SBA Loan Types, Pros and Cons & How to Apply (2024)

⏰ Estimated read time: 10 minutes

SBA loans are business loans partially guaranteed by the U.S. Small Business Administration and issued by participating lenders, usually banks. These loans have tight lending standards, but if you can qualify for an SBA loan, their flexible terms and low interest rates can make them one of the best small-business loans.

Here’s an overview of how SBA loans work, the types of SBA loans that are available, what each loan type can be used for and how to get SBA financing for your small business.

An SBA loan is a small-business loan that can help cover startup costs, working capital needs, expansions, real estate purchases and more. This type of financing is issued by a private lender but backed by the federal government, specifically the Small Business Administration.

More than $11 billion in SBA 7(a) lending has been approved so far in the 2024 fiscal year .

You apply for an SBA loan through a lending institution like a bank or credit union. That lender then applies to the SBA for a loan guarantee, which means if you default on an SBA loan, the government pays the lender the guaranteed amount.

The SBA requires an unconditional personal guarantee from everyone with at least 20% ownership in a company. This guarantee puts you and your personal assets on the hook for payments if your business can't make them.

Both the government guarantee and the personal guarantee reduce the risk for lenders — making them more willing to work with small businesses.

Once you’re approved for an SBA loan, your lender is responsible for closing the loan and disbursing the loan proceeds. You repay the lender directly, usually on a monthly basis.

There are several government small-business loan options available — each with its own terms and conditions. The best SBA loan for you will depend on what you plan to use the funding for.

Here’s a summary of the most common types of SBA loans.

Competitive rates

Per federal rules, participating lenders base SBA loan interest rates on the prime rate plus a markup rate known as the spread.

Note that the annual percentage rate on a loan is different from the interest rate. The APR is a percentage that includes all loan fees in addition to the interest rate.

APRs can vary substantially between SBA lenders and non-SBA lenders. For example, an online lender that specializes in SBA loans may cap its APR around

15

You can use NerdWallet’s SBA loan calculator to estimate your monthly payments and find out how much you’ll spend on interest based on different rates.

Low fees

Fees for SBA loans usually consist of an upfront guarantee fee, based on the loan amount and the maturity of the loan, and a yearly service fee — based on the guaranteed portion of the outstanding balance. The SBA reassesses its fee structure each year.

Longer terms

Another perk of SBA loans is that you get more time to repay them, which means you’ll have more money available for other business needs. The loan term will depend on how you plan to use the money. The current maximum maturities are:

Large loan amounts

Although the amount of funding you receive will vary based on the type of SBA loan and your business’s qualifications, SBA loans generally offer large loan maximums.

7(a) loans, for example, offer a maximum loan amount of $5 million. Similarly, the 504/CDC program offers a maximum loan amount of $5 million, but provides up to $5.5 million for small manufacturers and eligible energy public policy projects.

These are much larger loan amounts than are typically offered by online lenders or even banks — who generally max out at $500,000 and $1 million, respectively.

Hard to qualify

Although the government guarantee reduces the risk that lenders face when issuing loans to small businesses, you’ll still need to meet strict eligibility criteria to get an SBA loan. Typically, you’ll need several years in business, strong business finances and a good credit history to qualify.

Slow to fund

Depending on your lender and the type of SBA loan you apply for, it can take anywhere from one to three months to access funds. Plus, the SBA loan application process is detailed and requires extensive documentation.

Require some form of collateral

SBA loans typically require an unlimited personal guarantee from anyone who owns 20% or more of the business. Lenders may ask that other business owners provide a limited or unlimited personal guarantee as well.

Depending on the loan and your business’s qualifications, you may also need to put up physical collateral or offer a down payment. SBA 504 loans, for example, will require a down payment of 10% or more.

SBA loan requirements vary based on the lender and the particular loan program, but you’ll typically need several years in business and a good credit history to qualify. Additional criteria from the SBA, include:

If your business is newer or smaller, SBA microloans may offer an SBA loan option that’s easier to qualify for.

1. Make sure your business is eligible

To qualify for an SBA loan, lenders typically like to see at least two years in business, strong annual revenue and a good credit score, which starts around 690.

If your business is struggling, an SBA loan is probably out of the question. And if it falls into any of the ineligible categories, such as gambling or political lobbying, you shouldn’t apply.

2. Choose a lender

The SBA offers a convenient Lender Match tool to match potential borrowers with lenders within two days.

If you’re applying through a traditional bank, it helps to work with one that has a track record of processing SBA loans. Ask your potential lender these questions:

In general, a bank with multiple years of SBA experience will be able to better guide you, including letting you know your chances of being approved. Banks will follow SBA guidelines but use their own underwriting criteria to evaluate loan applications.

For example, Newtek Bank, based in Florida, is the most active SBA 7(a) lender in the United States by lending volume so far in the 2024 fiscal year .

Newtek is also an SBA Preferred Lender. Preferred Lenders can make final credit decisions on loan applications without sending them to the SBA, thereby expediting the underwriting process.

3. Gather your documents

SBA loan applications can vary based on loan type, but your lender should be able to help you prepare your paperwork.

Here are some of the documents you will need:

4. Submit your application and wait

The time it takes to get approved for an SBA loan will depend on the lender you choose. With a bank, the entire process — from approval to funding — can take anywhere from 30 days to a couple of months.

If you’re short on time, you might opt for the SBA Express loan, which typically funds faster than other options. The maximum amount for this type of financing is $500,000 and the maximum amount the SBA guarantees is 50%.

Learn more about getting an SBA loan: