Your guide to SBA loans (and what you need to qualify)

If you’ve ever researched small business financing, you’ve likely heard of SBA loans. But, how much do you really know?

In this guide, we cover:

What are SBA loans?

Types of SBA loan programs

The SBA 7(a) Loan program

SBA Express Loan program

SBA 7(a) Community Advantage Loan program

SBA CAPLines Loan program

The CDC/504 Loan program

The SBA Microloan program

SBA Disaster Loan

Pros and cons of SBA loans

Do I qualify for a SBA loan?

How to prepare for an SBA loan

Term Loans from Funding Circle: An easy alternative to SBA loans

FAQs

What are Small Business Administration (SBA) loans?

Contrary to popular belief, the Small Business Administration (SBA) doesn’t usually lend money directly to small businesses. Instead, the SBA partners with participating SBA-approved banks, credit unions, community development organizations, nonprofits, and other lenders to provide long term, low-cost, government-backed loans ranging from $500 to $5.5 million to small businesses.

Depending on the SBA loan program you choose, the Small Business Administration will guarantee up to 90% of the loan amount. If, for some reason you were to default, the SBA covers the guaranteed portion. This eliminates most of the risk for the participating lenders issuing these loans, which makes capital more accessible for small businesses. 

Types of SBA loan programs

There are multiple types of SBA loans available to small business owners.

The SBA 7(a) Loan program

SBA 7(a) loans are the most popular type of SBA loan. These loans are federally guaranteed term loans with a maximum loan amount of $5 million. Business owners often use SBA 7(a) loans to finance working capital needs, buy an existing business, refinance debt, or purchase new equipment. When most people talk about an SBA loan, they’re usually referring to this type of loan, because the use of capital is flexible and can be applied to just about any business purpose.

SBA 7(a) Loan overview

• Maximum loan amount: Up to $5 million
• Repayment terms:
  • 25-year max for real estate loans
  • 10-year max for equipment loans
  • 10-year max for working capital or inventory loans
• Interest rates: 2.75% to 4.75% + prime rate
• Average minimum credit score requirement: 640 or above
• Other requirements:
  • Typically a down payment equivalent to 10% of the total loan amount
  • Collateral may be required
• Loan purposes:
  • Equipment purchases
  • Working capital
  • Meeting your seasonal business needs
  • Refinancing debt
  • Setting up a new branch or buying an existing business
  • Construction or contract work
  • Buying commercial real estate
  • Funding startup costs

SBA 7(a) Loan rates and terms

The rate for an SBA 7(a) loan depends on a variety of factors, including your credit score and the repayment terms. SBA 7(a) loan rates can also be fixed or variable. While the lender is the one evaluating your application and determining an interest rate, the SBA does set a maximum rate that the lender is not allowed to exceed.

Your SBA loan rate is contingent upon the current Prime Rate, which is a market rate that changes based on how the U.S. economy is doing. Simply put, if the economy is doing well, you should expect to pay more in interest than when the economy is struggling. SBA 7(a) loan rates currently range between 5.50% to 9.75%

SBA Express Loan program

The SBA Express Loan program is a part of the SBA 7(a) loan umbrella. As the name suggests, the Express program is used by businesses who are in need of a quicker turnaround for approval — within 36 hours to be exact. It’s important to note that while the SBA Express Loan program does provide faster turnaround times from the SBA, borrowers will still need to go through the underwriting process with individual lenders, which can take a few weeks. And while the SBA Express Loan program does offer a faster application and approval process, these loans have shorter repayment terms and higher interest rates, and you can only borrow up to $350,000. They are also only able to be guaranteed up to 50% by the federal government.

SBA Express Loan overview

• Loan amount: Up to $350,000
• Interest rates: 4.5% to 6.5% + prime rate
• Time in business requirement: Generally two years or more
• Loan terms:
  • Up to 7 years for a line of credit
  • Same as Standard 7(a) for working capital or commercial real estate
• Approval time: Within 36 hours

SBA 7(a) Community Advantage Loan program

Community Advantage loans range from $50,000 to $250,000. The loans are guaranteed up to 85% for a $250,000 loan, with interest rates typically falling between 7% and 10%. Similar to SBA Express loans, there is a faster turnaround time on the application process than with the standard SBA 7(a) loan program.  

SBA Community Advantage Loan overview

• Maximum loan amount: Up to $250,000
• Interest rate: Prime rate + 6% (typically 7% – 10%)
• Repayment terms: Up to 7 to 10 years

SBA CAPLines Loan program

The SBA CAPLines program offers four different lines of credit that are designed to help small business owners with their short term working capital needs. The maximum amount offered by SBA CAPLines is $5 million.

