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SBA loan guide: programs, types, and how to apply

Updated: November 16, 2022

By: Jon Davis

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Nearly 70 years ago, the US Small Business Administration (SBA) was established to protect the interests of small business owners. These days, they also have a hand in how some companies get access to capital ⁠— so if you run a small business yourself, you may have considered applying for an SBA loan at some point. With the assistance of the SBA, community partners, and participating lenders, more than 61,000 loans totaling $44 billion were made to small businesses in 2021.

 

SBA loans come in many sizes and shapes — and are available for just about any legitimate business purpose, from renovating a building to purchasing machinery. But before you apply, it pays to understand them a bit so you can make sure they’re a good fit and that you’re applying for the right type of loan for your needs.

 

Let’s break down what SBA loans are, whether you might qualify, and how the application process works.

Did you know?

President Dwight D. Eisenhower signed the Small Business Act on July 30, 1953, establishing the SBA.

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What is an SBA loan?

An SBA loan is a government loan for small businesses that can help with startup costs, operating capital requirements, expansions, real estate purchases, and other expenses. In almost all cases, a business owner doesn’t borrow money directly from the SBA. So how do these loans work?

 

The SBA partners with lending agents to provide loans to small businesses, and these loans are partially backed — or guaranteed — by the SBA. That means if a loan recipient defaults, the SBA isn’t required to pay back the entire loan amount. Instead, they’re on the hook to pay back a portion (also known as the guarantee) to the financial institution that provided the loan. Guarantees can range anywhere from 50% to 90% of the total value of the loan, depending on the program and dollar amount.

Which businesses are eligible for SBA loans?

 

Eligible business criteria

Before we get too far down the road, you might be wondering if you meet the SBA’s definition of a small business. Usually, size standards are based on the average annual receipts or the average number of employees of your business.

 

Generally, in the eyes of the SBA, you’re a small business if you meet the following criteria:

  • Your team consists of between 50 – 1,500 employees
  • You have between one million to $41.5 million in annual receipts

 

So, if you’re sandwiched somewhere in there, it’s a good sign. The SBA also publishes a table of size standards (the latest resource was updated October 1, 2022) that lists hundreds of eligible industries and employee counts. And when in doubt, you can contact any of their district locations across the US and territories for help. Besides the size standards, the SBA has some other general qualifications for simply being defined as a small business, including that you must be a for-profit business, have a place of business in the United States, make contributions to the US economy, and not be dominant in your field of business.

 

There are also some qualifications that can make or break your chances of working with SBA lenders and loan programs.

To be eligible, you:

  • Need to operate as a for-profit business
  • Are engaged in or propose to do business in the United States or its territories
  • Have reasonable owner equity to invest (typically this is around 10% of the total loan amount)
  • Must have used alternative resources — such as personal assets — prior to seeking assistance

 

Credit scores also come into play; the SBA and participating lenders usually prefer businesses with good credit scores to apply. We caught up with a handful of lenders to get a sense of what they are looking for:

While the requirements can vary by bank, lending agent, or business circumstances, many experts report that:

  • Loans amounting to $50,000 or less typically require a credit score of 700 or higher.
  • Loans amounting to $51,000 or more typically require a credit score of 650 or higher.

You should always ask about credit score requirements when speaking with a particular bank or lending agent you’re considering.

Ineligible businesses 


Digging deeper into the SBA terms and conditions, the agency calls out some businesses that are not eligible for these types of loans. You’ll need to look elsewhere and are not considered eligible if your business is involved in:

  • Illegal activities
  • Loan packaging
  • Speculation
  • Multi-sales distribution
  • Gambling
  • Investment
  • Lending
  • Dealing in rare coins
  • Sell stamps
  • “Wildcatting for oil”
  • A situation where the business owner is on parole

 

So now we know a bit more about eligibility, but you may be wondering how to determine if the loan options offered by the SBA are a good fit for your business goals. Let’s dive in.

What are some pros and cons of SBA loans?


