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Understanding SBA Loans

SBA loans are business loans backed by the U.S. Small Business Administration (SBA). The SBA works with financial institutions to provide loans to small businesses. Learn more about what an SBA loan can be used for and how to apply.

Updated
9 min. read

What is an SBA loan and how do they work?

An SBA loanfootnote 1 is a type of business loan that’s backed by the U.S. Small Business Administration (SBA). The SBA establishes the guidelines for the loans, helping to simplify the process for businesses to qualify for funding and reduce risk for the lenders that provide the financing.

Under the SBA loan program, borrowers can apply for as little as $500 in financing or as much as $5.5 million. Many SBA loans can go toward common business expenses, including the cost of long-term fixed assets and operating capital. However, some SBA loans may restrict the use of the funds, so you should carefully review guidelines when researching SBA loan options with a lender.

Additional reasons to consider applying for an SBA loan include:

  • Comparable terms: Rates and fees typically are similar to non-guaranteed loans.footnote 1
  • Business support: Some loans will include opportunities for counseling and education for launching and operating a business.
  • Special features: Some SBA loans may waive collateral requirements, require lower down payments, and offer flexibility with overhead mandates.footnote 1 

SBA Loan vs. Conventional Business Loan

What is an SBA loan like compared to a conventional business loan? Although SBA loans share the same goal of providing businesses with working capital, they may not work for every situation. 

Since SBA loans are geared more toward established companies, you might apply for this type of funding if you've been in business for five to 10 years and generate steady sales but need additional investment. By contrast, if you’re a startup that has been in business for more than two years, you could possibly apply for the SBA microloan program, but the most you’d receive is $50,000, so you might prefer to pursue other types of funding to fully launch your enterprise.

SBA Loans Pros and Cons

SBA loansFootnote 1 may offer certain advantages for your business, but they may not be right for all circumstances. Here are some benefits and drawbacks of SBA loans to consider:

SBA Loan Pros

  • Variety of loan types: Funding can range from $500 to more than $5 million, depending on the loan.
  • Competitive interest rates: Lenders must follow SBA limits on interest rates. For example, interest rates for 7(a) loans are negotiated between the borrower and the lender, but are subject to SBA maximums, which are pegged to the prime rate or an optional peg rate. Interest rates may be fixed or variable.
  • Longer terms and amortizations: Repayment terms can be longer under SBA loans than with conventional funding. Real estate terms can range up to 25 years, while loans for equipment, working capital, and inventory can go up to 10 years.
  • Flexible credit requirements: Similar to traditional financing, SBA loans usually require good credit. But there may be greater flexibility compared to traditional loans.

SBA Loan Cons

  • Strict loan requirements: To qualify for an SBA loan, a borrower must have been unable to obtain traditional financing from other lenders.
  • Longer approval period for non-preferred lenders: The approval period for SBA loans, especially from funders that are not part of the Preferred Lender Program (PLP), can be as long as 90 days.
  • May require down payment and collateral: Borrower contribution requirements vary, but some SBA loans, such as the 504 loan, will ask for a down payment of 10%.
“The right SBA loan type for you will depend on the type of business, its stage, and why you're looking for funding.”

SBA Loan Types

There are multiple SBA loan typesFootnote 1 with varying terms, structures, and funding levels. The two most popular are SBA Loan 7(a) and SBA 504. 

Under the 7(a) Loan Program, borrowers can receive up to $5 million in funding for a wide range of uses, from the acquisition, refinancing, or improvements of real estate holdings to the purchase of equipment, furniture, and supplies, to changes in ownership — or some combination of uses.

The 504 Loan Program, meanwhile, can provide up to $5.5 million in funding for "major fixed assets" to fuel business growth and job creation.

Here is additional information about these loan programs:

 
 
SBA Loan 7(a)
SBA 504
Potential Uses
  • Business acquisition/expansion
  • Purchase machinery and equipment
  • Working capital and inventory
  • Purchase land or buildings, construction, renovations
  • Land/Building acquisition 
  • Construction and renovations
  • Purchase machinery or equipment
Limits
  • Up to $5 million
  • Up to $500,000 (Small Loan)

Typical structure:

  • 50% financing by BMO
  • 40% 504 debenture financing through a Certified Development Company (CDC)—Maximum of $5 million
  • 10% injection by the borrower (may be higher for special purpose real estate or start-up businesses)
Terms
  • Working capital, equipment, and business acquisitions up to 10 years
  • Commercial real estate up to 25 years
  • Equipment up to 10 years
  • Commercial real estate and construction up to 25 years
Eligibility
  • Be an operating business
  • Operate for profit
  • Be located in the U.S.
  • Be small under SBA size requirements
  • Not be a type of ineligible business
  • Not be able to obtain the desired credit on reasonable terms from non-federal, non-state, and non-local government sources
  • Be creditworthy and demonstrate a reasonable ability to repay the loan
  • Operate as a for-profit company in the United States or its possessions
  • Have a tangible net worth of less than $15 million
  • Have an average net income of less than $5 million after federal income taxes for the two years preceding your application

 

Some SBA loans will provide funding under more specific criteria, including the following:

SBA Disaster Loans

These loans are meant to provide assistance to businesses, private non-profit groups, homeowners, and renters in a declared disaster area. The funding can be used for losses that are not reimbursable by insurance or funds from the Federal Emergency Management Agency (FEMA), as well as operating expenses the disaster prevented the business from covering. Disaster loan types include:

  • Physical damage loans
  • Mitigation assistance
  • Economic injury disaster loans
  • Military reservist loans

SBA Export Working Capital

Under the Export Working Capital loan programFootnote 1, lenders are eligible for up to a 90% guarantee on export loans. Financing options include export express loans, which leaders can underwrite without SBA approval in amounts up to $500,000, and export working capital loans, which businesses can use to finalize an export sale or contract in amounts up to $5 million.