SBA CAPlines are a good option for small businesses that pay upfront for goods or services before receiving payment themselves. It’s worth noting that while SBA CAPLines are available as a standalone product, they’re usually offered in conjunction with a traditional SBA 7(a) loan or CDC/SBA 504 loan. For these loans, the SBA usually guarantees between 75% to 85% of the loan amount. Once approved for an SBA CAPLine, you have a set amount of time to pay back the credit line.

SBA CAPLines overview

• Maximum credit limit: Up to $5 million
• Repayment terms:
  • Up to 5 years for Builders CAPLines
  • Up to 10 years for seasonal, working capital, and contract CAPLines
• Interest rates: Range from 5.75% – 8.25%
• Guarantee fee: Range from 2% – 3.5% of the guaranteed amount
• Average minimum credit score requirement: Typically 660 and above

The SBA CAPLines umbrella includes four different loan programs. Each has its own qualification standards in addition to the standard SBA eligibility criteria. The four programs are:

1. Contract loans: Used to finance contracts, purchase orders, or sub-contracts. In addition to material and labor costs, these funds can also be used to cover overheard and other administrative expenses that are necessary in order to complete the contract.  
2. Seasonal lines of credit: Used for short term financing needs based on changes in seasonable operations. The funds can only be used to finance the increase of accounts receivable, inventory, and sometimes labor costs. (You are not able to use the loan proceeds to maintain business activity during slow periods of the year.)
3. Builders lines: Used by small general contractors or builders to cover labor, building materials and supplies, rental equipment, building permits and inspections, utility connections, landscaping, and septic tank construction. If the cost of the land does not exceed 20 percent of the project cost, it may be eligible for coverage.
4. Working capital lines of credit: Used strictly for short term working capital and operating needs. They cannot be used for floor planning or for paying certain delinquent taxes or trust funds. In addition to meeting the standard requirements necessary to qualify for the 7(a) loan, your business must also have assets in the form of inventory or accounts receivable.

SBA CAPLines rates and fees

Interest rates for SBA CAPLines mirror those of the SBA 7(a) program. It’s important to remember that with a line of credit, though, you only pay interest on the money you borrow — you are not advanced funds upfront like with a term loan.

The ongoing servicing fee for an SBA CAPLine will be higher than that of an SBA 7(a). This is due to the fact that SBA CAPLines are extended based on short-term assets like invoices and contracts, which requires the lender to frequently review those documents. For the majority of CAPLines, the servicing fee is capped at 2%.

The CDC/504 Loan program

The CDC/504 loan program is complex, but the rates and terms are some of the best available to small business owners. Many small business owners use this type of loan to finance major capital asset purchases, such as equipment, land, and buildings.

CDC/504 SBA loans are actually funded by two separate lenders: a bank or traditional lender and a Certified Development Corporation (CDC). The two lenders will have different rates, terms, fees, and limits. Combined, these rates will make up your total SBA/CDC 504 loan rates. Generally, your interest rate will fall somewhere between 4%-6%, with repayment terms as long as 25 years.

CDC/504 SBA Loan rates

CDC/504 SBA loans are actually funded by two separate lenders: a bank or traditional lender and a Certified Development Corporation (CDC). The two lenders will have different rates, terms, fees, and limits. Combined, these rates will make up your total SBA/CDC 504 loan rates. Generally, your interest rate will fall somewhere between 4%-6%, with repayment terms as long as 25 years.

Examining the CDC portion of the SBA 504 Loan:

The CDC can cover up to 40% of the loan, and the SBA sets limits on the rates and fees given by the CDC. The interest rates on the CDC loan are based on the current rate for 5-year and 10-year U.S. Treasury bonds. In addition to those rates, however, you must add a spread for investor returns, as well as fees that the CDC and SBA charge. The loan has 10 or 25 year terms, and the rates typically look like this:

• Current 20-year maturity: 2.528%
• Current 25-year maturity: 2.602%

Examining the bank/nonbank lender portion of the SBA 504 Loan

The SBA does not set limits on the rates and terms for the lender, which leaves the specifics of the loan up for negotiation. In general, interest rates should be below 10 percent.

Your maximum loan size (between the two lenders) cannot exceed $14 million. That being said, this is the limit on an individual project — it’s possible for borrowers to take out multiple SBA loans at the same time for different projects, which raises the maximum amount one can borrow to $20 million.

CDC/504 SBA Loan fees

In the case of CDC/504 SBA Loans, both the CDC and the SBA are able to charge fees. Below are the primary fees you should be aware of. In addition to the fees listed below, you should also expect additional closing costs and fees from the CDC and the bank.

• Annual servicing fee: Currently 0.3205% on the unpaid balance
• Upfront guarantee fee: 0.50%

CDC/504 SBA Loan purposes

• Buying existing commercial or industrial real estate
• Purchase of lot and land improvements, including utilities, parking lots, street improvements, and landscaping
• Construction or renovation of existing buildings
• Purchase of long-lasting equipment or machinery

The SBA Microloan program

The SBA Microloan program provides smaller loans than other types of SBA financing, with the maximum loan amount being $50,000. The SBA Microloan program is typically used by small businesses, startups, and not-for-profit childcare centers to grow their operations.