Pros of SBA loan benefits to consider

 

Can be applied to versatile needs

Generally, SBA loans are pretty versatile, so you can use the capital in a variety of ways to help your business. For example, some allow you to use the loan funds as working capital or to construct a building from the ground up. The money could be used to cover the purchase of real estate, or for equipment or asset purposes. SBA funds can also be used simply to purchase supplies for your place of business.

 

Competitive financing 

Many small businesses are attracted to SBA loans because some offer fixed-rate financing, which means the interest rate does not change over the life of a loan. Fixed-rate loans keep your finances predictable because you don’t have to worry about unexpected monthly payment minimums skyrocketing or having to make large lump-sum balloon payments. Since the loans are backed by the SBA, many lenders are able to provide longer repayment terms and lower interest rates, which means you should end up paying less in monthly interest.

 

Owner and lender opportunity

SBA loans can be a “win-win” for the individual who receives the loan and the agents who extend them. Business owners generally get to take advantage of lower interest rates, while lenders enjoy less risk since the SBA guarantees a portion of the loan — meaning lenders will get some money back should the borrower bow out and default.

 

Cons of SBA loans to consider

 

Timeline for approval 

Applying for an SBA loan can require a lot of paperwork ⁠— and patience. It can take weeks to months to receive word from lenders on whether or not your application has been approved.

 

Personal financial responsibility 

In many cases, if a business owner is forced to close their doors, they’re looking at a personal guarantee: you’re personally responsible for paying back debt if your business can’t meet the obligation. Anyone involved who owns 20% or more of the business may be required to pay this personal guarantee. In addition to the personal guarantee, owners may also be required to provide collateral or a down payment in order to get approved for the loan.

 

Competition

There are a lot of small business fish in the sea — meaning you’ll likely have other business owners applying through the SBA and competing to receive the same loans from lenders.

Do SBA loans have fees?

Yes, some SBA loans have what’s called a guarantee fee, which they charge to lenders ⁠— but these fees usually get passed on to the borrower. Fees are typically a percentage of the amount the SBA guarantees if the borrower defaults, instead of the total loan amount. Percentages vary and can be anywhere from 2% to 3.75% of the guaranteed portion of the loan. 

Fees that you should not see

Note that lenders are not allowed to charge an SBA loan applicant points, bonus points, application, brokerage, or origination fees. If you see any of these come up in the application process, it’s probably a red flag that this is not the right lender to work with.

How do you apply for an SBA loan?

Now that we touched on some of the high-level pluses and minuses of SBA loans, let’s break down the steps involved in applying for this type of funding. We’ll get into a broad overview of each, but recommend you do your own research since you’ll have the best grasp on what’s most relevant for your business. We’ve included links to more information on each loan type below to give you a head start.

 

Step one: research SBA loan types

As we cover some common loan types, you may want to think about how quickly you need funds, what you might use them for, and how you might pay them back. Here is an overview of some common loan types:

 

 

SBA loan type and description What the loan can be used for Loan amount More resources 
Standard (7)a loans

Of the loan programs the SBA offers, the standard 7(a) is advertised as their most common, and usually popular because they tend to be pretty flexible because they can be used across many industries, particularly ones that traditionally find lending to be a challenge such as daycares, retail, and restaurants.

