What Is an SBA Loan? An Overview for SMBs

The U.S. economy is remarkable for many reasons.

People may point to the eye-watering wealth created by Silicon Valley: only seven companies represent 30% (approximately $13 trillion as of mid-2024) of the market capitalization of the S&P 500. That number is difficult to get your brain around.

But the unsung heroes of American industry are the 33 million small businesses (SMBs), which provide nearly half (46.4%) of all private sector jobs. 

Entrepreneurship has been a hallmark of American culture since the 13 colonies declared independence from England. 

Since then, the challenges faced by small business owners haven’t changed much: connecting with customers, growing sales, stocking enough products or providing a competitive service, and perhaps most importantly, having enough funding to stay operational.

Thankfully, in the early 1950s the Small Business Administration (SBA) came into existence to lend a helping hand to small businesses across the country, mainly through the SBA loans.

What is an SBA loan, exactly?

In this article, we’ll explore the ins and outs of this type of funding, including the benefits, requirements, application process, and SBA loan types available. This comprehensive article is meant to be your guide through the complex (and potentially transformative) world of SBA lending.

Small Business by the Numbers‍

American industriousness is clearly on a roll, with 2023 seeing a record number of new business applications—marking a multi-year stint of vigorous post-pandemic entrepreneurship.

The deeper we dive into the numbers, the more they reveal the vital role small businesses play in the American economy:

• In a remarkable defeat of expectation, in 2020—during the depths of the COVID-19 pandemic—America saw an 86% increase in new business growth. 
• Since 2021:
  • More than 16 million new business applications have been filed with the SBA.
  • Over 7.2 million net new small business jobs have been added to the economy.
• And the number that tops them all: 99.9% of American businesses are small.

One theme that emerges from history is that SMB owners struggle to get the funding they need to succeed. As early as 1957, the Federal Reserve found that SMBs couldn’t secure enough credit to keep up with technological changes. 

In fact, nearly 70 years later, in 2022, only a third of SMBs received adequate funding from banks. This triggered a renewed focus on microlending—loans of $50,000 or less—through the SBA’s 7(a) loan program, which we’ll get into below.

What Is an SBA Loan?

In 1953, President Dwight Eisenhower signed the Small Business Act into law. This created a new independent agency: the Small Business Administration (SBA), which aimed (and aims) to “aid, counsel, assist and protect the interests of small business concerns.”

Today, the SBA provides entrepreneurial development, government contracting opportunities, and advocacy for small businesses. However, its most crucial role is access to capital—the SBA functions as the financial backer for tens of billions in loans to SMB owners annually. 

Although the SBA doesn’t act directly as the lender or servicer, its role helps make SBA loans some of the most affordable funding on the market. The SBA works with banks, credit unions, and lenders nationwide to provide government-backed loans to SMB owners. 

While hope and the entrepreneurial spirit remains high in the SMB community, the harsh reality is that almost 50% of SMBs fail within five years. 

That level of risk is more than most lenders would be willing to accept for a significant loan. To help offset this risk, the SBA guarantees a portion of each loan. Annually, the SBA backs more than $50 billion in loans for small businesses. However, applying for an SBA loan can feel overwhelming: you need patience and the right resources. 

Generally, SBA loans provide working capital for seasonal financing, export loans, revolving credit, and debt refinancing. They can also be used for fixed assets such as furniture, real estate, machinery, equipment, and construction costs. 

The SBA supports four distinct loan programs—each stipulates how much can be borrowed and what can be spent on. We’ll get into these SBA loan types later.

Benefits of SBA Loans

SBA loans can go anywhere from $500 to $5.5 million, meaning that small business owners have a wide range of options.

And while the application process might be tough at times, the good news is that the SBA mandates SBA lenders to make this funding available to SMB owners. With traditional loans, the lender can reject an application, (almost) no questions asked.

SBA loans offer several other benefits compared to conventional loans.

 SBA loans tend to have better interest rates than conventional commercial loans, due to interest caps that the SBA sets. While lenders are allowed to charge rates lower than the cap, they cannot exceed it. Lower interest rates mean significant cost savings over the life of the loan.

The terms of an SBA loan often include lower down payments, no collateral requirement (depending on loan type), and flexible overhead requirements. Repayment terms are also more favorable than conventional loans, extending to 25 years for real estate purchases.

And it’s not just about the money: the SBA also provides information resources and training for SMB owners who seek guidance and best practices.

SBA Loan Types

As part of its mission to fund small businesses, the SBA maintains several lending and funding programs. There are three primary SBA loan types, with multiple sub-categories of loan within each.

1. SBA 7(a) Loan Program

This is the bread-and-butter SBA funding program, and it comprises seven sub-types.