The way the Microloan program works is the SBA lends money to non-profit intermediary lenders, who in turn lend the money out to small businesses.

SBA Microloan Program overview

• Maximum loan amount: Up to $50,000
• Rate: 8% to 13%
• Term: Maximum of 6 years
• Average minimum credit score requirement: Typically 640 and above
• Fees:
  • Reasonable packaging fees
  • Repayment terms of one year or more: limited to 3%
  • Repayment terms of one year or less: limited to 2%
  • Late fees (limited to 5% of the late payment amount)
  • NSF (non-sufficient fund) fees if applicable
  • According to the SBA, intermediary lenders can also charge “actual, paid and documented out of-pocket closing costs … such as filing or recording fees, collateral appraisals, credit reports, and other such direct charges related to loan closing”.
• Repayment cycle: Monthly

SBA Microloan program rates and terms

Unlike other types of SBA loans, the interest rate for microloans is determined by the partner institution, or intermediary, who looks at the borrower’s credit score as well as their relevant business financials. On average, the interest rates for SBA Microloans range from 8% to 13%. You’re able to borrow up to $50,000, however, in 2017 the average loan size was roughly $14,000. The maximum loan term for an SBA Microloan is six years.

SBA Microloan purposes

• Purchase of equipment
• Working capital
• Purchase of inventory and supplies
• Start-up capital (for new businesses)
• Purchase furniture and fixtures.

SBA Disaster Loan

The SBA offers disaster loans to those affected by a declared disaster, such as a hurricane, drought, or tornado. The disaster loan program is the only SBA program that lends directly to borrowers, instead of going through an intermediary. Each type of disaster loan can be used differently, and you’re able to apply for multiple disaster loans at the same time if needed.

SBA Disaster Loan overview

• Loan amount: Up to $2 million

• Repayment terms: Up to 30 years

• Interest rates: Ranging from 1% – 8%
• Average minimum credit score requirement: Generally 640 and above

There are multiple types of disaster loans available:

1. Business Physical Disaster Loans: These let business owners replace or repair material assets that may have been damaged by a disaster. Examples include (but are not limited to) property, machinery, inventory, or equipment. These loans are meant to offset losses not fully covered by your insurance. Businesses of any size and most private nonprofits are eligible to apply for these loans.
2. Economic Injury Disaster Loans (EIDL): You can think of EIDLs as working capital loans. This type of financing is used to help business owners fund areas of their businesses they are no longer able to operate because of a disaster. Only small businesses, small agricultural co-ops, and private nonprofit organizations are eligible.
3. Home and Personal Property Disaster Loans: Homeowners can borrow directly from the SBA to repair or replace the value of their primary home and property. This is not solely for people who own businesses. You only need to be affected by a declared disaster to be eligible.
4. Military Reservist Economic Injury Disaster Loans (MREIDL):  MREIDLs provide capital to small businesses to meet expenses that they would not have incurred if a staff member hadn’t been called to active military duty.

SBA Disaster Loan rates and terms

SBA Disaster Loan rates and terms differ based on the type of disaster loan. All of the SBA Disaster loans offer rates as low as 1 percent, and you can borrow up to $2 million. The highest interest rate you can be charged is 8 percent, and this is only if you are able to get credit from another source.

Pros and cons of SBA loans

• Pros
  • Large loan amounts
  • Low rates
  • Longer terms
  • Reasonable fees
  • Low down payments
  • Flexible use
  • Access to SBA resources
  • Tax perks 

• Cons
  • Difficult to qualify
  • Lengthy application and approval process if not working with an SBA lender with final credit decision abilities, known as “Preferred” status
  • Paperwork intensive
  • Good credit score required
  • Solid proven track record required
  • Must have a quality business plan
  • Collateral is usually necessary for larger loans — with personal risk, too

Will I qualify for an SBA loan?

Eligibility requirements vary from loan to loan, but here are some of the basic SBA requirements you should keep in mind:

• Be located in the US by a US citizen who’s at least 21-years-old
• Have no bankruptcies or foreclosures within the last 3 years
• Have no outstanding tax liens
• Have “reasonable owner equity to invest,” whether that’s time, money, or both
• Prove that you’ve sought out alternative financial resources and were unable to obtain a loan from one of these sources before seeking an SBA loan

You’ll need to have financial documents, projections, and a business plan to prove your ability to repay the loan.

Both your personal credit score and your business credit score will play a role in your ability to get approved for an SBA loan. 

