An SBA loan is money borrowed from a bank or lender that the Small Business Administration backs with a may provide
An SBA loan is a loan made by a bank or other lender to a small business owner, with the Small Business Administration (a federal agency) promising to repay a portion of it if the borrower defaults. The SBA itself does not lend the money — a bank does. The SBA's may provide reduces the lender's risk, which means banks are willing to lend to businesses that might not otherwise may have access to for a conventional loan.
The may provide typically covers 75 to 90 percent of the loan amount, depending on the program. If you borrow $100,000 and stop paying, the SBA reimburses the lender for most of that loss. You still owe the full amount — the may provide protects the lender, not you — but the may provide makes lenders more willing to work with newer businesses, businesses with less-than-perfect credit, or businesses in industries banks normally avoid.
SBA loans come in several types, each designed for different purposes: the 7(a) loan program for general business needs, microloans for very small amounts, disaster loans after declared emergencies, and others. The terms, amounts, and requirements vary by program.
Key Takeaways
- The SBA guarantees a portion of the loan to the lender, not a gift or grant to you, so you repay the full amount you borrow.
- Banks and credit unions make SBA loans; the SBA does not lend directly in most programs.
- The 7(a) loan program is the most common SBA loan, used for working capital, equipment, real estate, and debt refinancing.
- SBA loans typically have longer repayment terms (5 to 10 years or more) and lower interest rates than conventional loans.
- You must have a genuine business need and show you cannot get conventional financing on reasonable terms before a lender will consider an SBA loan.
How the SBA may provide works in practice
When you explore for an SBA loan, you go to a bank, not to the SBA. The bank reviews your process, your business plan, your credit, and your collateral. If the bank thinks you are a reasonable risk, it submits your process to the SBA for a may provide. The SBA reviews the process again and decides whether to may provide it.
If the SBA approves the may provide, the bank funds the loan. You make monthly payments to the bank. If you default, the bank files a claim with the SBA, and the SBA reimburses the bank for its loss (up to the may provide percentage). You are still legally responsible for the debt, and the SBA or the bank may pursue collection.
The may provide does not mean automatic approval. Both the bank and the SBA must believe the loan is sound. The bank still requires collateral, a personal may provide from the owner, and evidence that the business can repay. The SBA still reviews the business plan and your ability to manage the business.
The most common SBA loan program: the 7(a) loan
The 7(a) loan program is the SBA's largest and most flexible program. It covers loans from $50,000 to $5 million (though most are smaller) and can be used for almost any business purpose: buying equipment, purchasing inventory, renovating a location, refinancing existing debt, or covering working capital.
The SBA guarantees up to 90 percent of loans under $150,000 and up to 75 percent of larger loans. Interest rates are typically prime rate plus 2.25 to 2.75 percent, though rates vary by lender and market conditions. Repayment terms are usually 5 to 10 years for equipment and working capital, and up to 25 years for real estate.
You must be a U.S. citizen or permanent resident, own at least 20 percent of the business, and show that you have tried to get conventional financing and were either denied or offered terms you cannot accept. The bank will ask for a detailed business plan, personal tax returns for the past two years, and a personal may provide (meaning you are personally liable if the business cannot repay).
Other SBA loan programs for specific situations
The SBA offers programs beyond the 7(a) loan. Microloans are loans up to $50,000, made through nonprofit lenders, for businesses too small or too new for traditional bank loans. Disaster loans are available after a declared disaster (hurricane, flood, wildfire) and can cover physical damage, lost inventory, or working capital to restart. Export loans help businesses that sell internationally. Community Advantage loans are for businesses in underserved areas or owned by people with limited credit history.
Each program has different terms, interest rates, and requirements. Disaster loans, for example, have lower interest rates (sometimes 3 to 4 percent) but are only available after a federal disaster declaration. Microloans have shorter terms and smaller amounts but may be easier to get if you are just starting out.