• Standard 7(a): loan amounts range from $500,000 to $5 million. Collateral may be required. 
• 7(a) Small: the loan amount must be $500,000 or less. No collateral is required for loans less than $50,000. For loans between $50,000 and $500,000, the lender follows their non-SBA commercial loan collateral policy. 
• SBA Express: allows lenders to use mostly their own processes but comes with a lower SBA guarantee. The maximum loan amount is $500,000. No collateral is required for loans of $50,000 or less. Beyond that, the lender can observe their collateral policy (with exceptions).
• Export Express: similar to the SBA Express loan but targeted at businesses that want to grow their export business. 
• Export Working Capital: offers loan amounts up to $5 million for businesses with established export businesses that need access to more working capital.
• International Trade: similar to the Export Working Capital vehicle, this loan helps businesses with established exporters to improve their competitive position against importers. 
• CAPLines: designed to supply short-term and cyclical working capital to small businesses. Includes four additional subtypes for specific businesses and ventures.

SBA 7(a) loans are as flexible as they come as far as what you can use the funds for, which is why they are the most popular SBA loan type. However, there are other options to consider if you’re seeking funding for your SMB.

2. SBA 504 Loan Program

This program is distributed through Certified Development Companies (CDCs), non-profit partners certified and regulated by the SBA.

‍SBA 504 loans are long-term, fixed-rate loans for purchasing fixed assets to support business and job growth. The SBA 504 loan program covers the purchase of land, buildings, and equipment. It can also be used for new construction and improving existing facilities.

3. SBA Microloan Program

Although the 7(a) program covers loans of less than $50,000, the Microloan program is even more targeted, and is administered via designated intermediary nonprofit lending organizations, which have local knowledge and can provide technical assistance to borrowers. 

Funds are typically used to help small businesses and specific not-for-profit childcare centers get started and expand.

4. Disaster Assistance

As a rule, the SBA does not make direct loans, but in cases of declared disasters, the SBA provides direct funding to help businesses and homeowners recover.  

Although disaster assistance funding isn’t available unless you live or operate a business in a declared disaster area, the program is specifically designed to help people recover from natural disasters. 

Low-interest disaster loans from the SBA also have a wider eligibility pool, including businesses of all sizes, homeowners, renters, and private nonprofit organizations. 

SBA Loan Requirements: Eligibility, Documentation, and Application

The SBA lending programs can offer a lifeline for small business owners—when borrowers can’t meet the stringent lending criteria of conventional commercial lenders, the SBA fills an important gap. 

As you may have noticed when reading about the different types of SBA loans, there is significant nuance and complexity to the various programs, making it difficult for some business owners to find the best fit. 

While the 7(a) and 504 programs are the most popular, at Hansa we work with you to find the right funding vehicle for your specific needs, and fulfill the application requirements. 

Here’s a high-level look at SBA borrower eligibility, documentation, and the application process.

Eligibility

Eligibility for SBA loans is incredibly detailed and governed by a long set of rules and requirements. Here are some pointers to consider:

• Business size: your SMB must meet the SBA size requirements, which vary and may refer to the number of employees or annual operating revenue. 
• For-profit business: the SBA does not fund 501(c)(3) organizations. 
• Owner investment: the loan applicant must have a minimum stake in the business. 
• Demonstrated need: you must prove that you could not obtain funding on reasonable terms from conventional, non-government sources. 
• Sound business purpose: some types of businesses are completely ineligible, but for the most part, you just need to justify why you’re requesting a loan.
• No delinquent debt: you cannot have outstanding, delinquent debt held by your SMB. 

In essence, your SMB must have a solid foundation and clear motivations, before you can even begin to think about an SBA loan.

Documentation

SBA lenders request financial statements, documents, and forms to validate that your business needs funding and is in a strong enough position to reasonably pay it back. 

• Personal and business financial statements: because SBA loans often require a personal guarantee from the applicant to repay the debt, you’ll need to provide both personal and business financial statements.
• Business plan: a detailed business plan proves that your business has a clear path to growth and sustainability. 
• Tax returns: verify your operating history (a minimum of two years) and financial health by analyzing your business tax returns. 
• Loan application history: this allows the lender to confirm that you have applied for other forms of funding and been denied. 
• SBA forms: the 7(a) application process includes the 7(a) LGPC Submission Cover Sheet, SBA Form 1919, and SBA Form 1920. Other forms may include SBA Form 413 and SBA Form 912. 
• Legal documents: part of your eligibility includes showing the legal structure of your business and any ownership arrangements. 

One of the best things you can do is work with a loan specialist to ensure that all the documents are prepared in advance, and error-free.

‍Application

As you can imagine, the SBA application process is rigorous, and any discrepancies or errors in the documentation could result in rejection. 

