An SBA Loan Is a Bank Loan That the Government Backs

An SBA loan is money you borrow from a bank or lender, but the Small Business Administration — a federal agency — promises to repay part of it if you cannot. The bank lends the money. The SBA does not lend directly to you in most cases. Instead, the SBA guarantees a portion of the loan, usually between 75 and 90 percent, which means the bank takes less risk and is willing to lend to small businesses that might not otherwise get approved.

Because the government backs the loan, the terms are often better than a conventional business loan: lower interest rates, longer repayment periods, and smaller down payments. You still have to repay the full amount — the SBA may provide does not erase your debt. It straightforward makes the bank more willing to lend to you.

Key Takeaways

  • The SBA guarantees a portion of the loan to the bank, not the money itself, so you borrow from a bank and repay the bank.
  • SBA loans typically have lower interest rates and longer repayment terms than conventional business loans because the government reduces the lender's risk.
  • You must have a business plan, personal credit history, and collateral or equity in the business, though requirements vary by loan type.
  • The most common SBA loan is the 7(a) loan, which can be used for working capital, equipment, real estate, or debt refinancing.
  • The SBA charges fees — typically 2 to 3 percent of the loan amount — which are added to what you owe.

The Three Main Types of SBA Loans

The 7(a) loan is the most common SBA loan. It can be used for almost any business purpose: buying equipment, renovating a building, paying for inventory, or covering working capital. Loan amounts range up to $5 million, and you can borrow for up to 10 years for equipment or 25 years for real estate. Interest rates are typically 2 to 3 percentage points above the prime rate, though the exact rate depends on the lender and the size of the loan.

The 504 loan is designed specifically for buying real estate or equipment. It works differently: you get a first loan from a bank and a second loan from a certified development company (a nonprofit partner of the SBA). The SBA guarantees the second loan. This structure is useful if you need to buy a building or large equipment but do not have enough down payment for a conventional loan. Terms run up to 20 years for real estate and 10 years for equipment.

The microloan is for smaller amounts — up to $50,000. These loans are made through nonprofit intermediaries rather than banks, and they often come with business training and mentoring. Microloans are useful if you are just starting out or need a smaller amount than a 7(a) loan would provide.

What You Need to Borrow

Banks that offer SBA loans will ask for a business plan that describes what you do, who your customers are, and how you will use the money. The plan does not need to be long or formal, but it should be realistic and show that you have thought through the business.

You will also need to show your personal credit history. Most lenders want a credit score of at least 620, though some will work with lower scores. They will pull your credit report and may ask about past late payments or debts. If your score is low, you may still get approved, but the interest rate will be higher.

Collateral — something of value the bank can take if you do not repay — is usually required. For a 7(a) loan, this might be equipment, inventory, accounts receivable, or a lien on your home or business building. For a 504 loan, the real estate or equipment you are buying serves as collateral. You will also typically need to put down 10 to 20 percent of your own money, called equity.

How Much an SBA Loan Costs

The interest rate on an SBA loan is set by the lender and is not fixed by the government. However, SBA loans have rate caps — the maximum interest rate the lender can charge — which vary by loan type and size. For a 7(a) loan under $50,000, the cap is usually around 10 percent above prime. For larger loans, the cap is lower.

In addition to interest, you pay an upfront may provide fee to the SBA. This fee is typically 2 to 3 percent of the loan amount and is added to what you owe. For example, on a $100,000 loan with a 2.5 percent fee, you would owe $102,500 to the bank. Some lenders also charge an annual servicing fee, usually around 0.55 percent of the remaining balance.

The total cost depends on the loan size, the interest rate, and how long you take to repay. A $100,000 7(a) loan at 8 percent interest over 5 years will cost you roughly $22,000 in interest and fees combined. A longer repayment period lowers your monthly payment but increases the total interest you pay.

Who Can Get an SBA Loan

You must own at least 20 percent of the business, and the business must be for-profit and located in the United States. The SBA has size limits — your business cannot be too large — but these vary by industry. A manufacturing business might be limited to 500 employees, while a retail business might be limited to $7.5 million in annual revenue.

You cannot use an SBA loan for certain purposes: paying off personal debt, buying an existing business from the current owner (with some exceptions), or investing in passive real estate. You also cannot use it if you are in an industry the SBA excludes, such as gambling, lending, or speculative investments.

If you have been denied credit elsewhere or have a lower credit score, an SBA loan may still be an option because the government may provide makes lenders more willing to take a chance. However, you will still need to show that you can repay the loan and that your business has a reasonable chance of success.

How Long It Takes to Get Approved

The timeline varies by lender and loan type. A 7(a) loan typically takes 5 to 10 business days from the time you submit a complete process to the time the SBA approves it. The lender may take additional time to do their own review, order an appraisal, or verify information. From start to funding, the process usually takes 2 to 4 weeks, though it can be faster or slower depending on how quickly you provide documents and how busy the lender is.

A 504 loan takes longer because it involves two lenders — the bank and the certified development company. Plan on 4 to 6 weeks from process to funding. Microloans can move faster, sometimes in 1 to 2 weeks, because the amounts are smaller and the nonprofit intermediaries often have simpler processes.

SBA Loans Versus Other Ways to Borrow

A conventional bank loan does not have government backing, so the bank takes all the risk. This means higher interest rates, stricter credit requirements, and shorter repayment terms. An SBA loan is usually cheaper and more flexible because the government shares the risk.

A line of credit is short-term borrowing for working capital — money to cover payroll or inventory while you wait for customers to pay. An SBA loan is for longer-term needs like buying equipment or a building. A line of credit might have a higher interest rate but is faster to set up.

A personal loan from a bank or online lender is unsecured, meaning you do not have to pledge collateral, but the interest rate is much higher — often 8 to 36 percent. An SBA loan requires collateral but costs less over time if you are borrowing a significant amount.

Frequently Asked Questions

Can I use an SBA loan to start a brand new business?

Yes. You do not need to have been in business for a certain amount of time. However, you will need a business plan that shows you have researched the market and understand your costs and customers. Lenders are more cautious with startups, so you may need a larger down payment or a personal may provide from someone with good credit.

What happens if my business fails and I cannot repay the loan?

You are personally responsible for the loan. The bank will pursue collection, which may include taking your collateral, garnishing your wages, or suing you. The SBA may provide protects the bank, not you — it means the bank will be repaid even if you default, but you still owe the debt.

Do I have to use a specific bank to get an SBA loan?

No. Many banks and credit unions offer SBA loans. You can shop around and compare rates and terms. Some lenders specialize in SBA loans and may have faster processes or more flexible requirements. Ask your current bank if they offer them, or search the SBA's lender directory online.

Can I pay off an SBA loan early without a penalty?

Yes. Most SBA loans do not have prepayment penalties, so you can pay off the balance early without extra fees. Paying early saves you interest, though you will still owe any fees that were charged upfront.

What is the difference between an SBA loan and a grant?

An SBA loan is money you borrow and must repay with interest. A grant is money given to you that you do not have to repay. The SBA does not offer grants to most small businesses. Grants are usually available only for specific purposes like disaster recovery or research and development, and they are highly competitive.