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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.

SBA loans are small-business loans offered by preferred banks and online lenders and partly guaranteed by the government. 

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.

How do SBA loans work?

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 loans 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.

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 10%, while major online small-business lenders that don't offer SBA loans have loans with APRs as high as 99%.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.

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. There are no upfront guarantee fees or annual service fees for SBA 7(a) loans of $500,000 or less through September 2023.[1] And there are no upfront guarantee fees on SBA Express loans to any veteran-owned businesses.

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:

• Working capital or inventory loan: 10 years.
• Equipment: 10 years.
• Real estate: 25 years.

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. The SBA 7(a) loan program offers a maximum loan amount of $5 million[2] and the 504/CDC program offers a maximum loan amount of $5.5 million.[3]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.

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.

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.  If you need capital quickly, you’ll want to consider a faster small-business loan alternative.

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.  You may also need to put up physical collateral or offer a down payment — in addition to signing a personal guarantee — to secure your SBA loan.

SBA loan requirements vary based on the lender and the particular loan program. Regardless of your lender or SBA loan program, however, you’ll have to meet a set of standard criteria from the SBA, such as:

• You must be a for-profit business operating in the U.S.
• The business owner must have invested equity, such as their own time and money, into the business.
• You must be able to demonstrate a need for financing and show the business purpose for which you’ll use the funds.
• You must be a small business as defined by the SBA.

» MORE: Learn about SBA loan requirements and see if you’ll qualify.

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 charitable and religious institutions, you shouldn’t apply. 

 2. Choose a lender

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

• How many SBA loans do you make?
• How often do you fund SBA loans?
• How experienced is your staff in the process?
• What is the dollar range of the loans you make?

In general, a lender with multiple years of SBA experience like 818 Capital Funding, will be able to better guide you, including letting you know your chances of being approved. 

Lenders and Banks will follow SBA guidelines but use their own underwriting criteria to evaluate loan applications. 

To qualify for their SBA loan, you must be in good financial standing and able to show personal and business tax returns for the past three years.

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:

• SBA’s borrower information form.
• Statement of personal history.
• Personal financial statement.
• Personal income tax returns.
• Business tax returns.
• Business license.
• Lease agreement if applicable.
• One-year cash flow projection.

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 from 30 days to a couple of months.  

Short on time? The SBA has another type of loan called SBA Express, which aims to respond to loan applications within 36 hours. The maximum amount for this type of financing is $500,000 and the maximum amount the SBA guarantees is 50%.

• Here are 5 reasons why you might not qualify for an SBA loan.
• What’s the difference between SBA loan collateral and a guarantee?
• Find out how to get SBA loan forgiveness for PPP and EIDL loans.

Information Sources:

• U.S. Small Business Administration. 7(a) Fees Effective October 1, 2022, for Fiscal Year 2023. Accessed Nov 18, 2022.
• 2.U.S. Small Business Administration. Terms, conditions, and eligibility. Accessed Nov 18, 2022.
• 3.U.S. Small Business Administration. 504 Loans. Accessed Nov 18, 2022.
• 4.U.S. Small Business Administration. 7(a) & 504 Lender Report. Accessed Nov 18, 2022.https://www.nerdwallet.com/article/small-business/small-business-loans-sba-loans
• https://www.nerdwallet.com/article/small-business/small-business-loans-sba-loans

A merchant cash advance (MCA) was originally structured as a lump sum payment to a business in exchange for an agreed-upon percentage of future credit card and/or debit card sales. The term is now commonly used to describe a variety of small business financing options characterized by short payment terms (generally under 24 months) and small regular payments (typically paid each business day) as opposed to the larger monthly payments and longer payment terms associated with traditional bank loans. The term "merchant cash advance" may be used to describe purchases of future credit card sales receivables or short-term business loans. 

Merchant cash advance companies provide funds to businesses in exchange for a percentage of the businesses' daily credit card income, directly from the processor that clears and settles the credit card payment. A company's remittances are drawn from customers' debit and credit-card purchases on a daily basis until the obligation has been met. Most providers form partnerships with payment processors and then take a fixed or variable percentage of a merchant's future credit card sales. 

This structure may have some advantages over the structure of a conventional loan. Payments to the merchant cash advance company fluctuate directly with the merchant's sales volumes, giving the merchant greater flexibility with which to manage their cash flow, particularly during a slow season. Advances are processed quicker than a typical loan, giving borrowers quicker access to capital. Also, because MCA providers typically give more weight to the underlying performance of a business than the owner's personal credit scores, merchant cash advances offer an alternative to businesses who may not qualify for a conventional loan. An example transaction is as follows: A business sells $25,000 of a portion of its future credit card sales for an immediate $20,000 lump sum payment from a finance company. The finance company then collects its portion (generally 15-35%) from every credit card and/or debit card sale until the entire $25,000 is collected.

Term loans carry a fixed or variable interest rate, a monthly or quarterly repayment schedule, and a set maturity date. 

If the loan is used to finance an asset purchase, the useful life of that asset can impact the repayment schedule.

The loan requires collateral and a rigorous approval process to reduce the risk of default or failure to make payments. However, term loans generally carry no penalties if they are paid off ahead of schedule. 

Repayment Terms

Term loans come in several varieties, usually reflecting the lifespan of the loan. A short-term loan, usually offered to businesses that don't qualify for a line of credit, generally runs less than a year, though it can also refer to a loan of up to 18 months or so. 

An intermediate-term loan generally runs more than one to three years and is paid in monthly installments from a company's cash flow. 

A long-term loan runs for three to 25 years, uses company assets as collateral, and requires monthly or quarterly payments from profits or cash flow. 

A business line of credit (LOC) is a revolving loan that allows access to a fixed amount of capital, which can be used when needed to meet short-term business, needs. 

A LOC is one of the tools a business can use to finance short-term working capital requirements, such as: Purchasing inventory. 

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