The typical SBA loan application process follows this sequence: 

1. Prepare documentation: create a checklist of the documents you need. Then, gather them or finalize any documents you haven’t created yet. 
2. Complete SBA forms: usually done through a digital application tool, you must watch for errors and double-check your answers against your documentation.
3. Draft a business plan: if you don’t have one, you must create a business plan (more on this below). 
4. Submit application: submit all the documentation you’ve prepared, including all the necessary forms.
5. Await lender review: this step can take weeks or months, and lenders may request clarification or additional paperwork before proceeding.
6. SBA review: in some cases, lender approval is sufficient. In other cases, the SBA will also review your application to obtain final approval.  
7. Loan approval and disbursement: if approved, the funds will be disbursed in accordance with the loan terms that you signed. 

While this might be enough to give you a working idea of the process, we recommend working with a funding partner who can take the time to understand your business and walk you through the application process. 

For a more detailed look at requirements and documentation for the SBA 7(a) Loan—again, the SBAs most popular and flexible offering—we recommend reading our SBA (7a) Loan checklist.

Strategies for Improving Chances of Approval

As a small business owner, you’re wearing many hats and juggling many balls. Time is a finite resource, so make the most of it by keeping an organized folder with all your SMB documents.

When time comes, having all the paperwork that you need to apply at hand will reduce a lot of stress. If you don’t have them, be sure to know where to look for them. Also, you’ll probably need to review and polish financial and other statements before you apply, so give yourself room for that task.

Keep in mind that while your personal credit history may not be a factor for conventional commercial loans, it is for an SBA loan. You're unlikely to get approved if your personal credit score is below 640. Building up your credit history is a process that takes time, and it’s best to start as soon as possible. 

Your business plan is another crucial factor that determines whether you get approved. 

Banks and conventional lenders almost always want to see a business plan before they approve a loan. The SBA is the same way. This can be a huge hurdle for solo-preneurs or early start-ups, so don’t leave it for the last minute—instead, design a business plan in the early stages of building and beginning your business. 

If this is your first trip to the “business plan deep end,” Hansa can help with the heavy lifting—in just ten minutes. Check out our free AI business plan generator. 

Positioning yourself as a good SBA candidate may feel tricky, but you should aim high. You have to prove that you failed to qualify for other forms of funding, but that your business is strong enough to grow and repay an SBA loan.

SBA Loan Rates 2024

As mentioned, the SBA sets a cap on the interest a lender can charge for an SBA loan. This is a graduated scale based on the size of the loan and the current prime rate.

The larger the loan, the lower the interest cap. Loans of $50,000 or less are capped at the prime rate + 6.5%, whereas any loan above $350,000 is capped at the prime rate + 3%. 

504 loans have a different structure, including an interest rate based on the current Treasury bond rate and several other fees paid to various parties involved in securing and administrating the loan. 

To learn more about SBA loan rates for 2024, check out this great overview from NerdWallet.

SBA Loans FAQs

1. What is the most common SBA loan?

The most common SBA loan is the 7(a) loan program, known for its versatility and wide range of eligible uses, including working capital, equipment purchases, and real estate acquisition.

2. How long does it take to get an SBA loan?

The time it takes to get an SBA loan can vary, but typically, the process can take anywhere from a week to a few months, depending on the complexity of the application, the type of loan, and the borrower's responsiveness. The SBA has streamlined the process, reducing the response time for most SBA loans.

3. Can I get an SBA loan with a criminal record?

While a criminal record does not automatically disqualify you from obtaining an SBA loan, it can complicate the application process. The SBA requires applicants to complete Form 912, which discloses any criminal history. However, each case is reviewed individually.

4. What if my SBA loan is denied?

If your SBA loan application is denied, you can ask the lender for specific reasons for the denial and work on addressing those issues. The denial could be based on your credit score or business plan. Thankfully, you can take steps to improve your eligibility when re-applying.

It could also be due to other eligibility requirements that may deserve a second look. You can file appeals with the SBA if you feel the denial was inappropriate or mistaken.

5. Does SBA loan forgiveness exist?

SBA loan forgiveness is typically associated with specific programs like the Paycheck Protection Program (PPP) or COVID-19 distress, rather than standard SBA loan terms. Standard SBA loans do not generally offer forgiveness, but other relief options may be available in certain situations. 

Disaster assistance loans have different rules for debt relief than the 7(a) and 504 programs.

Grow Your Business With Hansa

In some sense, the SBA is a backstop for conventional lending channels. If you’ve applied for loans or lines of credit to help your small business and been denied, an SBA loan might be exactly what you need. 

The biggest challenge for most small business owners is proving they cannot gain funding through the private markets and are strong enough to repay a government-backed loan. 

At Hansa, we’ve seen that many business owners are in search of guidance on their funding opportunities, and how to build their creditworthiness and financial health—after all, they are long and cumbersome processes.

When you register with Hansa, you get unbiased access to our AI-powered financial assistant, as well as other informational resources and guidance. 

If you’re considering an SBA loan application, or any other type of funding, we’d love to help you prepare for a smooth application and hopeful approval.