There’s no shortage of use cases the SBA spells out. For example, if you’re not having luck finding the right commercial space for your needs (or the workplace could benefit from a refresh), you can use a 7(a) loan toward new construction or building renovation. You can also purchase a business, refinance debt, or buy inventory. Size: The maximum loan amount is up to $5 million. Learn more about  standard 7(a) loans.
7(a) small loan
These loans tend to be fairly functional and a good fit for general business improvements. It’s similar to the standard (7a) but the maximum loan amount is much smaller.
You can get moving on purchasing buildings, equipment, or inventory with enhancements to your business. Size: The maximum loan amount is up to $350,000. Learn more about  7(a) small loans.
SBA 504 loan
Also known as certified development company loans (CDC), the 504 loan provides long-term, fixed-rate financing for significant fixed assets that promote business growth and encourage job creation.
You can use these for endeavors such as expanding your business or purchasing fixed assets (for example, something you might buy for long-term use such as commercial real estate and equipment). Size: The maximum loan amount to up to $5.5 million. However, for certain energy projects, borrowers can receive as much as $5.5 million per project, for up to three projects not to exceed $16.5 million in total. Learn more about SBA 504 loans.
SBA express loan
SBA express loans
If you need it in a hurry, an SBA express loan could offer faster funding as there are fewer eligibility requirements.
Items such as expansion, equipment purchases, or working capital (for example, money to literally pay the electric bill and keep the lights on or other day-to-day obligations). Size: The maximum loan amount is up to $500,000. Learn more about SBA express loans.
SBA microloans
This program exists for small businesses and some not-for-profit childcare centers looking to get off the ground or that are ready for an expansion.
You can use these loans for a variety of purposes, including repairs or to get your business reopened. Other valid purchases include fixtures, furniture, and supplies. Size: The maximum loan amount is up to $50,000. Learn more about SBA microloans.
CAPLines
CAPLines is a loan program designed for small businesses to meet short-term and cyclical or seasonal working capital needs.
For short-term needs such as inventory, receivables, or debt consolidation with revolving lines of credit. Size: The maximum loan amount is up to $5,000,000. Learn more about CAPLines.

 

 

Now that we have covered some of the main loan types, your next step would be to get your paperwork together.

Did you know?

An early version of the SBA was the Reconstruction Finance Corporation (RFC), formed by President Herbert Hoover in 1932 to alleviate the financial crisis of the Great Depression.

Step two: paperwork and SBA forms

There’s a laundry list of what lenders expect to see when you apply for an SBA loan, as well as some forms that the SBA requires you to include as part of the application process. Sharpen your pencils (or get on a solid Wi-Fi connection) and let’s chip away at the following checklist. It’s provided by the SBA and they recommend you have the information together before applying, so you can feel confident when submitting an application to a potential lender:



Profit and loss (P&L) paperwork

Be sure to pull a P&L statement that is current within 180 days of your application. And you’ll need to include supplementary schedules from the last three fiscal years.



Financial projection statements

You’ll also need to provide a comprehensive, one-year projection of income, finances, and a written explanation as to how you expect to achieve this projection.



Ownership and affiliations

Gather the names and addresses of any subsidiaries and affiliates, including situations in which you hold a controlling interest that may be affiliated by stock ownership, franchise, proposed merger or otherwise with you.



Business certificate or license

Lenders will want to see your original business license or certificate of doing business.   You’ll stamp your corporate seal on the SBA loan application form if your business is a corporation.



Loan application history

One of the things the SBA expects is for you to have exhausted all other financing options before turning to their programs, so you’ll need to include records of any loans you may have applied for in the past.



Income tax returns

The requirements here are signed personal and business federal income tax returns of your business’ principal(s) for the previous three years.



Resume and job experience

To provide a background on your experience and potentially your business partners, you need to include personal resumes for each principal in the company.



Business overview and history

Put together a short company history and any challenges you’ve faced. The SBA points out that you should provide an explanation of why a loan is needed and how it will help the business.



Business lease

If you have an existing workspace, you need to provide a copy of your business lease. If you are in the process of finding a space, a note from your landlord — with the terms of the proposed lease — is acceptable.



Note: Are you purchasing an existing business?

 

If so, you’ll need to have the following documentation:

  • Two years of previous federal income tax returns of the business
  • A current balance sheet and P&L statement of business to be purchased
  • Proposed bill of sale including terms of sale
  • Asking price with schedule of inventory, machinery and equipment, furniture and fixtures
  • Franchise, jobber, or licensing agreements
  • Proof of equity injection

 

Did you know? Paperwork best practices

While we’re on the subject of paperwork, did you know that employers are required to retain payroll records for a certain period of time?

The SBA has some of its own forms that need to be included in the application process. These are pretty much must-have documents no matter which loan you apply for.



