7 SBA Loan Types SMBs Need to Know
Aside from small-to-medium businesses (SMBs) that bootstrap their success, most SMBs reach a point where they want to grow, but they don’t have enough money to power the expansion. That’s when most business owners pursue outside investment or a loan.
The U.S. banking system supports entrepreneurs through commercial lending, and non-bank lenders fill some of the remaining gaps. However, in 1953, the Eisenhower administration decided that more could be done to support America’s SMBs.
Since its founding, the Small Business Administration has been mandated to “aid, counsel, assist and protect the interests of small business concerns.” The primary vehicle it uses to accomplish this goal is a system of government-backed loans distributed through a network of authorized lenders, including but not limited, to banks..
The push to provide SMBs with funding is stronger than ever. And while you’re busy working on your business, in this article we’ll present an easy-to-digest guide to the main SBA loan types and numerous programs that you could apply for.
We did the research, so you don’t have to. Let’s get into it.
1. 7(a) Loan Program
By far the largest and most popular SBA loan program, it comprises numerous sub-types of loans. 7(a) loans are capped at $5 million, and the SBA sets eligibility requirements.
If approved, you can use a 7(a) loan to:
- Acquire, refinance, or improve a property or structure.
- Function as working capital.
- Refinance commercial debt.
- Acquire and install equipment, including some software-related expenses.
- Purchase furniture and other supplies.
- Help facilitate a change of ownership.
As you can see, the loan is quite flexible regarding what you can use it for. However, it’s not for everyone.
7(a) Eligibility
You must be a functional, for-profit business (a going concern) that is headquartered in the U.S. and fits under SBA size requirements based on your company’s North American Industry Classification System (NAICS) designation.
Certain businesses are ineligible due to their industry or other criteria, such as being a non-profit. You must also demonstrate that you have an acceptable credit score and the ability to repay the loan. Finally, the SBA lender will also ask you to prove that you could not secure funding from other non-government lenders.
7(a) Loan Sub-Types
These small business loans fall under the 7(a) umbrella, with specific provisions for different applications or business types.
- Small 7(a): similar to the standard 7(a), but for loans up to $350,000.
- SBA Express: they offer faster approval times for loans up to $350,000—due to the expedited process, interest rates may be higher.
- Export Express: revolving lines of credit or term loans of less than $500,000 for businesses developing their export sales channels.
- Export Working Capital: for businesses with established export revenue that want to expand their operation.
- CAPLines: designed to help SMBs meet their short-term and cyclical working capital needs:some text
- Seasonal CAPLine: helps during peak seasons.
- Contract CAPLine: finances direct labor and material costs associated with contracts.
- Builders CAPLine: used for the direct expenses related to construction or renovation.
- Working CAPLine: helps businesses with short-term working capital.
- International Trade: term loans for businesses that already export or plan to develop new export markets and are negatively impacted by import competition.
In addition to these 7(a) SBA loan types, there is also the Working Capital Pilot program, which offers monitored lines of credit within the 7(a) loan and one-on-one counseling with SBA experts.
2. 504 Loan Program
504 SBA loans are designed to support small businesses in acquiring or developing real estate, including equipment purchases, with a projected lifespan of 10 years. It can also be used for the improvement of existing facilities—with the express purpose of promoting job creation and business growth.
However, the 504 loan cannot be used for:
- Working capital or inventory purchases.
- Debt consolidation or repayment.
- Real-estate speculation/investment.
- Certain AI-related soft costs.
The max 504 loan size is $5.5 million, and the down payment ranges between 10% and 20%.
504 Eligibility
Only available to for-profit businesses operating in the U.S. and its territories, the 504 loan requirements include the following:
- A net worth smaller than $15 million.
- An average net income of less than $5 million (after tax) for the two years preceding your application.
- Fitting within the SBA’s size guidelines.
- Qualified management expertise.
- A strong business plan.
- Good character and ability to repay the loan.
You can only apply for a 504 loan via a Certified Development Company (CDC), which are regulated by the SBA—find one close to you.
3. Microloan Program
SBA microloans are usually less than $50,000 and are offered through designated SBA intermediaries. It is meant to be used as start-up capital for small businesses and certain not-for-profit childcare organizations.
SBA microloan providers are non-profit, community-based organizations that can support microloan borrowers with management expertise and technical support.
Microloan funds can help you with the following:
- Working capital
- Inventory
- Supplies
- Furniture
- Fixtures
- Machinery
- Equipment
Keep in mind that microloans cannot be used for real estate, debt repayment, or debt consolidation.