What you actually pay: interest, fees, and terms
An SBA loan is not information programs. You pay interest, and you pay fees. On a 7(a) loan, the interest rate is typically the bank's prime rate plus a spread of 2.25 to 2.75 percent. The SBA also charges a may provide fee (usually 1 to 3 percent of the loan amount, paid upfront or rolled into the loan) and a servicing fee (usually 0.55 percent per year, deducted from your payments).
A $100,000 SBA loan at 8 percent interest over 10 years costs you roughly $955 per month. The may provide fee might add $1,000 to $3,000 to the total cost. Over the life of the loan, you pay back significantly more than you borrowed — that is how lending works.
The advantage is that these terms are usually better than you would get on a conventional loan if you could get one at all. A business with limited credit history or collateral might pay 12 to 15 percent on a conventional loan, or might not be able to borrow at all. The SBA may provide makes the difference.
Who can get an SBA loan and who cannot
You must be a U.S. citizen, national, or permanent resident. Your business must be for-profit and operate in the United States. You must own at least 20 percent of the business (though most lenders require you to own more). You cannot use the loan for certain purposes: paying off personal debts, buying existing businesses (with some exceptions), or speculating in real estate.
Businesses in some industries face restrictions or cannot borrow at all. These include gambling, lending, insurance, real estate investment, and a few others. If your business is primarily a passive investment (you own rental property but do not manage it), you likely cannot get an SBA loan.
The SBA also looks at your personal credit and your business credit. If you have a history of not paying bills, a recent bankruptcy, or fraud, a lender will probably decline you. If your business has been operating for less than two years, you will need a strong business plan and personal financial statements to show the lender you can manage the business.
The process process and what to expect
Start by contacting SBA-approved lenders in your area. You can find them through the SBA website or by calling your local SBA office. Bring a business plan (2 to 5 pages describing what you do, who your customers are, and how you will repay the loan), personal tax returns for the past two years, and a personal financial statement.
The bank will ask for details about the loan: how much you need, what you will use it for, and how the business will generate revenue to repay it. The bank will also run a credit check and may ask for collateral (equipment, real estate, or inventory). The entire process typically takes 4 to 8 weeks from process to funding, though it can be faster or slower depending on how complete your process is and how busy the lender is.
Once the bank approves the loan and the SBA guarantees it, the lender funds the money into your business account. You begin making monthly payments on a schedule set in the loan agreement. If circumstances change and you cannot make a payment, contact the lender when ready — many lenders will work with you on a temporary deferment or modification rather than declare you in default.
Frequently Asked Questions
Is an SBA loan a grant or do I have to repay it?
You must repay every dollar you borrow. An SBA loan is a loan, not a grant. The SBA may provide protects the lender if you default, but you remain legally responsible for the full amount. If you stop paying, the lender will pursue collection and may seize collateral or sue you personally.
Can I get an SBA loan if I have bad credit?
It depends on how bad and how recent. Most lenders want a credit score of at least 650 to 680, though some will work with lower scores if you have a strong business plan and collateral. Recent bankruptcies, unpaid judgments, or fraud will likely disqualify you. A lender can tell you whether your credit history is a barrier.
How long does it take to get an SBA loan?
The typical timeline is 4 to 8 weeks from process to funding. This assumes your process is complete and the lender does not need to request additional information. If you are missing documents or the lender needs to verify details, it can take longer. Disaster loans sometimes move faster because of the emergency.
What happens if my business fails and I cannot repay the loan?
You are personally responsible for the debt. The lender will attempt collection, which may include seizing collateral, garnishing wages, or suing you. The SBA may provide reimburses the lender for its loss, but that does not erase your obligation. You should contact the lender when ready if you foresee a problem — some lenders offer loan modifications or forbearance.
Can I use an SBA loan to buy an existing business?
Yes, but with restrictions. You can use a 7(a) loan to buy an existing business if you are buying the assets or the entire company. You cannot use it to buy a franchise unless the franchisor is on the SBA's approved list. The lender will want to see the seller's financial statements and tax returns to verify the business is viable.