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April 27, 2022   /   K. Lee Graham

Small business owners have a few different paths they can take to get the funds they need to build and grow their businesses. One popular route is through the Small Business Administration’s government guaranteed loan programs, known as SBA loans.

Below, we share the key things you need to know about SBA loans and answers to the most common questions business owners have about their SBA loan options

What is the SBA and what are SBA Loans?

The Small Business Administration (SBA) is a government organization created to connect small business owners to the resources they need to succeed. In support of America’s entrepreneurs, the SBA created their government guaranteed loan programs to address the challenges of securing small business financing.

Their most popular loan program is the SBA 7(a) loan program. This program makes it possible for entrepreneurs to secure loans of up to $5 million with highly competitive terms and benefits. The 7(a) loan program helps more than 60,000 businesses obtain funding each year to start, build, or grow their operations.

What is a guaranteed loan?

When a loan is ‘government guaranteed’ it means that the US government absorbs some of the risk that banks take on whenever they lend money to businesses who qualify and go through the program. This loan guarantee enables banks to offer better terms to borrowers that might otherwise have to satisfy more requirements to get a loan. Because of this, guaranteed loans enable more businesses to qualify for financing from their bank with reasonable terms.

Why are SBA loans good for small businesses?

Rates and terms may vary from bank to bank since SBA loans are still processed through lending institutions and not the government itself. However, SBA loans are regarded as good for small businesses because of their interest rates, eligibility requirements, and the variety of ways you can use the funds for your business.

The maximum interest rate for an SBA 7(a) loan is set by the SBA to keep it entrepreneur-friendly. They also often have longer repayment terms, so monthly payments on your total loan amount may be smaller. You can estimate what your monthly SBA loan payment might be with this free calculator.

SBA lenders are also not required to ask the borrower to put up more in collateral than their loan amount. For conventional loans, it’s typical for lenders to ask that a borrower pledge more collateral than their loan amount. The collateral requirements alone can be quite a challenge for small business owners in need of funds to start, grow, or expand their business.

Another benefit of the SBA 7(a) loan program is its flexible use of proceeds. Borrowers typically find that the loan is good for their business goals because they can use the funds on a range of eligible projects related to growing their business. The SBA wants entrepreneurs to use their loans to start, build, or expand their business. Their mission is to foster the growth of American small businesses, so they’ve given a lot of options to borrowers in the program on how to use the loan.

How can I use an SBA 7(a) loan for my business?

Basic uses for SBA 7(a) loans include the following:

• Working capital

• The purchase of equipment, machinery, furniture, fixtures, supplies or materials

• The purchase of real estate, which includes both land and buildings

• The construction of a new building or renovation of an existing building

• Establishing a new business

• Buying a business (You can learn more about using an SBA loan to buy a business with our article.)

• Refinancing existing business debt (under certain conditions)

Additionally, SBA loans can sometimes be used to purchase franchise locations. If you’re considering financing options for a franchise, be sure to read our guide to franchise financing with SBA loans.

How long does it take to get funding through SBA loans?

The SBA application can sometimes be a lengthy process, however, if you’re well prepared with all your business documents in order before the application starts then your timeline could be expedited. Expect it to take anywhere from one to three weeks to get approved after submitting a complete application.

Once your application is approved, it can take anywhere from 20 to 60 days to obtain SBA approval and close the loan. This can vary based on the complexity of the transaction and the structure of the business. The exact time it will take to fund your loan depends on the lender you choose and their internal underwriting procedures. As you’re speaking with potential lenders, be sure to ask about their timelines.

Read our four best tips for SBA loan applications to start preparing for the loan application process.

How much is the down payment for an SBA 7(a) loan?

A down payment for an SBA 7(a) loan can be as little as 0% in certain cases. However, between 10% and 20% of the total project cost is more common. The exact amount of your required down payment will depend on a variety of factors, including which lender you choose.

Why would I have to put up my house as collateral for an SBA loan?

Your personal residence is sometimes required as collateral for an SBA loan if you don’t own enough business assets to meet the SBA or lender’s collateral requirements. The SBA requires that lenders secure their 7(a) loans with personal real estate when the business collateral does not meet the SBA’s definition of ‘fully collateralized’ for loans larger than $350,000. For loans $350,000 and smaller (aka “7(a) Small Loan”), the SBA does not require lenders to take personal assets as collateral. Some lenders might require this as part of their internal lending policies, so it is pragmatic to inquire with your lender about their Small Loan processing requirements.

How is interest accrued on my SBA loan?

Interest is accrued on your loan once the funds have been disbursed. The amount of interest is based on the interest rate that is agreed upon with you and your lender. If your loan funds are disbursed over a period of time, interest will only accrue on the portion of the loan that has been disbursed to your business.

How do I know if I am eligible for an SBA 7(a) loan, according to the SBA’s guidelines?

SBA loan eligibility is determined by your business size, model, business operations, intended project or use of the loan, and your ability to find funding elsewhere. To be eligible for the SBA 7(a) loan, you must:

• Be considered a small business by the SBA. You can check your own business’ eligibility using this tool.

• Operate for profit

• Use the funds for an eligible use

• Do business in the United States or its territories

• Prove alternative financial resources are not available before pursuing an SBA loan

Are there any other loan programs like the SBA loans?

Other government guaranteed loan programs offer similar types of benefits geared towards strengthening the US economy. The 7(a) loan program was created in a way that extends financing options to many different types of industries and business models. However, if you fall under the wider umbrella of agriculture or energy related business, you may be eligible for USDA government guaranteed loan programs. Learn more about government guaranteed agribusiness financing programs here.

As you evaluate your small business financing options, keep in mind the size of your business, what projects you want to complete with your loan, and how soon you need the funding. These are key factors that can help entrepreneurs decide if an SBA loan program is a good fit for their goals.

Have a question we didn’t answer about SBA loan programs or about your options for small business financing? Ask a question using the form below to connect with one of our loan officers who can help you understand your business financing options.

Ask an SBA Expert.