Microloan Eligibility
Each individual microloan intermediary sets eligibility requirements. Usually, the borrower is expected to provide collateral, a solid business plan, and a personal loan guarantee.
4. Disaster Loan Program
If your home or business is in a declared disaster area, you can apply for an SBA disaster loan. The program is designed to help organizations and citizens recover from government-declared disasters.
Disaster loans are meant to cover losses that insurance and the Federal Emergency Management Agency (FEMA) don’t reimburse, and business expenses that weren’t paid because of the disaster.
There are four types of disaster loans:
- Physical damage, which covers repairs to any damaged physical assets.
- Mitigation assistance, which helps fund improvements to avoid future harm.
- Economic injury disaster, which covers operating expenses after a declared disaster.
- Military reservist, which provides operating expenses for small businesses affected by employees getting called up for active duty.
Major disasters are declared by the President, after which FEMA defines the disaster area.
Disaster Loan Eligibility
Unlike other SBA loans, disaster funding is available to:
- Businesses of any size.
- Homeowners.
- Renters.
- Nonprofit organizations.
Although nobody wants to be the victim of a natural disaster, this funding program offers crucial support for regions affected by natural and manmade disasters.
5. Community Advantage Pilot Program
Despite efforts by the Biden-Harris Administration to expand and improve the Community Advantage (CA) pilot program, the SBA decided to sunset the program on October 31, 2023.
This pilot lending program was designed to make capital more accessible to businesses in underserved areas and expand the types of lenders who could participate in the 7(a) lending program.
The CA pilot program also provided management and technical assistance to historically underserved and veteran-owned and women-owned businesses.
Unfortunately, the program failed to justify the risks and costs compared to other established SBA lending programs.
6. Contracting Assistance Programs
The SBA offers robust resources for small business owners and entrepreneurs beyond its funding programs and small business loans. The various contracting assistance programs it runs are not funding initiatives; rather, they support small business growth by improving access to the revenue stability that federal contracts can provide.
Current contracting assistance programs include:
- Small Disadvantaged Business: qualified and registered Small Disadvantaged Businesses (SDBs) can win up to 10% of all federal contracting dollars.
- Women-Owned Small Business Federal Contract program: qualified and registered Women-Owned Small Businesses (WOSBs) are eligible to win at least 5% of all federal contracting dollars.
- Veteran contracting assistance programs: the federal government awards contracting dollars to certified veteran-owned businesses and offers these businesses the opportunity to purchase surplus federal property.
- 8(a) Business Development program: offers a nine-year certification to small business owners who are socially or economically disadvantaged, helping them gain equal access to federal contracts.
- HUBZone program: helps businesses in underserved areas gain access to federal contracting opportunities with preferential consideration.
While federal grants and cooperative agreements are a form of federal assistance, federal contracts require providing property or services to the U.S. property.
7. Surety Bond Guarantee Program
Some contracts require the small business fulfilling the contract to be properly bonded, also called surety bonds. The SBA guarantees bonds through authorized companies, providing surety bonds to small businesses that wouldn’t otherwise qualify for bonding.
This further ensures access to valuable contracts for SMBs. These businesses must meet the following criteria:
- Meet the SBA’s size standards.
- Be considered for or have won a private contract worth up to $9 million or a federal contract worth up to $14 million.
- Meet the surety companies' requirements for credit, character, and capacity.
For performance and payment bond bonds, you’ll have to pay a 0.6% guarantee fee to the SBA—bid bonds don’t require a guarantee fee. Always be sure to operate via an agency that offers SBA-guaranteed bonds.
SBA Resources Go Beyond Funding
If the only thing that business owners and entrepreneurs needed to succeed were funding, the SBA would have everyone covered.
But running a profitable, sustainable business takes a huge amount of dedication, training, and regulatory compliance.
To help out with that, the SBA maintains a comprehensive business guide and multiple types of mentorship and counseling programs for small business owners and entrepreneurs. Taxpayer dollars fund these resources and can help you avoid many pitfalls of early-stage entrepreneurship.
Small Business Funding Made Simpler
As you can gather from this overview of SBA loan types and programs for small businesses, finding the right one for you may feel overwhelming.
Rest assured that becoming an SBA lender isn’t an easy accomplishment. Most lenders have domain expertise and will help guide you toward a funding solution that fits your needs.
What they can’t do is handle the paperwork for you. SBA loans are some of the most affordable loans on the market, but the application process is notoriously intense. For example, generating a business plan is a major hurdle for most business owners and entrepreneurs when they apply for loans.
Hansa is an AI-powered assistant that can help you find the funding you need, and much more.