Form 1919

This is the SBA’s borrower information form. It collects details such as your name, any affiliates you have, and is used for reference purposes by the SBA and lender.



Form 413

The SBA uses Form 413 to assess the financial situation for each applicant that applies for a loan. Some items you may need to include on the statement include any assets or real estate you own.

Step three: use SBA’s lender match tool

Have you got all your SBA forms and paperwork together and ready to go? Nice work! Now it’s time to match up with a lender using the SBA lender match tool. Keep in mind that the tool isn’t a formal application.

 

Once you complete the lender match form, you should hear from lending agents — by email or phone — and they’ll share more about their specific application process. If you’re not ready to take the plunge, or just curious about what the lender match process looks like, see the series of screenshots below.

 

SBA lender online form

 

The first step in the lender match process is to create an account by entering your full name, email address, and phone number, followed by submitting a new request.

Lender match create a new request

Lender match asks for your business name, website if you have one, the zip code you’ll do (or already do) business in, and a description of your business.

Enter your business details into lender match

You’ll then need to select your industry from a dropdown list of options,  and you’ll indicate how much experience you have — ranging from less than one year to five or more.

 

From there, you’ll enter the loan amount you’re looking for, how you plan to use it, and provide a short description.

 

 

 

You’ll then have to let the lender know a few more details, such as whether you’ve already prepared a business plan or financial projections.

And you’ll then review all your info to be sure it’s correct. If you need to make any edits, this is the time to do it.

 

 

Once you confirm your details, you’ll click the “Match” button and progress to one final screen. From here, click “Submit to Lender” and your loan interest will be sent to be matched up with potential lenders. You’ll also see how many lenders have received the request.

 

 

According to the SBA, you should hear from interested lenders within about two business days.

 

Don’t be shy to ask about the lenders’ credentials as they respond. There’s a critical one ⁠— PLP status ⁠— that experts recommend you ask about specifically.

 

“Almost any bank can do SBA lending, but only a handful can do it well,” says Tye Massey, a Vice President of Franchise Finance who has over twelve years of experience financing businesses across the United States through SBA programs. “Confirm that the bank has preferred lender partner status (PLP) with the SBA. If they’re not, they may not have a team that regularly manages these loans.”

 

Step four: apply for an SBA loan through a lender

Remember that the lender match process gets you connected with community lenders but isn’t an official application. Each lender will have its own formal process, and loan officers should be able to share details with you.

 

The SBA also suggests you ask some questions as you begin talking with lenders, prior to moving forward with an application, such as:

  • Are there any cash flow requirements to apply for an SBA loan?
  • What are their interest rates for SBA loans?
  • Is there a minimum credit score to apply for one of their SBA loans?

 

The SBA also encourages you to “get an understanding of prepayment penalties, grace periods, and if/when the lender can demand full repayment of the loan’s principal.”

 

From there, ask the lender what the formal application process is, and if they have any additional paperwork you’ll need to complete in addition to the standard documents we discussed earlier. And in terms of standing out from the competition, a little organization goes a long way. Another piece of expert advice from Tye Massey is to:

 

“have your paperwork together and complete at the beginning of the process,” he says. “Anytime a loan officer has to stop to double check if they have the forms and files they need — or if they’re following up with you for paperwork — it slows the process.” Massey also points out that a loan officer can be working on “hundreds of deals” at any given time. “I cannot stress enough how important this is: When you’re organized, it makes an enormous difference.”

 

Once the lender has everything they need and your application is officially submitted, it can take a couple of weeks to several months to receive a response. During that period of time, the SBA says it’s ok to be a squeaky wheel. Don’t hesitate to check in with your lender for updates or anything that could hold up your loan status.

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SBA loans are not your only option

After doing all of your research, you’ll need to figure out what’s best for your business and whether an SBA loan is a good fit for your goals and growth plans. And if it isn’t? There are plenty of conventional options available online or in the community where you do business.

 

So, keep your head up — and best of luck with your business and finding a lender who has your best interests in mind.

 

This article is for informational purposes only and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors for formal consultation.

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Jon Davis is the Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.