Request a copy of your personal credit report and check for errors, such as missing payments or other incorrect information. You can obtain a copy of your report from multiple sources, generally for a fee. Annualcreditreport.com is a great resource that can provide you with these reports for free.

If you identify any errors, take the time to have the mistakes resolved with the credit bureaus before you apply for a loan. If your personal credit score is in the mid 600s or below, you may want to consider building your score before applying.

The SBA will also look at your FICO Small Business Scoring Service (SBSS), which is a measure of your business’s creditworthiness. Here are current minimum SBSS scores:

• 7(a) Small Loans: 140
• Community Advantage: 140
• Express Bridge Loan Pilot Program: 130 

Pro Tip: you’ll have a better chance of getting approved if you get a score of 160 or higher.

In addition to these, your business finances will also be examined:

• Cash flow
• Assets
• Number of workers
• Years in operation
• External and internal risks
• Public records: bankruptcy filings, liens, and judgments

How to prepare for a Small Business Administration loan

1. Gather documents and business info

Requirements vary by lender, so be ready to provide additional information as needed.

• Personal information
  • Personal history statement for each 20% + business owner (SBA Form 912)
  • Personal financial statement for each 20% + business owner (SBA Form 413)
  • Resume for each business owner
  • Personal tax returns from each business owner for the previous 2 to 3 years (depending on the loan program)
  • Personal bank statements from each of the business owners for the previous year
  • Driver’s license for each business owner
  • Proof of business ownership
  • Industry experience
• Business information:
  • Licenses and registrations
  • SBA loan application history
  • Insurance information
  • Leases (if applicable) 
  • Desired loan amount
  • Plans for loan proceeds
  • Business plan

Visit the SBA to learn more about how to write a solid business plan.

2. Get your financial house in order

There’s a process to applications and approvals, but remember the ultimate goal of your application is to prove to the SBA and the lender that you’re a responsible borrower. The more information you can provide to instill confidence in you and your business, the better.

Gather and organize business finances:

• Provide business financial statements:
  • Current income statement and balance sheet
  • Income statement and balance sheet for past 2 or 3 years 
  • Cash flow statement
  • 2 or 3 years of federal income tax returns (depending on the loan program)
• Create cash flow projections (month by month, for one year)
• Provide business debt schedule

Depending on the type of SBA loan you’re applying for (and your lender), you also might have to complete some different forms and provide additional information. For example, with the 504 loan, you will likely need:

• SBA Form 2450 
• An environment impact statement
• Evidence of meeting economic development goals (creating new jobs or supporting public policy goals such as energy conservation)
• Evidence that existing buildings are at least 51% owner occupied

3. Come up with collateral

In addition to a personal guarantee most SBA loans require you to provide collateral in some shape, fashion, or form. 

Collateral is another layer of security against defaults, because these assets can be sold for cash if you are unable to repay your loan. Qualifying assets include “equipment, buildings, accounts receivable, and in some cases, inventory.”  

4. Research and choose a lender

It’s important to consider that there are four types of SBA loan providers: 

• Referral agent: A referral agent identifies and refers applicants to lenders (or vice versa). They earn a 2% to 4% referral fee. 
• Referral and packaging agent: A referral and packaging agent does what a referral agent does – plus preparing the application. They earn a 4% referral fee and packaging fees. 
• Lending service provider (LSP) agent: A LSP agent is contracted by a lender to assist with their SBA loan functions, which may include originating, closing, servicing, and liquidating. 
• Small business lending company (SBLC): A SBLC is a non-depository lender authorized by the SBA to make 7(a) loans. 

Different lenders will offer varying rates and maximum loan amounts. Shop around to find a lender that you trust and that has a good reputation. Read reviews to see how their customer service performs, where they’re located, and what channels you can use to contact the company.

It can be tempting to just take the first offer, but don’t settle until you’ve exhausted all opportunities for a better rate —and more importantly, find the best fit for your unique financing needs.

5. Fill out SBA forms and apply

Once you have all your documentation and you’ve identified the lenders you’d like to work with, it’s time to start the application process. You could go through each lender’s lengthy process or use a lending platform like Funding Circle to submit one application to several SBA designated “Preferred Lenders”.

7(a) Loans from Funding Circle

Funding Circle is here to help you navigate the complex and often confusing SBA 7(a) loan process. With great interest rates, affordable once-monthly payments, and no prepayment penalties, federally-backed SBA loans are considered the gold standard in small business lending. We’ll pair you with a dedicated loan specialist who will help you prepare a complete and SBA approval-friendly application.

We work with a network of SBA Lenders to offer in–house approvals and accelerated processing giving you fast answers and even faster closings. SBA 7(a) Loans from Funding Circle feature:

• Loan amounts from $25K to $500K
• Loan terms up to 10 years
• Rate of Prime+2.75% (currently 6%)
• No prepayment penalties