SBA Loan

SBA loans are government-backed loans designed to help small businesses that don't qualify for traditional bank loans. The SBA guarantees a portion of the loan (up to 85%), reducing risk for lenders and enabling better terms for borrowers.

Types of SBA Loans:

1. SBA 7(a) Loan (Most Popular)

• Maximum: $5 million
• Use: Working capital, equipment, real estate, acquisitions, refinancing
• Terms: Up to 10 years (equipment/working capital), 25 years (real estate)
• Rates: Prime + 2.25-4.75% (typically 8-11%)
• SBA guarantee: 85% (loans ≤$150k), 75% (loans >$150k)

2. SBA 504 Loan

• Maximum: $5 million (up to $5.5M for manufacturing/energy)
• Use: Commercial real estate and large equipment purchases only
• Terms: 10, 20, or 25 years
• Rates: Fixed rate, typically 5-6%
• Structure: 50% bank loan, 40% SBA loan, 10% down payment

3. SBA Microloan

• Maximum: $50,000 (average $13,000)
• Use: Working capital, inventory, supplies, equipment
• Terms: Up to 6 years
• Rates: 8-13%
• Through intermediary lenders (nonprofits)

4. SBA Express Loan

• Maximum: $500,000
• Use: General business purposes
• Terms: Up to 10 years (equipment), 25 years (real estate)
• Rates: Higher than 7(a) (Prime + 4.5-6.5%)
• Approval: Faster (36-hour SBA response)
• SBA guarantee: 50% (lower than standard 7(a))

SBA 7(a) Loan Breakdown (Most Common):

Example Loan:

• Loan amount: $250,000
• Use: Purchase equipment and working capital
• Rate: Prime (8.5%) + 2.75% = 11.25%
• Term: 10 years
• Monthly payment: ~$3,480
• Total repaid: ~$417,600

Fees:

• Guarantee fee: 0-3.75% (based on loan amount)

• Loans ≤$150,000: 0%

  • $150,001-$700,000: 3%
  • $700,001+: 3.5-3.75%

• Example: $250,000 loan = $7,500 guarantee fee (often rolled into loan)

Eligibility Requirements:

Business Must: ✅ Be for-profit ✅ Operate in the U.S. ✅ Qualify as "small" by SBA size standards ✅ Have invested equity (owner's money) in the business ✅ Have exhausted other financing options

Personal Must: ✅ Good credit (typically 680+ for 7(a)) ✅ Demonstrate ability to repay ✅ Be a U.S. citizen or legal resident ✅ No defaults on previous government loans

Prohibited Uses: ❌ Speculation or investment in rentals ❌ Lending or investing in others ❌ Pyramid sales ❌ Gambling ❌ Paying off delinquent taxes

Advantages of SBA Loans:

✅ Lower down payments: 10-20% vs 25-30% conventional ✅ Longer terms: 25 years for real estate vs 10-15 conventional ✅ Lower rates: 8-11% vs 12-20% conventional business loans ✅ Easier approval: SBA guarantee reduces lender risk ✅ Build business credit: Establishes creditworthiness ✅ Flexible use: Can cover multiple business needs

Disadvantages:

❌ Slow approval: 30-90 days (vs 1-2 weeks for conventional) ❌ Extensive paperwork: Tax returns, financial statements, business plan ❌ Personal guarantee required: Personal assets at risk ❌ Collateral required: For loans over $25,000 ❌ SBA guarantee fee: Adds to total loan cost ❌ Restrictions on use: Can't use for pure investment/speculation

Documentation Required:

1. Business Plan (detailed roadmap)
2. 3 years of business tax returns (if existing business)
3. Personal tax returns (3 years)
4. Financial statements (balance sheet, P&L, cash flow)
5. Personal financial statement
6. Business licenses and registrations
7. Lease agreements (if applicable)
8. Resumes of owners/key employees

SBA 7(a) vs Conventional Business Loan:

When SBA Loan Makes Sense:

✅ Purchasing commercial real estate (long 25-year term) ✅ Buying an existing business (favorable terms) ✅ Starting a business with limited capital ✅ You have good credit but limited collateral ✅ You need lower monthly payments (longer terms)

When to Consider Alternatives:

• Need money fast → Business line of credit
• Small amount (<$50k) → Business credit card, microloan
• Excellent credit + collateral → Conventional loan (faster approval)
• Real estate only → SBA 504 loan (better rates)

Application Process:

1. Find SBA-approved lender (most major banks)
2. Prepare documentation (business plan, financials, tax returns)
3. Submit application to lender
4. Lender reviews and submits to SBA
5. SBA approval (if lender can't approve alone)
6. Close loan (sign docs, pay fees)

Timeline: 30-90 days from application to funding

The Bottom Line: SBA loans offer small businesses access to affordable financing that would otherwise be unavailable. The tradeoff is extensive paperwork and slower approval. If you have time and meet requirements, SBA loans are often the best financing option for small businesses.