not issued by the SBA. Banks, credit unions, community development corporations, micro-lending institutions, and other lenders provide these loans. The SBA makes a guarantee or promise to cover a portion of the lender’s losses if a borrower defaults on their loan. This guarantee ranges from 50% to 85%.
The SBA guarantee reduces the risk for lenders. This allows lenders to make loans to businesses they would otherwise not lend to. For example, businesses with insufficient down payments or collateral for conventional bank loans may be able to qualify for a loan that’s backed by an SBA guarantee. In some cases, borrowers receive loans with lower interest rates and longer repayment terms than they would with conventional commercial loans.
Hopefully, you now have enough information about the six primary types of SBA loans to help you decide which one is best suited for you. If you don’t qualify, there are plenty of other financing options available that may help you get the funds your business needs.