International Trade Loans

International Trade loan financingFootnote 1 can help businesses access global markets and invest in their companies to improve their competition position with rival importers. These loans combine fixed asset financing, working capital financing, and debt refinancing with the maximum SBA guarantee of 90% in amounts up to $5 million.

SBA Financing Requirements

SBA loans specify certain eligibility requirementsFootnote 1 and also ask applicants to submit extensive documentation. The 7(a) program, for example, sets forth the following eligibility criteria:

  • Be an operating business
  • Operate for profit
  • Be located in the U.S.
  • Be small under SBA size requirements
  • Not be a type of ineligible business
  • Not be able to obtain the desired credit on reasonable terms from non-federal, non-state, and non-local government sources
  • Be creditworthy and demonstrate a reasonable ability to repay the loan

Required documentation, depending on the SBA loan, may include but are not limited to:

  • SBA loan application
  • Business and personal financial statements/balance sheets, including for any affiliates
  • Business valuation
  • Business tax returns
  • Supporting documentation (franchising, licensing, real estate, etc.)
  • Real estate appraisals
  • Environmental impact reports

How to Apply for an SBA Loan

Here are some steps you can take to complete an SBA loan application.

1. Determine your business's needs and eligibility

Before filing an SBA loan application, you will need to assess the state of the company. You will probably want to list out your company's objectives, review your financials and your credit status, and determine not just where the monies will go but how you will pay them back. These calculators can help you figure out what term your loan should be and how long it will take to repay your loan.

2. Identify loan amount based on business needs 

After considering your business's needs, you will need to determine how much you would like to borrow. Factors include your plans for the funds, growth projections, and the full cost of the financing.

3. Evaluate SBA loan types and choose the one(s) that match your needs

The right SBA loan type for you will depend on the type of business, its stage, and why you're looking for funding. Do you need to change or add locations? Purchase or repair equipment? Build out inventory or make new hires?

4. Identify and select a lender

Identify potential lenders and compare their offerings to determine which one will best match your circumstances. Consider when choosing a lender whether they are part of the SBA's Preferred Lenders Program, in which the lender has the authority to complete underwriting and make the credit decision for certain types of SBA loans — working with this type of lender can simplify and speed up the process.

When you're ready to submit the application, your SBA lender will tell you what documents are required and expect you to come prepared to answer questions about your company.

5. Gather documents and submit the application

The process to submit an application will depend on the lender and type of SBA loan but here are checklists for the two most popular types:

SBA Loan 7(a) checklist

SBA Loan 504 checklist

Borrowers usually work with a business relationship manager/banker who helps to ensure the necessary documents and requirements have been gathered and completed.

FAQs for SBA loans

  • For most businesses, getting an SBA loan takes between 30 and 90 days, from the application process to receiving funds.

  • SBA loans require significant paperwork, as well as good credit, strong financials, and an established history for your enterprise. Your success also may depend on the lender's view of your business plan and the ways you intend to deploy the funds. In 2022, some 62,000 SBA loans were disbursed.

  • Once a business gets approved for an SBA loan, they may have funds available within 7 to 14 days, although funding could take as long as 90 days.

  • If you default on an SBA loan, you could damage your credit score, lose assets through seizure, and/or face litigation from a lender. To avoid default, you can try to work with your lender to find a solution, including debt rescheduling and/or consolidation.

  • SBA loans can offer a viable alternative to conventional business loans, especially for established companies with a proven track record that are looking to move or add locations, purchase equipment, and/or hire staff. However, SBA loans may not be right for a startup or a company that needs financing quickly. Explore SBA loans to decide if this is the right option for your business. 

Ready to apply for an SBA loan?

Explore our SBA loans

Helpful tools

Business Loan Term Comparison Calculator

Calculate what term your loan should be
Calculate how long will it take to repay a loan

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Footnotes

Footnote 1 details SBA loans from BMO (“Bank”) are in participation with the U.S. Small Business Administration. Loans are subject to credit approval in accordance with Bank and SBA eligibility and lending guidelines and are for business purposes only. Excluding certain loan programs, the business applying for the Business Loan or Line of Credit must have a physical presence (or in the instance where the business has no physical location, a mailing address for their headquarters) located in at least one of the following states: AZ, CA, CO, FL, ID, IL, IN IA, KS, MI, MN, MO, NE, NV, NM, ND, OK, OR, SD, TX, UT, WA, WI, or WY. Businesses located in MI or TX must be within 100 miles of a BMO full-service retail branch. Terms and conditions are subject to change at any time without prior notice. Certain fees, conditions, and additional restrictions may apply.   

Banking products are subject to approval and are provided in the United States by BMO Bank N.A. Member FDIC

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