Types of SBA loans: The different SBA loan programs explained

Types of SBA loans: The different SBA loan programs explained

Jessica Crosby
By Jessica Crosby
Jul 25, 2023
12 min read

If you’ve been considering financing your business with a traditional loan, then a Small Business Administration (SBA) loan may be for you. This federal agency backs loans designed for small businesses and they tend to have better terms than conventional loans. 

Even better, the SBA recently launched improvements to its lending programs, intending to expand access to capital for small businesses and increases protection against fraud. This is excellent news if you’re looking for funding, as these improvements increase the SBA’s network of lenders while cutting some of the red tape.

Read on to understand:

What is an SBA loan?

SBA loans are offered through a lender like a bank or a credit union. Because the SBA sets guidelines for the loan, it reduces the risk for both lenders and business owners, increasing access to capital. 

Lenders know the SBA will pay even if the owner defaults. Entrepreneurs can avoid borrowing from potentially predatory lenders with unfair terms.    

How does an SBA-backed loan work?

You obtain an SBA loan like you would any other loan with a lender: You apply, get approved and decide if the terms are right for your business.

But an SBA loan is different because the SBA backs the loan up to 85%, so lenders consider it less risky. It works similarly to other government agency funding like Department of Housing and Urban Development (HUD) and Department of Agriculture (USDA) loans, where you apply with a lender, and the loan application differs from a traditional loan. But the loan is managed by the bank or credit union.

Your business must satisfy the loan requirements for the lender and the SBA. SBA loans must be repaid — it’s not a grant. 

In 2022, the average SBA loan was $530,903. Businesses can use loans for working capital, startup money, expansion, real estate, etc. 

Types of SBA loans

You must apply for an SBA loan through a preferred lender (there’s one exception where the SBA loans out money directly for disaster assistance). 

There are various SBA loans you can apply for, but pick the right type because the application process is time-consuming. Pick the one that makes the most sense for your business for a more straightforward approval process. 

You are not limited to just one SBA loan. You can apply for multiple loans if you fulfill the requirements. For example, you can apply for a standard SBA 7(a) loan for a major real estate expansion and also apply for an SBA express loan for faster access to cash for smaller projects. 

SBA 7(a) loan

The most common SBA loan is the 7(a) loan. SBA 7(a) loans are harder to qualify for but have longer repayment terms and low interest rates. You can use a 7(a) loan in various ways for your business, including business expansions, purchasing supplies, equipment and working capital. 

There are a variety of SBA 7(a) loans:

SBA 7(a) loan: Purpose Max loan amount Application time
Standard 7(a) loan: Real estate, business expansion, building expansion, equipment, supplies and working capital $5 million 5-10 business days
7(a) small loan: Used for smaller purchases $350,000 5-10 business days
Express loan: Faster funding for a smaller loan amount $500,000 36 hours
Export express loan: Fast loan process specifically for export businesses $500,000 24 hours
Export working capital loan: Funds working capital for export companies $5 million 5-10 business days
International trade loan: Long-term loan for funding export sales to compete with foreign companies $5 million 5-10 business days
CAPLines of credit: For seasonal working-capital needs $5 million 5-10 business days

SBA 504 loan

The SBA 504 loan is used explicitly for real estate, heavy machines and equipment. That’s what makes it different from an SBA 7(a) loan which includes those things but also gives you more flexibility to spend in other ways. 

Your 504 loan can accomplish a lot. The goal of the loan is to promote business growth and create jobs. SBA 504 loans have longer repayment terms — up to 25 years — and fixed interest rates. They range from $125,000-$20 million.

Certified Development Companies (CDCs) offer 504 loans. CDCs are non-profit entities that promote economic development. The loan breakdown is 50% from a lender, 40% from a CDC and 10% from the business owner, but every loan term will vary. 

SBA microloans 

You can use SBA microloans for a smaller cash boost, and you can use them for start-up costs or young companies. The SBA fully funds SBA microloans. The microloans are for lower-income and underserved populations and communities. 

