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What is an SBA Loan?

An SBA loan is a loan backed by the Small Business Administration (SBA), a federal agency whose purpose is to help support small businesses and entrepreneurs. While the SBA does offer some loans directly, most SBA loans are from banks which are backed by the SBA. Banks consider SBA backed loans to be lower risk because if you are unable to make payments, the government will step in and cover up to 85% of the cost. Since the loan is a lower risk, banks tend to qualify businesses they otherwise would not and offer lower interest rates. The benefits of getting an SBA loan are apparent. However, it is often difficult to get the backing of the SBA.

Rates (%)

SBA rates tend to be significantly lower than those charged for traditional small business loans. The rates vary depending on the type and size of the loan, as well the amount of time it will be paid back in. When you schedule to pay them back in under seven years, SBA 7(a) loans have an interest rate of prime+4.25% if the loan is under $25 000. The interest rate is prime+3.25% if the loan is between $25001 and $50 000. The interest rate of prime+2.25% if the loan is for more than $50 000. If you are paying them back in more than seven years than an extra 0.5% is added to the interest rate.

The SBA set a maximum interest rate that lenders can charge to CDC/504 loans. The current maximum is between 3.83% and 4.56% depending on the length of the loan.

SBA Loan Requirements

SBA loans require a lot more paperwork than most other small business loans. In addition to your business plan, your credit score and your business credit score lenders may ask for your previous addresses, educational background, criminal records, a resume, your intention on how to spend the loan and some financial statements. While some SBA loans are designed to help startups, most others will ask that your business is at least two years old. The SBA will also ensure that your business meets their definition of a small business. Not all SBA loans ask for collateral, but some will.

To avoid having individuals abuse the advantages of SBA loans, the SBA 504 loan asks that you have a net worth of less than $15 million and a net income of less the $5 million.

Some specialized SBA loans (such as 8(a)) exist for the benefit of members marginalized groups, to qualify for these loans you must also prove that you are socially and economically disadvantaged.

What if I Have Bad Credit?

While most SBA loans take other factors into consideration, few, if any except credit ratings of worse than fair. If you a member of a socially and economically marginalized group than the SBA may have small specialized loans for you. In certain circumstances, micro-loans can be granted to those with little to no credit history.

The SBA recommends getting a business credit card, as a means of establishing or improving your business credit history. The process takes some time, but with patience, you can develop your credit and obtain a loan at a good rate.

No Credit Check

Unfortunately, the SBA does not back or provide any loans without a credit check. If you’re looking for a loan without a credit check because you have no business credit history, the SBA does grant some loans for startups to entrepreneurs with excellent personal credit. If you do not qualify for those, the SBA recommends that you get a business credit card to establish or improve your business credit history.

SBA 7(a) Loan

The SBA 7(a) Loan is the most common type of SBA backed loan. These loans range in size between $500 and $5 million, depending on the means and needs of your business. SBA 7(a) loans are only granted for those who do business in the United States. The funds can be spent on real estate, repairing existing capital, paying off existing debt, expanding a business, or purchasing machinery or supplies for your business. SBA 7(a) loans can be either standard loans or lines of credit, depending on the circumstance.

One aspect of the SBA 7(a) program is the express SBA loan. The maximum express loan is much lower ($350 000 as opposed to $5 million), but it is granted much quicker and has a significantly simpler application process. After application, the borrower should expect to hear if he has qualified or not within 36 hours.
In contrast to other SBA loans, the interest rate is negotiated between the lender and the borrower. However, the rates cannot exceed the SBA’s maximum.

SBA 504 Loan

The SBA 504 loan (sometimes referred to as a Certified Development Company (CDC) loan) is a small business loan backed by the SBA with the intention of stimulating local development. The rates for SBA 504 loans even lower the rates of SBA 7(a) loans, but they have stricter requirements. For a small business to get an SBA 504 loan, it needs to have evidence that the loan will help in developing the community. The community development can come through job creation (at least one new job for every $65 000 backed by the SBA), public policy (such as developing rural areas), or upgrading facilities to improve health, safety, or environmental impact.

The SBA 504 loan cannot be used as working capital, repaying debt, or investing in real estate.

How to Get an SBA Loan

Before you apply, you should find the SBA loan which suits your needs (ex. do you need a small express loan, or should you wait longer to secure a larger loan?) and ensure that you meet the minimum requirements for that loan. Once you are sure you have reached the minimum requirements, you should find a suitable lender, preferably an institution which has experience in dealing with SBA loans and also ideally an institution you have dealt with in the past.

Before you apply, you should gather the relevant documents. These documents can include (but are not limited to): your business plan, your credit score, your business score, your educational background, your intention on how to spend the loan, financial statements from your business, and proof of the size of your business. Make sure you have all of the necessary documents gathered beforehand because applying without having everything ready can further delay the acceptance of your application.