United States
Updated: December 18th, 2023
In this guide, we cover:
SBA 7(a) Community Advantage Loan program
How to prepare for an SBA loan
Term Loans from Funding Circle: An easy alternative to SBA loans
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 small business 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.
There are multiple types of SBA loans available to small business owners.
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.
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. SBA 7(a) loan rates currently range between 5.50% to 9.75%
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 need 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.
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.
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.
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:
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 because 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 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.
Two separate lenders fund CDC/504 SBA loans: 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 between 4%-6%, with repayment terms up to 25 years.
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:
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.
In the case of CDC/504 SBA Loans, both the CDC and the SBA can 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.
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.
Unlike other types of SBA loans, the interest rate for microloans is determined by the partner institution, or intermediary, which 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, the average loan size was roughly $14,000. The maximum loan term for an SBA Microloan is six years.
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.
There are multiple types of disaster loans available:
SBA Disaster Loan rates and terms differ based on the type of disaster loan. 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.
SBA loan requirements vary from loan to loan, but here are some of the basic requirements you should keep in mind:
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 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 the current minimum SBSS scores:
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:
SBA loan requirements vary by lender, so be ready to provide additional information as needed.
Visit the SBA to learn more about how to write a solid business plan.
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.
Gather and organize business finances:
Depending on the type of SBA loan program 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:
In addition to a personal guarantee, most SBA loan requirements include 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.”
It’s important to consider that there are four types of SBA loan providers:
Different lenders will offer varying rates and maximum loan amounts. When choosing an SBA-approved lender, read reviews to see how their customer service performs, where they’re located, and what channels you can use to contact the company.
Once you’ve reviewed the SBA loan requirements, 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 to submit one application to several SBA-designated “Preferred Lenders”.
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 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:
Louis DeNicola is the president of LD Money Media LLC and an experienced finance writer who specializes in credit, personal finance, and small business finance. Within the small business sphere, he helps business owners understand their financing options, cash flow management, business credit, and taxes. In addition to Funding Circle, you can find his work on BlueVine, Credit Karma, Experian, Wirecutter, and Lending Tree.
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