You can borrow up to $50,000 in the SBA microloan program with an interest rate of 6%-9%. Lenders do require collateral, but often you can use the item needing the loan (i.e., equipment) as collateral. Many SBA lenders don’t require credit history as long as you use collateral. 

Pros and cons of SBA loans

There are many reasons to apply for an SBA loan for your business, but SBA loan types aren’t always for everyone. Here are a few key advantages and disadvantages. 

Advantages of SBA loans

  • Competitive rates: SBA loans are federally regulated, which means the interest rates never get too high compared to other financing options. 
  • Low fees: Fees for SBA loans are upfront and then yearly, with clear communication during the loan process. 
  • Longer terms: Lenders are confident enough to give longer terms because the SBA backs the loans. You can expect 10-25 year terms on SBA loans. 
  • Larger money amounts: With the right SBA loan program, you can borrow up to $5 million. Traditional lenders typically max out at around $1 million. 

Additionally, another considerable advantage is access to SBA resources. You can access SBA resources before, during and after the loan process. These learning materials help grow a successful business.

According to Julio Casiano, SBA deputy district director of Connecticut, the SBA doesn’t have a goal to loan out an amount of money, and they aren’t trying to sell to business owners. He says, “Our goal is to educate everyone that needs to understand how SBA functions and how to utilize the program to the best of their ability.”

Disadvantages of SBA loans

  • Hard to qualify: You must be eligible under the SBA and lender requirements. 
  • Slower approval times: It can sometimes take 1-3 months to get approval on SBA loans, and other financing types can be faster. 
  • Personal guarantee required: This stipulates that the lenders hold you (and your personal assets) responsible if you default on your loan. You may also have to put up collateral.

What are SBA loan requirements? 

Your first step in the SBA loan approval process is to make sure you and your business fulfill the SBA loan requirements. SBA’s loan requirements stay the same, but individual lender requirements will vary. 

Your business must:

  • Be a for-profit US-based business.
  • Fit the SBA’s definition of a small business
  • Have owner equity — this includes either time or money.
  • Show a need for the loan.
  • Demonstrate a specific use for the loan.
  • Be in business usually for two years.
  • Display strong revenue and credit score.

What is the SBA loan approval process?

The first step in the SBA loan approval process is to determine your eligibility. If an SBA is right for you, here’s how to start. 

1. Choose an SBA lender

It’s key to choose a lender experienced in SBA loans. Ask your prospective lender how many SBA loans they do, which types of SBA loans they have experience with and other questions to determine their experience.

Because the SBA loan process is more complicated (you have to gain approval from the lender and the SBA), you want a knowledgeable lender. Even if a lender has SBA approval, they still need to gain experience with the SBA loan process.

2. Gather application documents

There are a few typical documents that your lender will require. (This list is not exhaustive; every lender will have slightly different requirements.)

  • SBA info form
  • Statement of personal history
  • Personal financial statements
  • Personal income tax returns
  • Business license
  • Business tax returns
  • Lease or real estate agreements
  • Cash flow projection

Often, the SBA relies heavily on the cash flow projection and does not look as closely at your credit score. The SBA knows that, in most cases, you’re just starting out and won’t have established credit.

But they still want to make sure your business will be profitable. The SBA considers itself a cash flow lender. Casiano says, “We look towards the profitability of the operation, the projections to make sure that they’re able to pay back. It’s not a grant. These are loans.”

3. Wait for approval 

Most SBA loan applications take 1-3 months to process. Once you gain approval, you can access the money.

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Types of SBA loans: The different SBA loan programs explained


Jessica Crosby
About the author

Jessica spent over a decade working in education before moving into content marketing. She has worked on content marketing campaigns in the edtech, real estate, and personal finance sectors. She has a passion for working with companies that take the time to educate their customers. When she’s not working, she’s probably outside with her two kids.

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