SBA Loans: Loan Programs, Pros and Cons and How To Apply

SBA loans are business loans partially guaranteed by the U.S. Small Business Administration.

The three main SBA loan programs—7(a), CDC/504, and microloan—let you borrow money for nearly any business purpose, including working capital, purchasing inventory or equipment, refinancing other debts, or buying real estate.

SBA loans offer low interest rates and long repayment terms, making them one of the most desirable types of business financing on the market. However, they are generally slower to fund and require a lengthy application.

There are several different SBA loan programs out there, with the following three programs being the most popular:

• 7(a) Loan Program
• CDC/504 Loan Program
• Microloan Program

The SBA loan program you’ll want to apply for depends on the size, age, and goals of your business.

Here’s a summary of all three options:

The SBA 7(a) loan program is the most popular of all SBA loan programs because the capital can be put toward a wide range of business purposes. SBA 7(a) loans are available in amounts up to $5 million and come in many types, including SBA Express loans and CAPLines credit lines.

Interest Rates: SBA 7(a) loans come with interest rates in either fixed or variable (typically adjusted quarterly) varieties. Your bank lender determines which it will offer. 

Your interest rate depends on your credit score and the length of your repayment term. To protect borrowers, the SBA restricts how much a bank can make off your SBA loan. Learn more in our guide to SBA loan rates.

Repayment Term:  You can expect monthly payments for 25 years for real estate and up to 10 years for equipment and working capital.

Fees: The guarantee fee on 7(a) loans ranges from 0.25% to 3.5% of the guaranteed portion of the loan up to $1 million, plus 3.75% of the guaranteed portion over $1 million. Be aware that your guarantee fee might be included in the total cost of the loan.

Some partnered banks might also charge an origination fee or a loan packaging fee, depending on which banks you’re working with.

There are a number of different subsets of the 7(a) program that you can apply for, including:

• Standard 7(a) Loan
• SBA 7(a) Small Loan
• SBA Express Loan
• Export Express Loan
• Export Working Capital
• International Trade Loans
• SBA CAPLines Line of Credit

An SBA 504 loan is a type of SBA loan that is used specifically to purchase fixed assets, to upgrade existing assets, or to purchase real estate.

Typically with a 504 loan, a bank extends half the total loan amount, SBA-approved certified development companies (CDC) extend 40% of the loan amount, and the borrower puts down a down payment to cover the rest.

These loans are available in amounts of up to $5.5 million.

Interest Rates: The rates on the CDC portion of the loan are subject to SBA rules—and you can expect to receive a rate equal to the 5- to 10-year Treasury rate + 2.23% to 2.39% depending on the repayment terms of your loan.

The bank portion of the loan, on the other hand, is not subject to SBA regulation, so you’ll receive a rate based on your business’s qualifications and you’ll be able to negotiate your rate with the bank you work with.

Repayment Term: CDC/504 loans come with either a 10-, 20-, or 25-year term.

Fees: SBA CDC/504 loan fees are usually about 3% of the loan amount—and can sometimes be financed with the loan.

An SBA microloan is a loan of up to $50,000 from an intermediary nonprofit to the owner of a small business or startup. The money originates from the SBA, which initially lends the money at a discounted rate to the intermediary.

Businesses can use SBA microloans for a range of purposes, including working capital or buying equipment, machinery, or supplies.

Interest Rates: The institution you work with is the one that sets the interest rate on the microloan, depending on your creditworthiness and the specifics of your small business. Rates typically range between 8% to 13%.

Repayment Term: The maximum repayment term allowed for an SBA microloan is six years.

Fees: There are no fees associated with microloans.

Is an SBA loan the right type of financing for your small business?

Here are some pros and cons to consider:

Pros

SBA loans usually have low interest rates.

Although the interest rates on SBA loans will vary based on your business’s qualifications, the SBA sets guidelines on the maximum rates a lender can charge.

Therefore, aside from bank loans themselves, it’s hard to find more affordable financing than SBA loans.

SBA loans offer long repayment terms. 

With SBA loans, repayment terms typically range from 10 to 25 years—so you don’t have to worry about payments cutting into your business’s cash flow.

In addition, whereas many online loans are repaid on a daily or weekly schedule, SBA loans are repaid on a monthly schedule.

SBA loans can be used for a variety of purposes.

SBA 504/CDC loans aside, one of the biggest benefits of SBA 7(a) loans and SBA microloans is they can be used for virtually any business purpose.

This gives you flexibility with your funds, although you should always have a plan for your financing before applying for a loan.

SBA loans require low down payments.

Not all SBA loans have down payments, but those that often require them—SBA 7(a) and SBA CDC/504 loans—usually ask for 10% of the total amount you’re borrowing.

This is a fairly low down payment, considering that traditional bank loans may ask anywhere from 20% to 30%.

Cons

SBA loans can be difficult to qualify for.

Although SBA loans can be easier to access than bank loans, you’ll still need to meet fairly high-level criteria to qualify. For most SBA loans, you’ll need at least a few years in business, strong annual revenue, and excellent personal credit.

If you’re a newer business, SBA microloans may offer more flexible requirements.

The SBA loan applicaiton process is lengthy. 

SBA loans require a document-heavy application that includes several SBA-specific forms, among other paperwork. Because many SBA lenders are banks, they don’t always offer online applications and you may have to visit a branch location to apply in-person.

In addition, the underwriting and approval process is notoriously slow. It can take anywhere from 60 to 90 days.

If you’re interested in an SBA loan—but want to expedite the process—you might want to learn more about the SBA Express loan.

SBA loans may require collateral. 

The SBA expects that all loans are secured in some way—which means your lender may require that you offer up collateral on your loan. These requirements will vary based on the type of loan and the lender.

That said, all SBA loans will require a personal guarantee from anyone who owns 20% or more of the business.

The SBA loan application process can be lengthy and complicated. You’ll need to provide documents like financial statements, information on your collateral, a description of your business, and a statement of how you’ll use the loan proceeds, among others. The complete list of loan documents you may need are as follows:

• Driver’s license
• Voided business check
• Bank statements
• Balance sheet
• Profit & loss statements
• Business tax returns
• Personal tax returns
• Business plan
• Business debt schedule

The participating bank will look for applicants with good credit, a solid business plan, profitable businesses (most of the time, not always), and a demonstrated ability to repay the loan.

Your borrowing history is especially important to the bank you’re working with for an SBA loan.